1
Exhibit 99.1
PNC BANK CORP.
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Consolidated Financial Highlights
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Three months ended Six months ended
June 30 June 30
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Dollars in thousands, except per share data 1994 1993 1994 1993
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FINANCIAL PERFORMANCE
Net interest income (taxable-equivalent basis) $501,363 $466,134 $1,007,167 $929,702
Income before cumulative effect of changes in accounting
principles 187,845 169,142 393,534 356,153
Net income 187,845 169,142 393,534 336,760
Earnings per common share
Before cumulative effect of changes in accounting principles
Primary .79 .71 1.66 1.50
Fully diluted .79 .71 1.65 1.49
Net income
Primary .79 .71 1.66 1.42
Fully diluted .79 .71 1.65 1.41
Net interest margin 3.58% 3.96% 3.63% 4.04%
Returns before cumulative effect of changes in accounting
principles
Return on average total assets 1.26 1.35 1.34 1.47
Return on average common shareholders' equity 17.70 17.59 18.51 18.76
Returns based on net income
Return on average total assets 1.26 1.35 1.34 1.39
Return on average common shareholders' equity 17.70 17.59 18.51 17.73
Net charge-offs to average loans .35 .76 .32 .76
After-tax profit margin 25.75 25.61 26.34 23.98
Overhead ratio 57.33 52.25 56.57 52.13
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SELECTED AVERAGE BALANCES (In millions)
Total assets $59,625 $50,152 $59,297 $48,979
Total earning assets 56,062 47,075 55,625 46,033
Securities 21,859 21,184 21,550 20,088
Loans, net of unearned income 32,531 25,184 32,278 25,199
Deposits 32,252 28,091 31,996 28,090
Shareholders' equity 4,268 3,869 4,299 3,841
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June 30 December 31 June 30
1994 1993 1993
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PERIOD-END RATIOS
Capital
Risk-based capital
Tier I 8.99% 9.57% 10.57%
Total 11.88 12.11 12.65
Leverage 6.99 7.85 7.80
Common shareholders' equity to total assets 6.77 6.93 7.32
Asset quality
Nonperforming loans to total loans 1.11 1.15 1.81
Nonperforming assets to total loans and foreclosed assets 1.55 1.65 2.63
Nonperforming assets to total assets .85 .89 1.25
Allowance for credit losses to total loans 2.97 2.92 3.60
Allowance for credit losses to nonperforming loans 267.09 253.12 199.57
Book value per common share
As reported $18.37 $18.34 $16.84
Excluding net unrealized securities gains/losses 19.02 17.96 16.84
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CONTENTS
CORPORATE FINANCIAL REVIEW.................................. 2
Consolidated Financial Statements
Consolidated Balance Sheet................................ 17
Consolidated Statement of Income.......................... 18
Consolidated Statement of Cash Flows...................... 19
Notes to Consolidated Financial Statements................ 20
Average Consolidated Balance Sheet
and Net Interest Analysis................................. 22
Corporate Information....................................... 24
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2
PNC BANK CORP.
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Corporate Financial Review
The following Corporate Financial
Review should be read in conjunction
with the Consolidated Financial
Statements of PNC Bank Corp. and
subsidiaries ("Corporation") included
herein and with management's discussion
and analysis included in the
Corporation's 1993 Annual Report.
Overview
During the first six months of 1994, the nation's real gross domestic product
grew at a preliminary annual rate of 3.5 percent, according to the United States
Commerce Department. Management expects economic growth to continue throughout
the remainder of 1994, although at a more moderate pace, accompanied by further
increases in short-term interest rates.
Net income for the first six months of 1994 was $393.5 million, or $1.65 per
fully diluted share, compared with $336.8 million, or $1.41 per share, for the
first six months of 1993. Income before accounting changes in the prior-year
period was $356.2 million or $1.49 per fully diluted share. Return on assets and
return on common shareholders' equity were 1.34 percent and 18.51 percent,
respectively, in 1994, compared with 1.39 percent and 17.73 percent,
respectively, in 1993. The corresponding 1993 returns before accounting changes
were 1.47 percent and 18.76 percent.
The results for the first six months of 1993 included the cumulative effect
of adopting Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes," and a change in the method of accounting for certain intangible
assets, primarily purchased mortgage servicing rights. The cumulative effect of
these changes reduced net income by $9.0 million and $10.4 million,
respectively.
Mergers and Acquisitions
On November 30, 1993, the Corporation completed its acquisition of PNC Mortgage
(formerly Sears Mortgage Banking Group) for $328 million in cash. The purchase
price is subject to certain post-closing adjustments. With this acquisition, the
Corporation added assets of $7.6 billion; a mortgage servicing portfolio
approximating $27 billion, including $21 billion serviced for others; and a
national residential mortgage production network.
During the first six months of 1994, the Corporation completed the purchase
of United Federal Bancorp, Inc. ("United"), State College, Pennsylvania, and
First Eastern Corp. ("First Eastern"), Wilkes-Barre, Pennsylvania, for a total
of $486 million in cash. The combined assets and deposits totaled $2.8 billion
and $2.4 billion, respectively. The Corporation also completed the acquisition
of a $10-billion residential mortgage servicing portfolio from the Associates
Corporation of North America ("Associates") for $117 million in cash.
During the second quarter of 1994, the Corporation entered into a definitive
agreement to acquire BlackRock Financial Management, L.P. ("BlackRock"), a New
York-based fixed-income investment management firm with approximately $23
billion in assets under management. The purchase price will approximate
$240 million in cash and notes. This transaction is expected to close in the
fourth quarter of 1994, pending regulatory and other approvals.
Subsequent to June 30, 1994, the Corporation announced agreements to acquire
Brentwood Financial Corporation, Cincinnati, Ohio, and Indian River Federal
Savings Bank, Vero Beach, Florida. The aggregate purchase price approximates $33
million in cash. The combined assets and deposits totaled approximately $175
million and $141 million, respectively, at June 30, 1994. These transactions are
expected to close in the fourth quarter of 1994, subject to regulatory and
shareholder approvals.
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PNC BANK CORP.
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Corporate Financial Review
Income Statement Review
INCOME STATEMENT HIGHLIGHTS
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Six months ended June 30 Change
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Dollars in millions 1994 1993 Amount Percent
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Net interest income--
taxable-equivalent basis $1,007 $930 $77 8.3%
Provision for credit losses 50 115 (65) (56.5)
Noninterest income 487 475 12 2.5
Noninterest expenses 845 732 113 15.4
Income before cumulative
effect of changes in
accounting principles 394 356 38 10.7
Net income 394 337 57 16.9
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NET INTEREST INCOME AND NET INTEREST MARGIN On a fully taxable-equivalent basis,
net interest income for the first six months of 1994 increased $77.5 million, or
8.3 percent, compared with the first six months of 1993. The increase was due to
higher levels of average earning assets.
NET INTEREST MARGIN
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Six months ended June 30
Basis
Point
Taxable-equivalent basis 1994 1993 Change
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Book-basis yield on earning
assets 6.36% 6.72% (36)
Effect of loan fees .13 .15 (2)
Taxable-equivalent adjustment .06 .09 (3)
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Taxable-equivalent yield on
earning assets 6.55 6.96 (41)
Rate on interest-bearing
liabilities 3.80 3.92 (12)
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Interest rate spread 2.75 3.04 (29)
Impact of noninterest-bearing
sources .53 .61 (8)
Net benefit of interest rate
swaps .35 .39 (4)
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Net interest margin 3.63% 4.04% (41)
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The net interest margin for the first six months of 1994 narrowed 41 basis
points when compared with the corresponding 1993 period. The maturity structure
and nature of liabilities assumed relative to assets acquired in the PNC
Mortgage acquisition contributed to the narrower interest rate spread. This
impact was mitigated by the benefit of lower prepayments on mortgage-related
assets in the rising interest rate environment in 1994. In addition, the net
interest margin was negatively impacted by a lower proportion of
noninterest-bearing sources supporting earning assets. The benefit of interest
rate swaps also declined in the rising interest rate environment.
VOLUME/RATE ANALYSIS
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Six months ended June 30 Increase (Decrease)
1994 versus 1993 Due to Changes in:
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Rate
In millions Volume Rate Volume Total
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Interest income $336 $(85) $(19) $232
Interest expense 157 (2) 155
Net interest income 193 (94) (22) 77
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PROVISION FOR CREDIT LOSSES The provision for credit losses was $50.0 million in
the first six months of 1994, compared with $115.2 million a year ago.
Continuing improvement in economic conditions combined with management's ongoing
efforts to improve asset quality resulted in lower nonperforming assets and
charge-offs, and a higher reserve coverage of nonperforming loans. The quarterly
provision for credit losses is expected to decline during the remainder of 1994.
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PNC BANK CORP.
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Corporate Financial Review
NONINTEREST INCOME
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Six months ended June 30 Change
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Dollars in thousands 1994 1993 Amount Percent
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Investment management and trust
Trust $ 98,805 $ 92,187 $ 6,618 7.2%
Mutual funds 47,656 43,179 4,477 10.4
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Total investment management and trust 146,461 135,366 11,095 8.2
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Service charges, fees and commissions
Deposit account and corporate services 82,225 78,072 4,153 5.3
Credit card and merchant services 26,797 26,545 252 .9
Brokerage 17,223 17,517 (294) (1.7)
Corporate finance 21,227 18,305 2,922 16.0
Other services 32,569 28,910 3,659 12.7
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Total service charges, fees and commissions 180,041 169,349 10,692 6.3
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Mortgage Banking
Servicing 77,292 13,031 64,261 493.1
Marketing 3,071 3,945 (874) (22.2)
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Total mortgage banking 80,363 16,976 63,387 373.4
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Net securities gains 30,307 111,777 (81,470) (72.9)
Other 49,619 41,247 8,372 20.3
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Total $486,791 $474,715 $ 12,076 2.5%
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NONINTEREST INCOME Noninterest income totaled $486.8 million in the first six
months of 1994, compared with $474.7 million in the corresponding 1993 period.
Net securities gains totaled $30.3 million, compared with $111.8 million in the
year-earlier period. Excluding net securities gains, noninterest income as a
percentage of total revenue was 31.2 percent in the first six months of 1994,
compared with 28.1 percent a year earlier.
Investment management and trust increased 8.2 percent to $146.5 million.
Growth in revenue from new trust business and mutual fund accounting and
administrative services was partially offset by a decline in fees resulting from
lower levels of managed assets. The BlackRock acquisition is expected to add
approximately 20 percent to investment management and trust revenue on an annual
basis. The table below sets forth trust and mutual fund assets, and the related
revenue, as of and for the six months ended June 30, 1994 and 1993.
INVESTMENT MANAGEMENT AND TRUST
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In millions Assets at June 30 Revenue
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ended
Discretionary Nondiscretionary Total June 30
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1994 1993 1994 1993 1994 1993 1994 1993
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Personal and charitable $23,853 $22,556 $ 9,560 $ 6,743 $ 33,413 $ 29,299 $ 73 $ 67
Institutional 6,535 9,257 70,978 68,861 77,513 78,118 25 25
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Total trust 30,388 31,813 80,538 75,604 110,926 107,417 98 92
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Mutual funds 23,164 27,548 55,463 45,989 78,627 73,537 48 43
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Total $53,552 $59,361 $136,001 $121,593 $189,553 $180,954 $146 135
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Service charges, fees and commissions increased $10.7 million, or 6.3
percent, to $180.0 million in the first six months of 1994. Increased
transaction volume related to new business and acquisitions accounted for the
growth in deposit account and corporate services revenue. Increased syndication
and advisory activity accounted for the growth in corporate finance fees. Other
service fees increased as a result of revised consumer loan fee schedules.
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PNC BANK CORP.
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Corporate Financial Review
Mortgage banking income increased $63.4 million to $80.4 million, primarily
as a result of the PNC Mortgage acquisition. During the first six months of
1994, the Corporation originated $3.9 billion of residential mortgages,
approximately 65 percent of which represented new financings, and realized gains
of $16.6 million from sales of mortgage servicing. During the first half of
1994, the rising interest rate environment adversely impacted the volume of
originations. However, the value of the mortgage servicing portfolio increased
as the rate of mortgage loan prepayments declined. Conversely, should interest
rates decline, the volume of originations and prepayment rates would likely
increase and the value of the existing servicing portfolio could decrease.
At June 30, 1994, the Corporation's mortgage servicing portfolio totaled
$43.8 billion with a weighted-average coupon of 7.72 percent, including
$34.3 billion serviced for others.
The increase in other noninterest income is attributable to higher gains
from sales of assets and venture capital activity. These increases were
partially offset by lower trading account profits.
NONINTEREST EXPENSE
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Six months ended June 30 Change
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Dollars in thousands 1994 1993 Amount Percent
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Compensation $329,402 $279,403 $ 49,999 17.9%
Employee benefits 81,469 66,937 14,532 21.7
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Total staff expense 410,871 346,340 64,531 18.6
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Net occupancy 66,562 58,203 8,359 14.4
Equipment 65,580 54,889 10,691 19.5
Amortization of
intangible assets 37,830 15,366 22,464 146.2
Federal deposit
insurance 36,339 32,932 3,407 10.3
Taxes other than income 21,878 18,610 3,268 17.6
Other 206,081 205,823 258 .1
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Total $845,141 $732,163 $112,978 15.4%
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NONINTEREST EXPENSE Noninterest expense totaled $845.1 million in the first six
months of 1994, compared with $732.2 million in the year-earlier period. The
overhead ratio increased to 56.6 percent in the first six months of 1994,
compared with 52.1 percent in 1993, due to lower net securities gains in 1994
and higher operating expenses relative to revenue associated with PNC Mortgage.
Excluding acquisitions, noninterest expense declined 2.2 percent. Pending
acquisitions are expected to increase noninterest expense by approximately 3
percent on a combined basis.
Staff expense increased 18.6 percent to $410.9 million, primarily due to
acquisitions completed subsequent to June 30, 1993. Average full-time equivalent
employees were 20,900 for the first six months of 1994, compared with 17,700 in
the year-earlier period. Approximately 3,600 average full-time equivalent
employees were added from acquisitions. Excluding the impact of acquisitions,
staff expense increased 2.8 percent. Pension expense increased $4.8 million in
the comparison due to acquisitions and a reduction in the discount rate used to
calculate the pension obligation.
Net occupancy and equipment expense increased $8.4 million and $10.7
million, respectively, primarily due to acquisitions, occupancy of an office
building purchased in 1993 and an upgrade of computer equipment. Amortization of
intangible assets increased $22.5 million primarily due to higher levels of
purchased mortgage servicing rights associated with PNC Mortgage. The increase
in federal deposit insurance resulted from acquired deposits. Taxes other than
income also increased due to acquisitions.
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PNC BANK CORP.
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Corporate Financial Review
Line of Business Results
The management accounting process uses various methods of balance sheet and
income statement allocations, transfers and assignments to evaluate the
performance of various business units. Unlike financial accounting, there is no
comprehensive, authoritative body of guidance for management accounting
equivalent to generally accepted accounting principles. The following
information is based on management accounting practices which conform to and
support the management structure of the Corporation and is not necessarily
comparable with similar information for any other financial institution.
Designations, assignments and allocations may change from time to time as the
management accounting system is enhanced and business or product lines change.
During 1994, certain methodologies were changed and, accordingly, results for
1993 are presented on a consistent basis.
For management reporting purposes, the Corporation has designated four
distinct lines of business: Corporate Banking, Retail Banking, Investment
Management and Trust, and Investment Banking. The financial results presented in
this section reflect each line of business as if it operated on a stand-alone
basis. Securities or borrowings have been assigned to each line of business
based on its net asset or liability position. The remaining securities and
borrowings, and related interest rate spread, emanating from management of the
Corporation's overall asset/liability position, and net securities gains, are
included in Portfolio Management.
LINE OF BUSINESS HIGHLIGHTS
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Net Interest and
Six months ended June 30 Noninterest Average Return on
Earnings Revenue Assigned Assets Assigned Equity
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Dollars in millions 1994 1993 1994 1993 1994 1993 1994 1993
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Corporate Banking
Large Corporate $ 40 $ 35 $ 88 $ 71 $ 3,756 $ 2,969 19% 20%
Middle Market 125 104 261 283 9,790 9,893 20 15
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Total Corporate Banking 165 139 349 354 13,546 12,862 20 16
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Retail Banking
Consumer Banking 138 129 641 617 24,938 23,325 19 21
Mortgage Banking 31 16 203 70 9,848 3,277 14 21
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Total Retail Banking 169 145 844 687 34,786 26,602 18 21
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Investment Management and Trust
Trust 22 23 109 103 393 351 45 53
Mutual Funds 12 12 53 47 170 107 44 55
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Total Investment Management and
Trust 34 35 162 150 563 458 44 54
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Investment Banking
Portfolio Management 58 106 96 172 9,824 8,774 43 85
Brokerage and Underwriting 14 13 49 36 533 278 42 39
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Total Investment Banking 72 119 145 208 10,357 9,052 43 75
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Total lines of business 440 438 1,500 1,399 59,252 48,974 22 25
Unallocated items (46) (82) (23) (15) 45 5
Cumulative effect of changes in
accounting principles (19)
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Total $394 $337 $1,477 $1,384 $59,297 $48,979
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Earnings contributed by the lines of business totaled $440 million in the
first six months of 1994, compared with $438 million in the first six months of
1993. These results exceeded reported consolidated net income by $46 million and
$101 million, respectively, due to the cumulative effect of changes in
accounting principles in 1993, provision for credit losses in excess of specific
reserve allocations and certain unallocated revenue and expenses. Excluding net
securities gains, earnings from the lines of business were $420 million and $365
million, respectively, and returns on assigned equity were 21 percent and 20
percent, respectively.
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PNC BANK CORP.
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Corporate Financial Review
CORPORATE BANKING Corporate Banking provided 38 percent of line of business
earnings in the first six months of 1994, compared with 32 percent in the first
half of 1993. Large Corporate benefited from a 25 percent increase in average
loans and improved asset quality, which more than offset the impact of narrower
interest rate spreads on loans. The majority of the loan growth was in
short-term commercial and money market loans that are typically repaid shortly
after period end. Middle Market revenue declined in 1994 due to the impact of
narrower interest rate spreads on loans and a reduction in the real estate
project portfolio. The increase in earnings resulted from a lower provision for
credit losses as asset quality improved in both the commercial and real estate
project portfolios. Revenue from treasury management services accounted for 16
percent of total Corporate Banking revenue in 1994, compared with 15 percent a
year ago.
RETAIL BANKING The earnings contribution from Retail Banking increased to 38
percent in the first six months of 1994, from 33 percent a year ago. Consumer
Banking average loans and deposits increased 16 percent and 6 percent,
respectively, when compared with the first six months of 1993, primarily due to
acquisitions. Higher net interest revenue and improved asset quality contributed
to the increase in earnings. The increase in Mortgage Banking earnings reflected
the contribution of the acquired assets and mortgage banking operations of PNC
Mortgage. Average mortgage-related assets increased $6.6 billion to $9.8
billion. During the first six months of 1994, the mortgage servicing portfolio
increased $8.2 billion to $43.8 billion at June 30, 1994, including $34.3
billion serviced for others. The net growth in servicing resulted from the
Associates transaction. Mortgage Banking originated $3.9 billion of residential
mortgages during the first half of 1994, and $1.9 billion of servicing was sold
which resulted in gains of $16.6 million.
INVESTMENT MANAGEMENT AND TRUST Investment Management and Trust contributed 8
percent to line of business earnings in both periods. Trust earnings declined in
the comparison as increased revenue from new business was more than offset by
higher marketing and incentive expenses. Mutual Funds earnings were unchanged in
the first six months of 1994 when compared with the year-earlier period.
Increased revenue from growth of the PNC Family of Funds, as well as expanded
accounting and administrative services, was offset by lower investment advisory
fees and increased marketing costs.
INVESTMENT BANKING The earnings contribution from Investment Banking was 16
percent in the first half of 1994, compared with 27 percent in the first six
months of 1993. Portfolio Management earnings declined in the comparison as net
securities gains were $30.3 million in the first six months of 1994, compared
with $111.8 million in 1993. These gains were significantly higher in the first
half of last year as certain mortgage-backed securities were sold in a higher
prepayment environment to provide more stability to net interest income.
Excluding net securities gains, Investment Banking's earnings were $52 million
and $46 million in the first six months of 1994 and 1993, respectively. Higher
venture capital income accounted for the increase in Brokerage and Underwriting
earnings.
Balance Sheet Review
BALANCE SHEET HIGHLIGHTS
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Six months ended June 30
------------------------ Full Year
Averages in millions 1994 1993 1993
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Total assets $59,297 $48,979 $50,321
Total earning assets 55,625 46,033 47,340
Securities 21,550 20,088 20,403
Loans, net of unearned
income 32,278 25,199 25,959
Deposits 31,996 28,090 28,442
Borrowed funds 11,253 10,821 10,373
Notes and debentures 10,589 5,163 6,486
Shareholders' equity 4,299 3,841 3,957
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The changes in the average balance sheet reflect the impact of acquisitions,
stronger loan demand and asset/liability management activities. Average earning
assets increased $9.6 billion when compared with the first six months of 1993.
The proportion of average loans to average earning assets was 58.0 percent
in the first six months of 1994, compared with 54.7 percent in the first half of
1993.
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8
PNC BANK CORP.
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Corporate Financial Review
Average loans for the first six months of 1994 increased 28.1 percent to $32.3
billion when compared with the first six months of 1993. Excluding the impact of
acquisitions, average loans increased 4.7 percent in the comparison due to
increased loan demand and higher levels of short-term commercial, money market
and consumer loans.
Average deposits increased $3.9 billion when compared with the first six
months of 1993. The proportion of average noninterest-bearing sources supporting
average earning assets was 14.1 percent in the first six months of 1994,
compared with 15.6 percent in the first half of 1993. Average notes and
debentures increased $5.4 billion as bank notes and Federal Home Loan Bank
advances were used as lower cost alternatives to other funding sources.
LOANS
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June 30, 1994 December 31, 1993
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Unfunded Unfunded
In millions Outstandings Commitments Outstandings Commitments
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Commercial
Manufacturing $ 2,850 $ 5,225 $ 2,765 $ 4,351
Retail/Wholesale 1,975 1,888 1,789 1,570
Services 2,031 2,191 1,586 1,599
Financial services 962 2,324 872 1,666
Communications 1,312 1,285 1,337 732
Real estate related 534 200 557 177
Investment/Holding Co. 478 230 454 264
Other 2,731 3,666 3,103 3,089
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Total commercial 12,873 17,009 12,463 13,448
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Real estate project
Residential construction and development 75 90 70 72
Commercial construction and development 263 280 280 221
Medium-term financings
Standing 902 219 875 142
Other 392 56 505 68
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Total real estate project 1,632 645 1,730 503
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Real estate mortgage
Residential 8,329 1,088 8,036 1,521
Commercial 1,332 25 905 6
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Total real estate mortgage 9,661 1,113 8,941 1,527
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Consumer
Home Equity 2,655 1,627 2,238 1,360
Automobile 2,580 2,428
Student 1,120 3 1,103 27
Credit card 700 3,287 725 3,065
Other 1,920 222 2,031 214
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Total consumer 8,975 5,139 8,525 4,666
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Other 1,937 495 1,871 400
Unearned income (218) (222)
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Total, net of unearned income $34,860 $24,401 $33,308 $20,544
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PNC BANK CORP.
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Corporate Financial Review
LOANS The Corporation manages credit risk associated with its lending
activities through portfolio diversification, underwriting policies and
procedures and loan monitoring practices. At June 30, 1994, commercial, real
estate project, real estate mortgage, consumer and other loans accounted for
36.7 percent, 4.7 percent, 27.5 percent, 25.6 percent and 5.5 percent of
total loans, respectively.
At June 30, 1994, total commercial loan outstandings increased $410 million,
or 3.3 percent, from December 31, 1993, primarily attributable to short-term
commercial loans. Total commercial unfunded commitments increased $3.6 billion,
or 26.5 percent, in the comparison. The growth in commitments was attributable
to increased economic activity. Should economic growth continue, management
expects a portion of these commitments to be converted into outstandings.
Total real estate project exposure remained relatively flat since year end.
Retail and office projects accounted for 29 percent and 25 percent,
respectively, of total real estate project exposure at June 30, 1994.
Multi-family and hotel/motel projects accounted for 12 percent and 8 percent,
respectively. No other project type accounted for more than 7 percent. Projects
in the Corporation's primary markets, which include Delaware, Indiana, Kentucky,
New Jersey, Ohio and Pennsylvania, accounted for 71 percent of the total
outstandings. The southeast region of the United States accounted for 15 percent
and no other geographic region accounted for more than 5 percent.
Real estate mortgage outstandings increased 8.1 percent primarily due to
acquisitions. Residential and commercial mortgages acquired in the first half of
1994 totaled $568 million and $288 million, respectively. As part of its overall
asset/liability management strategy, the Corporation retains certain originated
residential mortgage products in the loan portfolio. Generally, these products
are limited to adjustable-rate loans or those with balloon payment features. The
remainder of its fixed-rate production is securitized and retained for the
securities portfolio or sold.
Consumer loan outstandings increased $450 million due to acquisitions and
loan growth. Other loans increased $66 million and consisted of money market,
lease financing and foreign loans.
Highly leveraged transactions ("HLT") are included in various commercial
loan categories. At June 30, 1994, the loan portfolio included $942 million of
HLT outstandings and $239 million of HLT unfunded commitments. The comparable
amounts at December 31, 1993, were $953 million and $186 million, respectively.
The communications, manufacturing and retail/wholesale industries accounted for
70 percent, 19 percent and 4 percent, respectively, of total HLT exposure at
June 30, 1994. HLT outstandings represented 2.7 percent of total loans at June
30, 1994, compared with 2.9 percent at December 31, 1993. During the first six
months of 1994, $145 million of loans and $26 million of unfunded commitments
were no longer classified as HLT.
At June 30, 1994, the Corporation had 61 customers with loans designated as
HLT. The ten largest HLT outstandings and unfunded commitments totaled $472
million and $63 million, respectively. During the first six months of 1994, the
Corporation originated and/or participated in $219 million of commitments to new
HLT customers, compared with $43 million in the corresponding 1993 period. HLT
loan fees recognized in income during the first six months of 1994 totaled $3.2
million and deferred HLT loan fees totaled $4.4 million at June 30, 1994. The
yield on the HLT portfolio, including loans classified as nonperforming, was 6.4
percent during the first six months of 1994, compared with 6.1 percent a year
ago.
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PNC BANK CORP.
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Corporate Financial Review
RISK ELEMENTS During the first six months of 1994, nonperforming assets declined
$10 million as a result of continued improvement in overall asset quality.
Excluding the impact of the First Eastern acquisition, total nonperforming
assets declined $84 million when compared with year-end 1995. Assuming further
economic growth, management anticipates the favorable trend will continue during
the remainder of 1994.
At June 30, 1994, $81 million of nonperforming loans were current as to
principal and interest, compared with $102 million at December 31, 1993.
Nonperforming HLT loans totaled $17 million at June 30, 1994, compared with $25
million at December 31, 1993.
Office, retail and land projects accounted for 59 percent of total
nonperforming real estate project assets at June 30, 1994. The Corporation's
primary markets accounted for 58 percent of total nonperforming real estate
project assets. The southeast region of the United States and metropolitan
Washington D.C. area accounted for 29 percent and 8 percent, respectively.
Accruing loans contractually past due 90 days or more as to the payment of
principal or interest totaled $148 million at June 30, 1994, compared with $135
million at December 31, 1993. Residential mortgages and student loans in the
amount of $68 million and $34 million, respectively, were included in the total
at June 30, 1994, compared with $55 million and $41 million, respectively, at
year-end 1995.
NONPERFORMING ASSETS
- -------------------------------------------------------------
JUNE 30 December 31
Dollars in millions 1994 1993
- -------------------------------------------------------------
Nonaccrual loans
Commercial $232 $181
Real estate project 72 91
Real estate mortgage 80 84
- -------------------------------------------------------------
Total nonaccrual loans 384 356
- -------------------------------------------------------------
Restructured loans 4 28
- -------------------------------------------------------------
Total nonperforming loans 388 384
- -------------------------------------------------------------
Foreclosed assets
Real estate project 93 108
Real estate mortgage 33 42
Other 30 20
- -------------------------------------------------------------
Total foreclosed assets 156 170
- -------------------------------------------------------------
Total $544 $554
- -------------------------------------------------------------
Nonperforming loans to total loans 1.11% 1.15%
Nonperforming assets to total
loans and foreclosed assets 1.55 1.65
Nonperforming assets to total
assets .85 .89
- -------------------------------------------------------------
Annualized net charge-offs as a percentage of average loans were .32 percent
for the first six months of 1994, compared with .76 percent in the corresponding
1993 period. The 1994 charge-off and recovery levels reflected the continued
improvement in overall asset quality and the Corporation's loan workout efforts.
During the first six months of 1994, $10 million of HLT were charged-off and no
recoveries were realized. The corresponding 1993 amounts were $7 million and $2
million, respectively.
CHARGE-OFFS AND RECOVERIES
- ---------------------------------------------------------------
Six months ended June 30 1994
-------------------------------------
Net
In millions Charge-offs Recoveries Charge-offs
- ---------------------------------------------------------------
Commercial $28 $12 $16
Real estate project 9 1 8
Real estate mortgage 12 2 10
Consumer 32 15 17
- ---------------------------------------------------------------
Total $81 $30 $51
- ---------------------------------------------------------------
1993
- ---------------------------------------------------------------
Commercial $54 $15 $39
Real estate project 22 3 19
Real estate mortgage 9 1 8
Consumer 42 13 29
- ---------------------------------------------------------------
Total $127 $32 $95
- ---------------------------------------------------------------
10
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PNC BANK CORP.
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Corporate Financial Review
ALLOWANCE FOR CREDIT LOSSES The allowance for credit losses totaled $1.0 billion
at June 30, 1994, compared with $972 million at December 31, 1993. The allowance
as a percentage of period-end loans and nonperforming loans was 2.97 percent and
267.1 percent, respectively, at June 30, 1994. The comparable year-end amounts
were 2.92 percent and 253.1 percent, respectively.
ASSET/LIABILITY MANAGEMENT The primary objectives of asset/liability management
are to provide maximum levels of net interest income while maintaining
acceptable levels of interest rate and liquidity risk, facilitating the
Corporation's funding needs and ensuring capital adequacy. To achieve these
objectives, asset/liability management uses a variety of investment
alternatives, funding sources and off-balance-sheet instruments in managing the
overall interest rate risk profile of the Corporation. Asset/liability
management policies include limits on the amounts of various financial
instruments, the types of funding and the level of interest rate sensitivity,
and an assessment of overall liquidity.
Asset/liability management seeks to minimize the credit risk associated with
its activities. This is primarily accomplished by entering into transactions
with only a select number of high quality institutions, establishing credit
limits with counterparties and, where applicable, requiring segregated
collateral.
A dynamic income simulation model is the primary mechanism used in assessing
the impact on net interest income of changes in interest rates. Asset/liability
management projects net interest income in what it believes is a most likely
interest rate environment, as well as in higher and lower alternative interest
rate scenarios. The table below sets forth average interest rates for the month
of June 1994 and the respective rate assumptions for December 1994 and June
1995.
INTEREST RATE ASSUMPTIONS
- ---------------------------------------------------------------
June 30 December June
1994 1994 1995
- ---------------------------------------------------------------
Federal funds 4.25% 4.50% 5.00%
3-month LIBOR 4.63 4.90 5.40
5-year U.S. Treasury Note 6.70 6.80 7.00
- ---------------------------------------------------------------
In addition to interest rate assumptions, loan and deposit growth rates,
mortgage-related asset prepayments, and interest rate swap amortization are
adjusted based on current expectations. The model reflects management's
assumption that the market would present investment alternatives with
acceptable maturities and interest rate characteristics relative to expected
funding sources. The model also reflects transactions initiated by management
to reduce its liability-sensitive position, including reducing fixed-rate
assets and adding variable-rate assets. Actual net interest income may differ
from simulated results due to changes in management's strategies or market
conditions. The actual timing and rate of changes in interest rates and other
assumptions also could affect net interest income. As the model is based on
current on- and off-balance-sheet positions, it does not reflect additional
actions management could take to mitigate the impact of changes in interest
rates.
In the most likely scenario, the model projects that net interest income
would be relatively stable for the remainder of 1994, and for 1995 when
compared with full-year 1994. If interest rates were 100 basis points higher
than the most likely scenario, net interest income would decrease 8.4 percent
over the 18-month period ended December 31, 1995. Conversely, net interest
income would increase 7.2 percent over the same period if interest rates were
100 basis points lower than the most likely scenario.
An interest rate sensitivity ("gap") analysis represents a point-in-time net
position of assets, liabilities and off-balance-sheet instruments subject to
repricing in specified time periods. Gap analysis alone does not accurately
measure the magnitude of changes in net interest income since changes in
interest rates do not impact all categories of assets, liabilities and
off-balance-sheet positions equally or simultaneously. The liability sensitivity
of the cumulative one-year gap position was 18.4 percent of total earning assets
at June 30, 1994, which declined to 8.1 percent within 24 months. The cumulative
one-year gap position narrowed during the second quarter of 1994 as a result of
management actions to reduce exposure to rising interest
11
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PNC BANK CORP.
- --------------------------------------------------------------------------------
Corporate Financial Review
rates, primarily by reducing fixed-rate assets and adding variable-rate assets.
These actions were partially offset by a slower rate of prepayments on
mortgage-related assets which had the effect of extending the maturity of these
instruments.
INTEREST RATE SWAPS
- ----------------------------------------------------------------------
In millions Gain Position Loss Position
------------------ ------------------ Total
Notional Fair Notional Fair Notional
June 30, 1994 Value Value Value Value Value
- ----------------------------------------------------------------------
Hedge swaps
Receive fixed $2,001 $22 $11,350 $(437) $13,351
Pay fixed 79 693 (31) 772
- ----------------------------------------------------------------------
Total hedge swaps 2,080 22 12,043 (468) 14,123
Customer swaps 60 2 60 (2) 120
- ----------------------------------------------------------------------
Total $2,140 $24 $12,103 $(470) $14,243
- ----------------------------------------------------------------------
December 31, 1993
- ----------------------------------------------------------------------
Hedge swaps
Receive fixed $7,904 $153 $2,715 $ (26) $10,619
Pay fixed 1,193 (86) 1,193
- ----------------------------------------------------------------------
Total hedge swaps 7,904 153 3,908 (112) 11,812
Customer swaps 245 3 245 (3) 490
- ----------------------------------------------------------------------
Total $8,149 $156 $4,153 $(115) $12,302
- ----------------------------------------------------------------------
The Corporation enters into interest rate swaps to alter the maturity and
repricing structure of the balance sheet ("hedge swaps") and as an intermediary
for customers ("customer swaps"). At June 30, 1994, hedge swaps and customer
swaps accounted for 87 percent and 1 percent, respectively, of the total
notional amount of all interest rate swap, futures, forward, foreign currency
exchange and option contracts. The notional amount of hedge and customer swaps
totaled $14.1 billion and $120 million, respectively, at June 30, 1994. The
corresponding December 31, 1993 amounts were $11.8 billion and $490 million,
respectively. Credit risk with respect to interest rate swaps represents the
inability of the counterparty to perform under terms of the swap agreements. The
Corporation limits credit risk with respect to swap agreements by requiring,
where applicable, segregated collateral.
INTEREST RATE SWAPS ACTIVITY
- ----------------------------------------------------------------
Hedge Swaps
---------------- Total
Receive Pay Customer Notional
In millions Fixed Fixed Swaps Value
- ----------------------------------------------------------------
Balance at January 1,
1994 $10,619 $1,193 $490 $12,302
Additions 3,200 20 3,220
Maturities/amortization (468) (221) (341) (1,030)
Terminations (200) (49) (249)
- ----------------------------------------------------------------
Balance at June 30,
1994 $13,351 $772 $120 $14,243
- ----------------------------------------------------------------
Substantially all hedge swaps are index amortizing, the majority of which
are designated as hedges on deposits and other interest-bearing liabilities. The
Corporation receives payments based on fixed interest rates and makes payments
based on a floating money market rate. During the first six months of 1994,
hedge swaps benefited net interest income by $96.1 million, compared with $90.5
million in the corresponding 1993 period. Net deferred gains on terminated
interest rate swaps totaled $14 million and $22 million at June 30, 1994 and
December 31, 1993, respectively. Such deferred gains are being amortized over
various remaining periods of up to two years.
The table below sets forth the maturity distribution of hedge swaps and the
weighted average interest rates at June 30, 1994.
MATURITY DISTRIBUTION OF HEDGE SWAPS
- -------------------------------------------------------------------
In millions 1994 1995 1996 Beyond Total
- -------------------------------------------------------------------
Receive fixed $1,932 $5,819 $4,900 $700 $13,351
Rate received 6.74% 5.79% 5.25% 5.49% 5.71%
Rate paid 4.59 4.51 4.84 3.32 4.58
Pay fixed $49 $383 $165 $175 $772
Rate received 4.84% 5.81% 7.04% 9.12% 6.76%
Rate paid 4.29 4.33 4.07 4.44 4.30
- -------------------------------------------------------------------
Hedge swaps have remaining expected maturities that range from one and
one-half months to three years and four months in management's most likely
interest rate scenario. If interest rates rise further than assumed in the most
likely scenario, the maturities of certain index swaps would be extended;
however, the maturities would not extend beyond 1999. Because the Corporation
has an aggregate receive-fixed/pay-variable interest rate swap position, further
increases in interest rates would reduce
12
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PNC BANK CORP.
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Corporate Financial Review
the fair value of, and benefit provided by, such swaps. If such rate increases
are significant, the rate paid on interest rate swaps could exceed the rate
received.
In a rising interest rate environment, management would expect several
factors to mitigate a decline in the benefit provided by such swaps. As interest
rates increase, the Corporation will derive a greater benefit from existing
long-term liabilities as well as noninterest-bearing sources of funds. Also, an
increase in interest rates would likely be associated with increased economic
activity providing opportunities for loan growth, increased yields on
variable-rate assets, increased value of the mortgage servicing portfolio and
higher fee income.
LIQUIDITY MANAGEMENT Liquidity represents an institution's ability to generate
cash or otherwise obtain funds at reasonable rates to satisfy commitments to
borrowers as well as the demands of depositors and debtholders. Liquidity is
managed through the coordination of the relative maturities of assets,
liabilities and off-balance-sheet positions and is enhanced by the ability to
raise funds in capital markets. Liquid assets consist of cash and due from
banks, federal funds sold and resale agreements, interest-earning deposits with
banks, trading account securities and securities available for sale. At June 30,
1994, such assets totaled $9.9 billion. Liquidity is also provided by securities
that may be sold under agreements to repurchase, which totaled $7.7 billion at
June 30, 1994. In addition, several bank affiliates have access to funds as
members of the Federal Home Loan Bank system.
Liquidity for the parent company and its nonbank affiliates is generated
through the issuance of securities in public or private markets, lines of credit
and dividends from subsidiaries. Under effective shelf registration statements
at June 30, 1994, the Corporation has available $140 million of debt, $300
million of preferred stock and $350 million of securities that may be issued as
either debt or preferred stock. Additionally, the Corporation has a $150 million
unused committed line of credit. Funds obtained from any of these sources can be
used for both bank and nonbank activities. In addition to current parent company
funds, the funding for pending or potential acquisitions may include the
issuance of instruments that qualify as regulatory capital, such as preferred
stock or subordinated debt. Management believes that the Corporation has
sufficient liquidity to meet its obligations to customers, debtholders and
others. The impact of replacing maturing liabilities is reflected in the income
simulation model used in the Corporation's overall asset/liability management
process. At June 30, 1994, the model assumes rising interest rates and a
resulting higher cost of replacement funding.
As part of the overall asset/liability management process, management seeks
to obtain funding through various sources to maximize net interest income within
acceptable risk parameters. The following table sets forth funding sources at
June 30, 1994 and December 31, 1993.
FUNDING SOURCES
- --------------------------------------------------------------
JUNE 30 December 31
In millions 1994 1993
- -------------------------------------------------------------
Deposits
Demand, savings and money market $18,932 $18,621
Time 14,017 14,494
- -------------------------------------------------------------
Total deposits 32,949 33,115
- -------------------------------------------------------------
Borrowed funds
Repurchase agreements 4,547 4,995
Treasury, tax and loan 5,427 3,414
Federal funds purchased 2,123 2,066
Commercial paper 1,161 514
Other 144 673
- -------------------------------------------------------------
Total borrowed funds 13,402 11,662
- -------------------------------------------------------------
Notes and debentures 11,437 9,585
- -------------------------------------------------------------
Total $57,788 $54,362
- -------------------------------------------------------------
Total deposits at June 30, 1994 declined slightly since year-end as
decreases in brokered and other deposits more than offset the impact of acquired
deposits. Brokered deposits are primarily included in time deposits. Such
deposits totaled $2.9 billion at June 30, 1994, compared with $4.1 billion at
December 31, 1993. These deposits are expected to decline further in future
periods as they mature and alternative funding sources are employed. Retail
brokered deposits are issued or participated-out by brokers in denominations of
$100,000 or less and are fully insured. Such deposits represented 66.0 percent
of the
13
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PNC BANK CORP.
- --------------------------------------------------------------------------------
Corporate Financial Review
total at June 30, 1994, compared with 63.7 percent at year-end 1993.
At June 30, 1994, treasury, tax and loan borrowings increased $2.0 billion
from year-end 1993 due to relatively lower costs associated with such funds.
Notes and debentures increased $1.8 billion since year-end 1993. During the
first six months of 1994, the Corporation issued $2.9 billion of variable-rate,
unsecured bank notes with maturities of one year and $200 million of 7.75
percent subordinated debentures due in 2004.
SECURITIES At June 30, 1994, securities totaled $23.2 billion and were comprised
of $16.0 billion of investment securities and $7.2 billion of securities
available for sale. The comparable amounts at year-end 1993 were $11.7 billion
and $11.4 billion, respectively. At June 30, 1994, the securities portfolio
included $16.7 billion of collateralized mortgage obligations and
mortgage-backed securities with an aggregate weighted-average expected maturity
of 3 years and 7 months. As part of the overall asset/liability management
strategy, the Corporation invests in collateralized mortgage obligations and
mortgage-backed securities, primarily government agency-backed instruments. The
characteristics of these investments include attractive yields, principal
guarantees, marketability and availability as collateral for additional
liquidity. A risk associated with fixed-rate mortgage-related securities is the
rate of prepayment inherent in the underlying mortgages. The Corporation manages
this risk through the use of the income simulation model. The following table
sets forth the securities portfolio at June 30, 1994 and December 31, 1993.
SECURITIES
- ---------------------------------------------------------------------------------------------------------------------------------
June 30, 1994 December 31, 1993
------------------------------------------------ ------------------------------------------------
Unrealized Unrealized
Amortized ------------------ Fair Amortized ------------------ Fair
In millions Cost Gains Losses Value Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------------------------
Investment securities
Debt securities
U.S. Treasury $ 1,774 $ 32 $ 1,742 $ 1 $ 1
U.S. Government
agencies and
corporations 11,747 690 11,057 10,227 $ 39 $32 10,234
State and municipal 364 $20 1 383 389 38 427
Other debt 1,785 36 1,749 810 3 4 809
Corporate stocks and
other 301 1 302 245 245
- ---------------------------------------------------------------------------------------------------------------------------------
Total $15,971 $21 $759 $15,233 $11,672 $ 80 $36 $11,716
- ---------------------------------------------------------------------------------------------------------------------------------
Securities available
for sale
Debt securities
U.S. Treasury $ 2,624 $ 1 $ 72 $ 2,553 $ 2,402 $ 2 $ 2 $ 2,402
U.S. Government
agencies and
corporations 3,931 2 91 3,842 8,023 114 16 8,121
State and municipal 2 2 2 2
Other debt 668 5 6 667 788 18 4 802
Corporate stocks and
other 154 25 7 172 36 25 61
- ---------------------------------------------------------------------------------------------------------------------------------
Total $ 7,379 $33 $176 $ 7,236 $11,251 $159 $22 $11,388
- ---------------------------------------------------------------------------------------------------------------------------------
14
15
PNC BANK CORP.
- --------------------------------------------------------------------------------
Corporate Financial Review
Capital
The current economic and regulatory environment has placed an increased emphasis
on capital strength. Acquisition capability, funding alternatives, new business
activities, deposit insurance costs, and the level and nature of expanded
regulatory oversight depend in large part on a banking institution's capital
classification. At June 30, 1994, the capital position of each bank affiliate
was classified as well capitalized.
RISK-BASED CAPITAL AND LEVERAGE RATIOS
- ---------------------------------------------------------------
June 30 December 31
Dollars in millions, except ratios 1994 1993
- ---------------------------------------------------------------
CAPITAL COMPONENTS
Shareholders' equity $ 4,349 $ 4,325
Goodwill (352) (85)
Net unrealized securities (gains)
losses 154 (88)
- ---------------------------------------------------------------
Total Tier I risk-based capital 4,151 4,152
- ---------------------------------------------------------------
Subordinated debt 583 554
Eligible allowance for credit
losses 753 547
- ---------------------------------------------------------------
Total risk-based capital $ 5,487 $ 5,253
- ---------------------------------------------------------------
ASSETS
Risk-weighted assets and off-
balance-sheet instruments $46,173 $43,380
Average tangible assets 59,378 52,923
- ---------------------------------------------------------------
CAPITAL RATIOS
Tier I risk-based capital 8.99% 9.57%
Total risk-based capital 11.88 12.11
Leverage 6.99 7.85
- ---------------------------------------------------------------
The minimum regulatory capital ratios are 4.00 percent for Tier I, 8.00
percent for total risk-based and 3.00 percent for leverage. However, regulators
may require higher capital levels when a bank's particular circumstances
warrant.
The leverage ratio declined during the first six months of 1994, as a result
of completed purchase acquisitions. Capital ratios are expected to decline
further by year-end 1994 as a result of the BlackRock transaction. The
Corporation maintains its capital position primarily through its dividend policy
and retained earnings. During the first six months of 1994, the Corporation
retained capital of $243.6 million.
15
16
PNC BANK CORP.
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Corporate Financial Review
Second Quarter 1994 versus
Second Quarter 1993
Net income for the second quarter of 1994 was $187.8 million, or $.79 per fully
diluted common share, compared with $169.1 million, or $.71 per share, in the
comparable quarter of 1993. Return on assets and return on common shareholders'
equity were 1.26 percent and 17.70 percent, respectively, in the second quarter
of 1994. The corresponding returns in 1993 were 1.35 percent and 17.59 percent.
On a fully taxable-equivalent basis, net interest income for the second
quarter of 1994 was $501.4 million, an increase of $35.2 million, or 7.6
percent, from the comparable year-earlier period. The growth in net interest
income was due to higher levels of average earning assets. The net interest
margin narrowed 38 basis points in the comparison, primarily due to the PNC
Mortgage acquisition, a reduced benefit of noninterest-bearing sources and a
lower benefit of interest rate swaps.
The provision for credit losses was $25.0 million in the second quarter of
1994, compared with $53.8 million in the second quarter 1993. Continuing
improvement in economic conditions combined with management's ongoing efforts to
improve asset quality resulted in lower nonperforming assets and charge-offs,
and a higher reserve coverage of nonperforming loans.
Excluding the results of securities transactions, noninterest income
increased $40.5 million, or 21.6 percent, to $228.3 million during the second
quarter of 1994. Investment management and trust totaled $73.5 million, an
increase of 6.4 percent. Revenue growth from new trust business and mutual fund
accounting and administrative services was partially offset by a decline in
fees resulting from lower levels of managed assets. Service charges, fees and
commissions totaled $92.2 million, an increase of 4.9 percent from the second
quarter of 1993. The increase was primarily from growth in deposit and
corporate services revenue. Mortgage banking income increased to $42.7 million,
compared with $9.1 million in 1993 due to the PNC Mortgage acquisition.
Noninterest expense increased to $418.3 million, compared with $345.1
million a year ago, primarily due to acquisitions. Excluding acquisitions,
noninterest expense increased less than one percent when compared with the
second quarter of 1993.
16
17
PNC BANK CORP.
- --------------------------------------------------------------------------------
Consolidated Balance Sheet
- -----------------------------------------------------------------------------------------------------------------------------
June 30 December 31
Dollars in millions, except par values 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 1,989 $ 1,817
Short-term investments 672 856
Loans held for sale 804 1,392
Securities available for sale 7,236 11,388
Investment securities, fair value of $15,233 and $11,716 15,971 11,672
Loans, net of unearned income of $218 and $222 34,860 33,308
Allowance for credit losses (1,036) (972)
- -----------------------------------------------------------------------------------------------------------------------------
Net loans 33,824 32,336
Other 3,471 2,619
- -----------------------------------------------------------------------------------------------------------------------------
Total assets $63,967 $62,080
- -----------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Deposits
Noninterest-bearing $ 6,257 $ 7,057
Interest-bearing 26,692 26,058
- -----------------------------------------------------------------------------------------------------------------------------
Total deposits 32,949 33,115
- -----------------------------------------------------------------------------------------------------------------------------
Borrowed funds
Federal funds purchased 2,123 2,066
Repurchase agreements 4,547 4,995
Commercial paper 1,161 514
Other 5,571 4,087
- -----------------------------------------------------------------------------------------------------------------------------
Total borrowed funds 13,402 11,662
- -----------------------------------------------------------------------------------------------------------------------------
Notes and debentures 11,437 9,585
Accrued expenses and other liabilities 1,830 3,393
- -----------------------------------------------------------------------------------------------------------------------------
Total liabilities 59,618 57,755
- -----------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Preferred stock--$1 par value
Authorized: 17,628,760 and 17,663,791 shares
Issued and outstanding: 948,202 and 983,233 shares
Aggregate liquidation value: $20 1 1
Common stock--$5 par value
Authorized: 450,000,000 shares
Issued: 235,687,237 and 234,994,196 shares 1,179 1,175
Capital surplus 461 450
Retained earnings 2,958 2,715
Deferred ESOP benefit expense (95) (95)
Net unrealized securities gains (losses) (154) 88
Common stock held in treasury at cost: 26,767 and 288,959 shares (1) (9)
- -----------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 4,349 4,325
- -----------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $63,967 $62,080
- -----------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
17
18
PNC BANK CORP.
- --------------------------------------------------------------------------------
Consolidated Statement of Income
- ---------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Six months ended
June 30 June 30
------------------------ --------------------------
In thousands, except per share data 1994 1993 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Loans and fees on loans $594,011 $475,335 $1,166,847 $ 961,554
Securities 316,647 315,936 612,455 614,433
Other 24,336 9,205 50,796 18,042
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest income 934,994 800,476 1,830,098 1,594,029
- ---------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Deposits 217,512 188,536 417,516 387,713
Borrowed funds 110,574 98,827 207,311 187,350
Notes and debentures 113,949 57,467 214,971 109,629
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest expense 442,035 344,830 839,798 684,692
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income 492,959 455,646 990,300 909,337
Provision for credit losses 25,030 53,814 50,045 115,231
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income less provision for credit losses 467,929 401,832 940,255 794,106
- ---------------------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Investment management and trust 73,494 69,093 146,461 135,366
Service charges, fees and commissions 92,205 87,904 180,041 169,349
Mortgage banking 42,658 9,082 80,363 16,976
Net securities gains (85) 6,616 30,307 111,777
Other 19,968 21,739 49,619 41,247
- ---------------------------------------------------------------------------------------------------------------------------------
Total noninterest income 228,240 194,434 486,791 474,715
- ---------------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Staff expense 203,972 169,936 410,871 346,340
Net occupancy and equipment 66,860 54,773 132,142 113,092
Other 147,463 120,439 302,128 272,731
- ---------------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 418,295 345,148 845,141 732,163
- ---------------------------------------------------------------------------------------------------------------------------------
Income before income taxes and cumulative
effect of changes in accounting principles 277,874 251,118 581,905 536,658
Applicable income taxes 90,029 81,976 188,371 180,505
- ---------------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of changes in accounting
principles 187,845 169,142 393,534 356,153
Cumulative effect of changes in accounting principles,
net of tax benefit of $5,343 (19,393)
- ---------------------------------------------------------------------------------------------------------------------------------
Net income $187,845 $169,142 $ 393,534 $ 336,760
- ---------------------------------------------------------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE
Primary before cumulative effect of changes in accounting
principles $.79 $ .71 $1.66 $1.50
Cumulative effect of changes in accounting principles (.08)
- ---------------------------------------------------------------------------------------------------------------------------------
Primary $.79 $ .71 $1.66 $1.42
- ---------------------------------------------------------------------------------------------------------------------------------
Fully diluted before cumulative effect of changes in accounting
principles $.79 $ .71 $1.65 $1.49
Cumulative effect of changes in accounting principles (.08)
- ---------------------------------------------------------------------------------------------------------------------------------
Fully diluted $.79 $ .71 $1.65 $1.41
- ---------------------------------------------------------------------------------------------------------------------------------
CASH DIVIDENDS DECLARED PER COMMON SHARE $.32 $.285 $ .64 $ .57
AVERAGE COMMON SHARES OUTSTANDING
Primary 237,241 236,561 236,974 236,241
Fully diluted 239,086 238,751 238,887 238,545
- ---------------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
18
19
PNC BANK CORP.
- --------------------------------------------------------------------------------
Consolidated Statement of Cash Flows
- ---------------------------------------------------------------------------------------------------------------------------------
Six months ended June 30
In millions 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 394 $ 337
Adjustments to reconcile net income to net cash provided by operating activities
Cumulative effect of changes in accounting principles 19
Provision for credit losses 50 115
Depreciation, amortization and accretion 126 94
Deferred income taxes (3) (10)
Net securities gains (30) (112)
Net gain on sales of assets (54) (5)
Valuation adjustments on foreclosed assets, net of gains on sales (11) (5)
Change in
Loans held for sale 642 (177)
Trading account securities (71) (81)
Other (240) 28
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 803 203
- ---------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Net change in loans (600) 415
Repayment
Securities available for sale 1,630 614
Investment securities 1,867 2,914
Sales
Securities available for sale 7,325 10,666
Investment securities 34 11
Loans 561 51
Foreclosed assets 54 56
Purchases
Securities available for sale (7,329) (9,757)
Investment securities (4,922) (6,110)
Loans (17) (226)
Net cash paid for acquisitions (462)
Other 392 733
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (1,467) (633)
- ---------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net change in
Noninterest-bearing deposits (1,128) 282
Interest-bearing deposits (1,396) (1,241)
Federal funds purchased 53 (849)
Sale/issuance
Repurchase agreements 72,192 97,276
Commercial paper 2,152 3,804
Other borrowed funds 50,964 17,914
Notes and debentures 3,948 2,556
Common stock 20 27
Redemption/maturity
Repurchase agreements (72,640) (95,960)
Commercial paper (1,504) (4,209)
Other borrowed funds (49,477) (18,676)
Notes and debentures (2,190) (118)
Acquisition of treasury stock (6) (6)
Cash dividends paid to shareholders (152) (134)
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 836 666
- ---------------------------------------------------------------------------------------------------------------------------------
INCREASE IN CASH AND DUE FROM BANKS 172 236
Cash and due from banks at beginning of year 1,817 2,117
- ---------------------------------------------------------------------------------------------------------------------------------
Cash and due from banks at end of period $ 1,989 $ 2,353
- ---------------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
19
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PNC BANK CORP.
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Notes to Consolidated Financial Statements
Basis of Financial Statement Presentation
The unaudited consolidated interim financial statements have been prepared in
accordance with generally accepted accounting principles and include the
accounts of PNC Bank Corp. and its subsidiaries ("Corporation"), substantially
all of which are wholly owned. In the opinion of management, the financial
statements reflect all adjustments, which are of a normal recurring nature,
necessary for a fair statement of the results for the interim periods presented.
In preparing the unaudited consolidated interim financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the balance sheet
and revenues and expenses for the period. Actual results could differ from such
estimates.
The notes included herein should be read in conjunction with the audited
consolidated financial statements included in the 1993 Annual Report.
Reclassifications
Certain prior period amounts have been reclassified to conform to reporting
classifications utilized for the current reporting period. These
reclassifications did not impact the Corporation's financial condition or
results of operations.
Earnings per Common Share
Primary earnings per common share is calculated by dividing net income adjusted
for preferred stock dividends declared by the sum of the weighted average number
of shares of common stock outstanding and the number of shares of common stock
which would be issued assuming the exercise of stock options during each period.
Fully diluted earnings per common share is based on net income adjusted for
interest expense, net of tax, on outstanding convertible debentures and
dividends declared on nonconvertible preferred stock. The weighted average
number of shares of common stock outstanding is increased by the assumed
conversion of outstanding convertible preferred stock and convertible debentures
from the beginning of the year and the number of shares of common stock which
would be issued assuming the exercise of stock options. Adjustments to net
income and the weighted average number of shares of common stock outstanding are
made only when such adjustments dilute earnings per common share.
Changes in Accounting Principles
SECURITIES Effective December 31, 1993, the Corporation adopted Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Securities are classified as
investments and carried at amortized cost if management has the positive intent
and ability to hold the securities to maturity. Securities purchased with the
intention of recognizing short-term profits are placed in the trading account
and are carried at market value. Securities not classified as investments or
trading are designated as securities available for sale and carried at fair
value with unrealized gains and losses reflected in shareholders' equity. Prior
to the adoption of SFAS No. 115, securities available for sale were carried at
the lower of cost or fair value.
INCOME TAXES Effective January 1, 1993, the Corporation adopted SFAS No. 109,
"Accounting for Income Taxes," which requires the use of the liability method to
account for deferred income taxes. Under this method, deferred tax assets and
liabilities are determined based on differences between financial reporting and
tax bases of assets and liabilities and are measured using the enacted tax rates
and laws that will be in effect when the differences are expected to reverse.
Previously, deferred income taxes were accounted for using the deferred method.
The cumulative effect of the change decreased net income in 1993 by $9.0
million or $.04 per fully diluted share.
INTANGIBLE ASSETS Effective January 1, 1993, the Corporation changed its method
of accounting for certain identifiable intangible assets, consisting primarily
of purchased mortgage servicing rights. Such assets are
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PNC BANK CORP.
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Notes to Consolidated Financial Statements
accounted for at the lower of amortized cost or the estimated value of future
net revenues on a disaggregated basis. The estimated value of these assets is
determined by discounting the related expected future net cash flows at a rate
no less than the original discount rate. Previously, cash flows were not
discounted for this purpose.
The cumulative effect of the change decreased net income in 1993 by $10.4
million or $.04 per fully diluted share.
Mergers and Acquisitions
On November 30, 1993, the Corporation consummated its acquisition of PNC
Mortgage (formerly Sears Mortgage Banking Group) for $328 million in cash. The
purchase price is subject to certain post-closing adjustments. The transaction
was recorded under the purchase method of accounting and the total assets of PNC
Mortgage were $7.6 billion at closing.
During the first six months of 1994, the Corporation completed the purchase
of United Federal Bancorp, Inc., State College, Pennsylvania, and First Eastern
Corp., Wilkes-Barre, Pennsylvania, for a total of $486 million in cash. The
combined assets and deposits totaled $2.8 billion and $2.4 billion,
respectively, at closing. The Corporation also completed the acquisition of a
$10-billion residential mortgage servicing portfolio from the Associates
Corporation of North America for $117 million in cash.
During the second quarter of 1994, the Corporation entered into a definitive
agreement to acquire BlackRock Financial Management, L.P., a New York-based
fixed-income investment management firm with approximately $23 billion in assets
under management. The purchase price will approximate $240 million in cash and
notes. This transaction is expected to close in the fourth quarter of 1994,
pending regulatory and other approvals.
Subsequent to June 30, 1994, the Corporation announced agreements to acquire
Brentwood Financial Corporation, Cincinnati, Ohio, and Indian River Federal
Savings Bank, Vero Beach, Florida. The aggregate purchase price approximates $33
million in cash. The combined assets and deposits totaled approximately $175
million and $141 million, respectively, at June 30, 1994. These transactions are
expected to close in the fourth quarter of 1994, subject to regulatory and
shareholder approvals.
Cash Flows
During the first six months of 1994 and 1993, interest paid on deposits and
other contractual debt obligations totaled $816.5 million and $558.4 million,
respectively, and income taxes paid were $258.8 million and $199.6 million,
respectively.
Noncash investing activities consisted of transfers of securities available
for sale to investment securities totaling $2.7 billion during the first six
months of 1994 and transfers of loans to foreclosed assets aggregating $18.2
million in both 1994 and 1993. In connection with acquisitions completed during
1994, the Corporation acquired assets of $2.8 billion and assumed liabilities of
$2.7 billion. The cash paid totaled $580 million and the Corporation received
$128 million in cash and due from banks in connection with these acquisitions.
Allowance for Credit Losses
The following table presents changes in the allowance for credit losses:
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In millions 1994 1993
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Balance at January 1 $972 $897
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Charge-offs (81) (127)
Recoveries 30 32
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Net charge-offs (51) (95)
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Provision for credit losses 50 115
Acquisitions 65
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Balance at June 30 $1,036 $917
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Notes and Debentures
During the first six months of 1994, the Corporation issued $200 million of 7.75
percent, unsecured subordinated debentures due in 2004.
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PNC BANK CORP.
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Average Consolidated Balance Sheet and Net Interest Analysis
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Six months ended June 30
Taxable-equivalent basis ------------------------------------------------------------------------------------
1994 1993
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Average balances in millions, interest in Average Average Average Average
thousands Balances Interest Yields/Rates Balances Interest Yields/Rates
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ASSETS
Interest-earning assets
Short-term investments $ 860 $ 19,886 4.66% $ 424 $ 9,923 4.72%
Securities
U.S. Treasury 3,844 91,511 4.80 2,708 64,726 4.82
U.S. Government agencies and corporations 15,363 454,198 5.91 14,878 479,317 6.44
State and municipal 374 19,349 10.34 536 25,482 9.51
Other debt 1,685 46,070 5.47 1,884 50,333 5.34
Corporate stocks and other 284 8,180 5.76 82 3,255 7.94
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Total securities 21,550 619,308 5.75 20,088 623,113 6.21
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Loans, net of unearned income
Commercial 11,714 417,899 7.19 10,641 358,506 6.79
Real estate project 1,729 65,594 7.65 1,901 66,115 7.01
Real estate mortgage 9,018 308,794 6.85 3,960 172,611 8.72
Consumer 8,534 345,726 8.17 7,831 347,836 8.96
Other 1,283 38,785 6.07 866 28,120 6.51
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Total loans, net of unearned income 32,278 1,176,798 7.34 25,199 973,188 7.78
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Other interest-earning assets 937 30,973 6.62 322 8,170 5.12
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Total interest-earning assets/interest
income 55,625 1,846,965 6.67 46,033 1,614,394 7.04
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Noninterest-earning assets
Allowance for credit losses (992) (915)
Cash and due from banks 2,128 1,949
Other assets 2,536 1,912
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Total assets $59,297 $48,979
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LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities
Interest-bearing deposits
Demand $ 3,378 14,659 .87 $ 3,042 12,853 .85
Savings 2,386 10,721 .91 2,253 13,281 1.19
Money market 6,494 69,676 2.16 5,656 56,527 2.02
Certificates of deposit of $100,000 or
more 3,541 87,467 4.97 2,458 70,207 5.76
Other time 9,569 223,989 4.72 9,228 231,324 5.06
Deposits in foreign offices 555 11,004 4.00 237 3,521 3.00
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Total interest-bearing deposits 25,923 417,516 3.25 22,874 387,713 3.42
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Borrowed funds
Federal funds purchased 2,539 46,760 3.71 1,635 24,877 3.08
Repurchase agreements 5,468 100,069 3.69 7,639 130,464 3.44
Commercial paper 714 13,776 3.89 841 13,924 3.34
Other 2,532 46,706 3.72 706 18,086 5.16
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Total borrowed funds 11,253 207,311 3.72 10,821 187,351 3.49
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Notes and debentures 10,589 214,971 4.07 5,163 109,628 4.28
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Total interest-bearing liabilities/interest
expense 47,765 839,798 3.54 38,858 684,692 3.55
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Noninterest-bearing liabilities and
shareholder's equity
Demand and other noninterest-bearing
deposits 6,073 5,216
Accrued expenses and other liabilities 1,160 1,064
Shareholders' equity 4,299 3,841
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Total liabilities and shareholders' equity $59,297 $48,979
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Interest rate spread including interest rate
swaps 3.13 3.49
Impact of noninterest-bearing liabilities .50 .55
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Net interest income/margin on earning assets $1,007,167 3.63% $929,702 4.04%
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Nonaccrual loans are included in loans, net of unearned income. The impact of
interest rate swaps is included in the interest income/expense and average
yields/ rates for commercial loans, real estate mortgages, U.S. Government
agencies and corporations securities, demand, savings, money market,
certificates of deposit of $100,000 or more, and other time deposits, and other
borrowed funds.
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PNC BANK CORP.
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1994 1993
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Second Quarter First Quarter Second Quarter
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Average Average Average Average Average Average
Balances Interest Yields/Rates Balances Interest Yields/Rates Balances Interest Yields/Rates
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$ 855 $ 10,666 5.00% $ 864 $ 9,220 4.32% $ 412 $ 4,113 4.01%
4,244 51,997 4.91 3,439 39,514 4.66 3,149 36,468 4.65
15,206 229,640 6.04 15,520 224,558 5.79 14,626 233,683 6.39
369 9,566 10.36 379 9,783 10.33 524 12,408 9.47
1,746 24,823 5.69 1,625 21,247 5.23 2,803 35,532 5.07
294 3,996 5.44 275 4,184 6.10 82 2,233 10.89
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21,859 320,022 5.86 21,238 299,286 5.65 21,184 320,324 6.05
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12,075 213,853 7.10 11,349 204,046 7.29 10,705 179,705 6.73
1,736 33,767 7.80 1,723 31,827 7.49 1,876 32,205 6.89
8,981 156,806 6.98 9,055 151,988 6.71 3,892 82,997 8.53
8,617 175,131 8.15 8,450 170,595 8.19 7,858 172,999 8.83
1,122 19,448 6.94 1,446 19,337 5.38 853 13,506 6.34
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32,531 599,005 7.38 32,023 577,793 7.29 25,184 481,412 7.66
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817 13,705 6.71 1,057 17,268 6.54 295 5,115 6.92
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56,062 943,398 6.74 55,182 903,567 6.59 47,075 810,964 6.90
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(997) (986) (920)
2,029 2,228 2,046
2,531 2,542 1,951
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$59,625 $58,966 $50,152
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$ 3,380 8,644 .99 $ 3,377 6,315 .76 $ 3,074 5,808 .76
2,381 6,851 1.15 2,391 3,870 .66 2,267 6,105 1.08
6,495 37,421 2.31 6,493 32,255 2.01 5,612 27,352 1.95
3,302 41,298 5.01 3,782 46,169 4.94 2,325 33,498 5.78
9,686 114,466 4.74 9,450 109,523 4.70 9,187 114,022 4.98
884 9,132 4.14 223 1,872 3.41 247 1,751 2.84
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26,128 217,812 3.34 25,716 200,004 3.15 22,712 188,536 3.33
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2,821 28,434 4.04 2,254 18,326 3.30 1,756 13,160 3.01
4,879 48,241 3.97 6,065 51,828 3.47 8,304 70,804 3.42
925 9,681 4.20 500 4,095 3.32 626 5,166 3.31
2,342 24,218 4.15 2,724 22,488 3.21 799 9,697 4.87
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10,967 110,574 4.04 11,543 96,737 3.37 11,485 98,827 3.45
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11,030 113,949 4.14 10,142 101,022 4.04 5,578 57,467 4.13
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48,125 442,335 3.68 47,401 397,763 3.39 39,775 344,830 3.48
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6,124 6,021 5,379
1,108 1,214 1,129
4,268 4,330 3,869
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$59,625 $58,966 $50,152
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3.06 3.20 3.42
.52 .48 .54
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$501,063 3.58% $505,804 3.68% $466,134 3.96%
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PNC BANK CORP.
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Corporate Information
Stock Listing
PNC Bank Corp.'s common stock is traded on the New York Stock Exchange (NYSE)
under the symbol PNC.
Registrar and Transfer Agent
Chemical Bank
J.A.F. Building P.O. Box 3068
New York, New York 10116-3068
800-982-7652
Inquiries
Individual shareholders should contact:
The PNC Bank Hotline at 800-982-7652 or
Shareholder Relations at 800-843-2206.
Analysts and institutional investors should contact:
William H. Callihan, Vice President,
Investor Relations at 412-762-8257.
News media representatives and others seeking
general information should contact:
Jonathan Williams, Vice President,
Media Relations at 412-762-4550.
Form 10-Q:
PNC Bank Corp.'s Quarterly Report on Form 10-Q is filed with the Securities and
Exchange Commission. This report, excluding exhibits, may be obtained without
charge by writing to Samuel R. Patterson, Senior Vice President, Financial
Reporting, at corporate headquarters.
Corporate Headquarters
PNC Bank Corp.
One PNC Plaza
Fifth Avenue and Wood Street
Pittsburgh, Pennsylvania 15265
Stock Prices/Dividends Declared
The table below sets forth by quarter the range of high and low sale prices for
PNC Bank Corp.'s common stock and cash dividends declared per common share.
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Daily Sale Prices
----------------------- Cash Dividends
High Low Declared
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1994 QUARTER
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FIRST $29.875 $25.250 $ .320
SECOND 31.625 26.125 .320
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TOTAL $ .640
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1993 Quarter
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First $35.000 $27.000 $ .285
Second 36.125 29.750 .285
Third 32.750 28.500 .285
Fourth 31.125 27.625 .320
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Total $1.175
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Dividend Reinvestment and
Stock Purchase Plan
PNC Bank Corp.'s 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.
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