1
EXHIBIT 13
Index to Financial Information
CORPORATE FINANCIAL REVIEW
1995 VERSUS 1994
23 Overview
23 Mergers and Acquisitions
24 Income Statement Review
27 Balance Sheet Review
31 Financial Derivatives
35 Line of Business Results
39 Risk Management
1994 VERSUS 1993
43 Overview
43 Mergers and Acquisitions
43 Income Statement Review
44 Balance Sheet Review
REPORTS ON CONSOLIDATED FINANCIAL STATEMENTS
45 Management's Report on the Financial Reporting Internal Control Structure
45 Report of Ernst & Young LLP, Independent Auditors
CONSOLIDATED FINANCIAL STATEMENTS
46 Consolidated Balance Sheet
47 Consolidated Statement of Income
48 Consolidated Statement of Changes in Shareholders' Equity
49 Consolidated Statement of Cash Flows
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
50 Accounting Policies
53 Mergers and Acquisitions
53 Cash Flows
54 Securities
55 Loans and Commitments to Extend Credit
56 Nonperforming Assets
56 Allowance for Credit Losses
56 Premises, Equipment and Leasehold Improvements
57 Intangible Assets and Mortgage Servicing Rights
57 Notes and Debentures
58 Shareholders' Equity
58 Financial Derivatives
62 Special Charges
62 Employee Benefit Plans
64 Incentive Plans
65 Income Taxes
65 Regulatory Matters
66 Litigation
66 Other Financial Information
68 Unused Line of Credit
69 Fair Values of Financial Instruments
STATISTICAL INFORMATION
71 Selected Consolidated Financial Data
72 Selected Quarterly Financial Data
73 Analysis of Year-to-Year Changes in Net Interest Income
74 Average Consolidated Balance Sheet and Net Interest Analysis
76 Securities
77 Loans
78 Nonperforming Assets
78 Past Due Loans
79 Allowance for Credit Losses
80 Maturity of Time Deposits of $100,000 or More
81 Borrowed Funds
81 Taxable-Equivalent Adjustment
2
CORPORATE FINANCIAL REVIEW 1995 VERSUS 1994
The merger between PNC Bank Corp. and Midlantic Corporation ("Midlantic") was
completed on December 31, 1995 and accounted for as a pooling of interests.
Accordingly, all financial information has been restated as if the companies
were combined for all periods presented.
The Corporate Financial Review should be read in conjunction with the PNC Bank
Corp. and subsidiaries ("Corporation") Consolidated Financial Statements and
Statistical Information included herein.
OVERVIEW
Net income for 1995 totaled $408.1 million, or $1.19 per fully diluted share,
compared with $883.9 million, or $2.52 per fully diluted share, for 1994.
Returns on average assets and average common shareholders' equity for 1995 were
.54 percent and 7.05 percent, respectively. The 1995 results include $380.2
million of after-tax charges recorded in connection with the Midlantic merger
and actions taken to reposition the Corporation's balance sheet. Excluding
these charges, 1995 earnings were $788.3 million, or $2.29 per fully diluted
share. On this basis, returns on average assets and average common
shareholders' equity were 1.05 percent and 13.67 percent, respectively.
The financial results for 1995 include the impact of several
major initiatives. The Midlantic and Chemical Bank New Jersey
("Chemical") transactions moved the Corporation into the second
and third largest retail deposit market share positions in
Philadelphia and New Jersey, respectively. The in-market nature
of these transactions is expected to generate substantial economies
by reducing costs associated with overlapping and duplicative
operations and provide opportunities to enhance revenues
through marketing of the Corporation's products and services
to a new customer base. The acquisitions also provided a more
stable consumer deposit funding base, reducing the need for
wholesale funding, and added attractive middle-market and
consumer assets.
The Corporation accelerated and substantially completed the
balance sheet repositioning begun in the latter half of 1994.
The securities portfolio and related reliance on wholesale
funding were significantly reduced. At year-end 1995,
securities represented 23.7 percent of earning assets compared
with 33.9 percent at the end of 1994. Wholesale funding,
which includes brokered and foreign deposits, borrowed funds
and certain notes and debentures, was reduced to 28.2 percent
of total sources of funds compared with 35.9 percent a year
ago. In addition, the Corporation terminated $15.1 billion
notional value of financial derivative contracts.
Asset management capabilities were strengthened with the
acquisition of BlackRock Financial Management, L.P.
("BlackRock"), which brought extensive fixed-income
investment management capabilities to the Corporation.
The Corporation continued to invest in operating platforms
and alternative retail delivery systems. The National Financial
Services Center, a state-of-the-art telebanking center, strengthened
the Corporation's ability to deliver cost-effective services and
products. In addition, strategic alliances designed to leverage
delivery capabilities were implemented in the credit card and
merchant processing businesses. In January 1996, an agreement
was entered into with the American Automobile Association to
offer financial services and products to the organization's 34
million members. These services and products will be offered
nationally and leverage the Corporation's alternative delivery
capabilities.
MERGERS AND ACQUISITIONS
On December 31, 1995, Midlantic, a bank holding company
with $13.6 billion in assets, merged with the Corporation.
Each outstanding share of Midlantic common stock was
converted into 2.05 shares of the Corporation's common
stock. Approximately 112 million shares of the Corporation's
common stock were issued in connection with the merger. The
transaction was accounted for as a pooling of interests.
On October 6, 1995, the Corporation acquired Chemical's
franchise in southern and central New Jersey with total assets of
$3.2 billion and retail core deposits of $2.7 billion. No
nonperforming assets were acquired. The Corporation paid
$492 million in cash and the transaction was accounted for
under the purchase method.
In February 1995, the Corporation acquired BlackRock, a
New York-based, fixed-income investment management firm
with approximately $25 billion in assets under management at
closing. The Corporation paid $71 million in cash and issued
$169 million of unsecured notes and accounted for the
transaction under the purchase method.
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3
CORPORATE FINANCIAL REVIEW 1995 VERSUS 1994
INCOME STATEMENT REVIEW
INCOME STATEMENT HIGHLIGHTS
Year ended December 31
Change
-------------------
Dollars in millions 1995 1994 Amount Percent
- -----------------------------------------------------------------------------
Net interest income
(taxable-equivalent basis) $2,189 $2,530 $(341) (13.5)%
Provision for credit losses 6 84 (78) (92.9)
Noninterest income before
net securities losses 1,241 1,181 60 5.1
Net securities losses (280) (142) (138) (97.2)
Noninterest expense before
special charges 2,209 2,190 19 .9
Special charges 260 48 212 NM
Net income 408 884 (476) (53.8)
- -----------------------------------------------------------------------------
<FN>
NM - not meaningful
NET INTEREST INCOME Net interest income is the difference
between interest income and interest expense. The level and
volatility of interest rates affect interest received or paid on
assets, liabilities and off-balance-sheet financial instruments
and, as a result, impact net interest income.
NET INTEREST INCOME
Year ended December 31
Taxable-equivalent basis
Change
------------------
Dollars in millions 1995 1994 Amount Percent
- ---------------------------------------------------------------------------------
Interest income/expense
before financial derivatives
Interest income $5,224 $4,600 $ 624 13.6%
Loan fees 82 83 (1) (1.2)
Taxable-equivalent adjustment 47 38 9 23.7
-------------------------------
Total interest income 5,353 4,721 632 13.4
Interest expense 2,979 2,320 659 28.4
-------------------------------
Net interest income before
financial derivatives 2,374 2,401 (27) (1.1)
Effect of financial derivatives on
Interest income (157) 41 (198) (482.9)
Interest expense 28 (88) 116 131.8
-------------------------------
Total effect of financial
derivatives (185) 129 (314) (243.4)
-------------------------------
Net interest income $2,189 $2,530 $(341) (13.5)
- ---------------------------------------------------------------------------------
Taxable-equivalent net interest income totaled $2.2 billion in
1995 compared with $2.5 billion a year earlier. The net
interest margin, the ratio of taxable-equivalent net interest
income to average earning assets, was 3.15 percent compared
with 3.64 percent in 1994. In the year-to-year comparison,
interest income increased due to higher loan volume and
yields, partially offset by a reduction in the securities
portfolio. The growth in interest income was offset by higher
expense on deposits and borrowings, which was primarily due
to higher interest rates. During 1995, net interest income and
margin were adversely impacted by interest rate swaps and
caps. During the fourth quarter of 1995, the Corporation
terminated $5.1 billion notional value of pay-fixed interest
rate swaps and $5.5 billion notional value of interest rate caps.
Such actions substantially reduced the adverse impact of these
instruments on net interest income and margin. Management
expects these actions to favorably impact net interest income
and margin in 1996 compared with 1995.
NET INTEREST MARGIN
Year ended December 31 Basis Point
Taxable-equivalent basis 1995 1994 Change
- -----------------------------------------------------------------------------
Book-basis yield on earning assets 7.51% 6.63% 88 bp
Effect of loan fees .12 .12
Taxable-equivalent adjustment .07 .05 2
---------------------------
Taxable-equivalent yield on earning assets 7.70 6.80 90
Rate on interest-bearing liabilities 5.06 3.96 110
---------------------------
Interest rate spread 2.64 2.84 (20)
Noninterest-bearing sources .78 .59 19
---------------------------
Net interest margin before
financial derivatives 3.42 3.43 (1)
Effect of financial derivatives on
Interest income (.23) .06 (29)
Interest expense .04 (.15) 19
---------------------------
Total effect of financial derivatives (.27) .21 (48)
---------------------------
Net interest margin 3.15% 3.64% (49)bp
- -----------------------------------------------------------------------------
PROVISION FOR CREDIT LOSSES The provision for credit losses
totaled $6.0 million in 1995 compared with $83.5 million in
1994 reflecting improved asset quality during the year. Based
on the current risk profile of the loan portfolio, management
does not expect to record a provision for credit losses during
1996. Should the risk profile of the loan portfolio or the
economy deteriorate, asset quality may be adversely impacted
and a provision for credit losses may be required.
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4
NONINTEREST INCOME Noninterest income before net securities losses
totaled $1.2 billion in 1995, a 5.1 percent increase compared
with the prior year. Excluding net securities losses, noninterest
income was 36.2 percent of total revenue in 1995 compared
with 31.8 percent a year earlier.
NONINTEREST INCOME
Year ended December 31 Change
---------------
Dollars in millions 1995 1994 Amount Percent
- -----------------------------------------------------------------------------
Investment management and trust
Trust $ 266 $223 $43 19.3%
Mutual funds 154 112 42 37.5
---------------------------
Total investment management and
trust 420 335 85 25.4
Service fees
Deposit 240 242 (2) (.8)
Credit card and merchant 47 60 (13) (21.7)
Corporate finance 53 50 3 6.0
Brokerage 42 34 8 23.5
Consumer 52 44 8 18.2
Insurance 25 22 3 13.6
Other 36 38 (2) (5.3)
---------------------------
Total service fees 495 490 5 1.0
Mortgage banking
Servicing 120 122 (2) (1.6)
Sale of servicing 34 61 (27) (44.3)
Marketing 33 16 17 106.3
---------------------------
Total mortgage banking 187 199 (12) (6.0)
Other 139 157 (18) (11.4)
---------------------------
Total noninterest income before
securities losses 1,241 1,181 60 5.1
Net securities losses (280) (142) (138) (97.2)
---------------------------
Total $ 961 $1,039 $ (78) (7.5)
- -----------------------------------------------------------------------------
During 1995, investment management and trust revenue
increased $84.8 million, or 25.4 percent, to $420.2 million.
BlackRock contributed $57.1 million of the increase, and the
remainder was attributable to new business and an increase in
the value of administered assets. The following table sets forth
investment management and trust revenue generated by line of
business.
INVESTMENT MANAGEMENT AND TRUST REVENUE BY LINE OF BUSINESS
Year ended December 31
In millions 1995 1994
- -------------------------------------------------------------------
Trust
Consumer Banking $172 $159
Corporate Banking 51 52
Asset Management 43 12
------------------
Total trust 266 223
Mutual funds
Asset Management 154 112
------------------
Total $420 $335
- -------------------------------------------------------------------
At December 31, 1995, assets under administration totaled
$282 billion, of which $96 billion were discretionary. The
comparable amounts at year-end 1994 were $221 billion and
$57 billion, respectively. The BlackRock acquisition added
approximately $25 billion of discretionary assets at closing.
Service fees increased $4.9 million in 1995 compared with
a year ago. Deposit services revenue declined as
corporate customers used compensating balances in lieu of
paying service charges. The decline in credit card and
merchant services fees reflects the impact of agreements with
third parties to provide certain administrative, marketing, data
processing and customer support services for the
Corporation's credit card business. Excluding the effect of
these agreements, credit card and merchant services fees
increased $5.8 million or 9.7 percent in the year-to-year
comparison.
During 1995, corporate finance fees increased 6.0 percent
reflecting higher syndication volume. Brokerage fee income
increased 23.5 percent due to higher transaction volumes.
Consumer fee income, which includes revenue from
automated teller machines ("ATM"), safe deposit services, and
other sources, increased $8.1 million, or 18.2 percent. The
increase was primarily due to higher ATM usage. Insurance
revenue increased 13.6 percent due to higher annuity sales.
During 1995, mortgage banking revenue decreased $11.9
million to $186.6 million primarily due to lower gains from
servicing sales. Marketing gains increased due to a change in
the method of accounting for the value of originated mortgage
servicing rights ("MSR"). In 1995, the Corporation adopted
new accounting guidance which provides for the immediate
recognition of the value of originated MSR. In 1995, the
Corporation recorded gains from originated MSR totaling
$37.1 million.
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5
CORPORATE FINANCIAL REVIEW 1995 VERSUS 1994
During 1995, other income totaled $138.7 million, a decrease
of $18.2 million compared with the prior year. A gain of
$11.2 million, included in other noninterest income, from
instruments used to hedge the economic value of MSR was
offset by a $10.9 million MSR impairment charge included in
noninterest expense. Excluding the mortgage-related hedge
gain, other income decreased $29.4 million, primarily due to
nonrecurring gains in 1994 from Midlantic's sales of assets
held for accelerated disposition.
Net securities losses totaled $279.7 million in 1995 and were
primarily associated with actions taken in the fourth quarter of
1995 to accelerate the Corporation's balance sheet
repositioning begun in the latter half of 1994. Approximately
$6.0 billion of securities were sold at a loss of $61.3 million.
In connection with the sales, losses totaling $228.2 million
were recognized on terminated pay-fixed interest rate swaps
designated to such securities. During 1994, net securities
losses totaled $141.6 million.
NONINTEREST EXPENSE Noninterest expense before special
charges increased .9 percent, or $19.0 million, in 1995. The
increase reflects lower deposit insurance premiums, successful
acquisition integration and continued emphasis on developing
alternative lower-cost delivery systems and rationalizing the
traditional branch delivery system. Excluding the impact of
acquisitions, special charges and the benefit of lower deposit
insurance premiums, noninterest expense decreased 1.8
percent in the comparison.
NONINTEREST EXPENSE
Change
Year ended December 31 ------------------
Dollars in millions 1995 1994 Amount Percent
- -----------------------------------------------------------------------------
Compensation $ 863 $ 838 $ 25 3.0%
Employee benefits 202 203 (1) (.5)
-------------------------------
Total staff expense 1,065 1,041 24 2.3
Net occupancy 180 180
Equipment 166 154 12 7.8
Intangible asset and MSR
amortization 115 86 29 33.7
Federal deposit insurance 58 102 (44) (43.1)
Taxes other than income 53 48 5 10.4
Other 572 579 (7) (1.2)
-------------------------------
Total noninterest expense
before special charges 2,209 2,190 19 .9
Special charges 260 48 212 NM
-------------------------------
Total $2,469 $2,238 $231 10.3%
- -----------------------------------------------------------------------------
<FN>
NM - Not meaningful
Staff expense increased 2.3 percent in the year-to-year
comparison due to acquisitions. Excluding acquisitions, staff
expense decreased 2.1 percent.
Amortization of intangible assets and MSR increased $28.4
million due to the BlackRock and Chemical acquisitions and
MSR impairment.
The decline in Federal deposit insurance reflects a reduction in
the Bank Insurance Fund premium. Approximately $5.3
billion of the Corporation's deposits insured by the Savings
Association Insurance Fund ("SAIF") continue to be assessed
a higher rate. There are several proposals for legislative action
to address recapitalization of the SAIF including a significant
one-time assessment. Management currently cannot predict
the outcome of these proposals or the effect, if any, on the
Corporation.
In connection with the Midlantic merger, the Corporation
recorded special charges of $260 million consisting of $89
million to eliminate duplicate operations and facilities, $42
million for employee severance and related costs, $49 million
for professional services and various other costs incidental to
the merger and $80 million for termination of an interest rate
cap position.
In 1994, the Corporation recorded special charges totaling $48
million in connection with the consolidation of seven
telebanking centers and rationalization of retail delivery
systems.
INCOME TAX EXPENSE Income tax expense totaled $219.0
million in 1995 compared with $318.5 million in 1994. The
effective tax rates were 34.9 percent and 26.3 percent in 1995
and 1994, respectively. The lower effective tax rate in 1994
was primarily due to a $106.8 million benefit from the
realization of Midlantic's previously unrecognized deferred
tax assets. Income tax expense for 1995 included a $15.0
million writedown of state deferred tax assets related to the
Midlantic merger.
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BALANCE SHEET REVIEW
BALANCE SHEET HIGHLIGHTS
Change
December 31 -------------------
In millions 1995 1994 Amount Percent
- -----------------------------------------------------------------------------
Assets $73,404 $77,461 $(4,057) (5.2)%
Earning assets 66,772 69,751 (2,979) (4.3)
Loans, net of unearned income 48,653 44,043 4,610 10.5
Securities 15,839 23,670 (7,831) (33.1)
Deposits 46,899 45,818 1,081 2.4
Borrowed funds 8,665 12,193 (3,528) (28.9)
Notes and debentures 10,398 12,127 (1,729) (14.3)
Shareholders' equity 5,768 5,727 41 .7
- -----------------------------------------------------------------------------
In 1995, the Corporation substantially reduced the securities
portfolio and level of related wholesale funding and, with
the Midlantic and Chemical acquisitions, significantly
increased retail core deposit liabilities. Selected balance sheet
composition ratios are set forth in the following table.
BALANCE SHEET COMPOSITION
December 31 1995 1994
- -----------------------------------------------------------------------------
Loans to earning assets 72.9% 63.1%
Securities to earning assets 23.7 33.9
Loans to deposits 103.7 96.1
Deposits to total sources of funds 63.9 59.1
Deposits to interest-bearing liabilities 84.9 76.0
Wholesale funds to total sources of funds 28.2 35.9
- -----------------------------------------------------------------------------
Total assets and earning assets were $73.4 billion and $66.8
billion, respectively, at December 31, 1995 compared with
$77.5 billion and $69.8 billion at year-end 1994. The declines
reflect the securities portfolio downsizing partially offset by
loan growth. The securities portfolio declined $7.8 billion to
$15.8 billion at December 31, 1995, and loans totaled $48.7
billion at year-end 1995, compared with $44.0 billion a year
ago.
LOANS During 1995, loans increased $4.6 billion, or 10.5
percent. The ratio of loans to earning assets increased to 72.9
percent at year-end 1995 compared with 63.1 percent a year
ago. Excluding purchase acquisitions, average loans increased
4.8 percent, primarily due to consumer and residential
mortgage loan growth. The Corporation's focus with respect to
the loan portfolio was to increase the proportion of such loans
to total loans and to change the composition to improve
overall returns on invested capital.
LOANS
December 31
In millions 1995 1994
- -----------------------------------------------------------------------------
Consumer
Home equity $ 4,541 $ 3,896
Automobile 4,236 3,508
Student 1,512 1,311
Credit card 1,004 838
Other 2,246 2,298
------------------------
Total consumer 13,539 11,851
Residential mortgage 11,689 9,746
Commercial
Manufacturing 3,363 3,148
Retail/Wholesale 3,148 2,828
Service providers 2,402 2,174
Communications 1,083 1,239
Financial services 1,082 911
Real estate related 1,291 1,154
Health care 1,028 729
Public utilities 335 310
Other 3,080 3,052
------------------------
Total commercial 16,812 15,545
Commercial real estate
Commercial mortgage 2,775 2,837
Medium-term financings 1,250 1,432
Construction and development 889 794
------------------------
Total commercial real estate 4,914 5,063
Other 2,102 2,223
Unearned income (403) (385)
------------------------
Total loans, net of unearned income $48,653 $44,043
- -----------------------------------------------------------------------------
Consumer loan outstandings increased 14.2 percent to $13.5
billion at December 31, 1995. The growth in consumer loans
was primarily due to initiatives to increase the Corporation's
credit card business and the impact of acquisitions. These
increases were partially offset by reductions in the indirect
automobile portfolio.
Residential mortgages increased 19.9 percent. As part of the
mortgage banking business, the Corporation retained for
portfolio certain originated mortgages, generally adjustable
rate mortgages with fixed initial terms of three, five, seven or
ten years. The remainder of originations were securitized and
sold, generally with servicing rights retained.
Excluding the impact of initiatives to reduce certain low-
spread loans, total commercial loan outstandings increased
approximately $2.0 billion from year-end 1994.
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CORPORATE FINANCIAL REVIEW 1995 VERSUS 1994
Commercial real estate exposure decreased slightly since year-
end 1994. Medium-term financings and construction and
development loans primarily consist of retail and office, multi-
family, hotel/motel and residential projects. Approximately 82
percent of total commercial real estate outstandings are
located in the Corporation's primary markets with the
remaining projects geographically dispersed throughout the
United States.
LOAN PORTFOLIO COMPOSITION
December 31
Percent of gross loans 1995 1994
- --------------------------------------------------------------
Consumer 27.6% 26.7%
Residential mortgage 23.8 21.9
Commercial 34.3 35.0
Commercial real estate 10.0 11.4
Other 4.3 5.0
---------------
Total 100.0% 100.0%
- --------------------------------------------------------------
Unfunded commitments represent agreements to lend funds
under specified terms provided no violations of specified
contractual conditions exist. Most commercial commitments
expire unfunded and, therefore, cash requirements are
substantially less than the total commitment. Unfunded
commitments are net of participations and syndications.
Growth in commercial unfunded commitments during 1995
was broad based and totaled $3.5 billion, or 16.8 percent. In
addition, the Corporation had letters of credit outstanding
totaling $4.5 billion and $4.6 billion at December 31, 1995
and December 31, 1994, respectively, primarily consisting of
standby letters of credit.
NET UNFUNDED COMMITMENTS TO EXTEND CREDIT
December 31
In millions 1995 1994
- --------------------------------------------------------------
Consumer $ 7,335 $ 6,050
Residential mortgage 554 769
Commercial 24,282 20,794
Commercial real estate 751 669
Other 892 917
-----------------
Total $33,814 $29,199
- --------------------------------------------------------------
SECURITIES During 1995, the Corporation reduced the size of
the securities portfolio relative to earning assets. The
securities portfolio was reduced by $7.8 billion to $15.8
billion at December 31, 1995, and represented 23.7 percent of
earning assets, compared with 33.9 percent a year ago. At
year-end 1995, all securities were classified as available for
sale. Securities classified as available for sale may be sold as
part of the overall asset/liability management process.
Realized gains and losses resulting from such sales would be
reflected in the results of operations and would include the fair
value of associated financial derivatives.
In connection with implementing new accounting guidance
issued in November 1995, the Corporation reassessed the
classifications of investment securities. All securities
previously classified as held to maturity were reclassified to
the available-for-sale portfolio. The reclassifications were
accounted for at fair value and included the fair value of
associated financial derivatives.
Subsequent to reclassifying the securities portfolio, to
accelerate the balance sheet repositioning begun in the latter
half of 1994, the Corporation sold $1.9 billion of U.S.
Treasury securities and $4.1 billion of collateralized mortgage
obligations at a loss of $61.3 million. In connection with the
sales, losses totaling $228.2 million were recognized on
terminated pay-fixed interest rate swaps with a notional value
of $5.1 billion that were designated to such securities.
At December 31, 1995, the securities portfolio included $6.2
billion of collateralized mortgage obligations and $2.4 billion
of mortgage-backed securities. The characteristics of these
investments include principal guarantees, primarily by U.S.
Government agencies, and marketability. Expected lives of
such securities can vary as interest rates change. In a declining
interest rate environment, prepayments on the underlying
mortgages may accelerate and, therefore, shorten the
expected lives. Conversely, expected lives would lengthen in a
rising interest rate environment. The Corporation monitors the
impact of this risk through the use of an income simulation
model as part of the asset/liability management process.
Other U.S. Government agencies securities and asset-backed
private placements represent AAA-rated, variable-rate
instruments. The interest rates on these instruments float with
various indices and are limited by periodic and maximum
caps. These securities have an initial specified term. At the
end of the initial term the maturity may be extended or the
security may be called at the option of the issuer. Other
mortgage-related debt securities consist primarily of private
label collateralized mortgage obligations.
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SECURITIES
1995 1994
--------------------------------------- -------------------------------------
Unrealized Unrealized
December 31 Amortized ---------------- Fair Amortized ------------- Fair
In millions Cost Gains Losses Value Cost Gains Losses Value
- -------------------------------------------------------------------------------------------------------------------------------
Securities available for sale
Debt securities
U.S. Treasury $ 3,211 $ 69 $ 3,280 $ 671 $ 8 $ 663
U.S. Government agencies
and corporations
Mortgage related 7,510 24 $75 7,459 2,161 69 2,092
Other 1,030 5 1 1,034 25 4 21
State and municipal 343 25 1 367 8 1 7
Asset-backed private placement 1,597 7 1,604
Other debt
Mortgage related 1,121 2 10 1,113 749 17 732
Other 525 3 3 525 149 $2 5 146
Corporate stocks and other 455 4 2 457 133 2 6 129
------------------------------------------------------------------------------------
Total securities
available for sale 15,792 139 92 15,839 3,896 4 110 3,790
Investment securities
Debt securities
U.S. Treasury 3,317 121 3,196
U.S. Government agencies
and corporations
Mortgage related 11,795 1 1,088 10,708
Other 1,000 28 972
State and municipal 360 12 2 370
Asset-backed private placement 1,597 33 1,564
Other debt
Mortgage related 726 43 683
Other 775 20 755
Other 310 1 311
-----------------------------------
Total investment securities 19,880 14 1,335 18,559
------------------------------------------------------------------------------------
Total securities $15,792 $139 $92 $15,839 $23,776 $18 $1,445 $22,349
- -------------------------------------------------------------------------------------------------------------------------------
At December 31, 1995, $6.1 billion notional value of interest
rate swaps and caps were associated with securities available
for sale. The fair value of securities available for sale at year-
end 1995 set forth above includes unrealized gains of $6
million on related derivatives. No financial derivatives were
designated to securities available for sale at year-end 1994.
Interest rate swaps and caps with a notional value of $11.1
billion, fair value of $204 million and carrying value of $130
million were designated to investment securities at December
31, 1994. The fair value of these derivatives is not included in
the values set forth above.
SECURITIES EXPECTED MATURITY DISTRIBUTION
Year ended December 31 Amortized
In millions Cost
- --------------------------------------------------------------
1996 $6,590
1997 2,619
1998 and beyond 6,583
-------
Total $15,792
- --------------------------------------------------------------
The expected weighted average life of the securities portfolio
was 2 years and 8 months at December 31, 1995 compared
with 3 years and 11 months at year-end 1994.
29
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CORPORATE FINANCIAL REVIEW 1995 VERSUS 1994
FUNDING SOURCES During 1995, the use of wholesale funding,
which includes brokered and foreign deposits, borrowed funds
and certain notes and debentures, was reduced. At December
31, 1995, the ratio of wholesale funding to total sources of
funds was 28.2 percent compared with 35.9 percent a year
ago. The ratio of deposits to total sources of funds increased to
63.9 percent compared with 59.1 percent a year ago. The
composition of the Corporation's funding sources will vary
depending on management's evaluation of the most cost-
effective funding alternatives.
FUNDING SOURCES
December 31
In millions 1995 1994
- --------------------------------------------------------------
Deposits
Demand, savings and money market $27,145 $27,079
Time 18,661 16,125
Foreign 1,093 2,614
-----------------
Total deposits 46,899 45,818
Borrowed funds
Federal funds purchased 3,817 2,219
Repurchase agreements 2,851 4,302
Commercial paper 753 1,226
Treasury, tax and loan 567 1,989
Other 677 2,457
-----------------
Total borrowed funds 8,665 12,193
Notes and debentures
Bank notes 6,256 8,825
Federal Home Loan Bank 2,393 1,384
Other 1,749 1,918
-----------------
Total notes and debentures 10,398 12,127
-----------------
Total funding sources $65,962 $70,138
- --------------------------------------------------------------
DEPOSITS During 1995, total deposits increased $1.1 billion, or
2.4 percent. A $2.5 billion increase in time deposits was partially
offset by a $1.5 billion decrease in foreign deposits. The Chemical
acquisition added $2.7 billion of deposits in the fourth quarter
of 1995.
Brokered deposits totaled $2.3 billion at December 31, 1995
compared with $2.8 billion at December 31, 1994. Retail
brokered deposits, which are issued or participated-out by
brokers in denominations of $100,000 or less, represented
77.8 percent of total brokered deposits at December 31, 1995
compared with 76.8 percent at year-end 1994.
BORROWED FUNDS AND NOTES AND DEBENTURES Total borrowed
funds and notes and debentures decreased $5.3 billion from
year-end 1994 primarily due to the balance sheet
repositioning.
Management believes the Corporation has sufficient liquidity
to meet its obligations to customers, debtholders and others.
The impact of maturing liabilities is reflected in the income
simulation model used in the Corporation's overall
asset/liability management process.
CAPITAL 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 financial institution's capital strength. The Corporation
manages its capital position primarily through the issuance of
debt and equity instruments, treasury stock activities, dividend
policies and retained earnings.
RISK-BASED CAPITAL AND CAPITAL RATIOS
December 31
Dollars in millions 1995 1994
- --------------------------------------------------------------
CAPITAL COMPONENTS
Shareholders' equity $ 5,768 $ 5,727
Goodwill and other intangibles (980) (458)
Net unrealized securities (gains) losses (26) 122
-----------------
Tier I risk-based capita 4,762 5,391
Subordinated debt 1,370 1,025
Eligible allowance for credit losses 750 727
-----------------
Total risk-based capital $ 6,882 $ 7,143
-----------------
ASSETS
Risk-weighted assets and off-
balance-sheet instruments $59,539 $57,578
Average tangible assets 74,756 75,883
-----------------
CAPITAL RATIOS
Tier I risk-based capital 8.00% 9.36%
Total risk-based capital 11.56 12.41
Leverage 6.37 7.10
- --------------------------------------------------------------
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. To be
classified as well capitalized, regulators require capital ratios
of 6.00 percent for Tier I, 10.00 percent for total risk-based
and 5.00 percent for leverage. At December 31, 1995, the
Corporation and each of its bank affiliates were classified as
well capitalized. Tier I risk-based capital declined during 1995
primarily due to an increase in acquisition-related intangibles.
30
10
During 1995, the Corporation repurchased 6.5 million common shares
pursuant to a stock repurchase plan authorized by the board of
directors in January 1995. The Corporation has not
repurchased any shares since the initiation of the Midlantic
merger due to constraints associated with the pooling of
interests method of accounting. Future share repurchases, if
any, are dependent on a number of additional factors
including capital adequacy, level of future earnings, balance
sheet growth and alternative capital reinvestment
opportunities.
FINANCIAL DERIVATIVES
FINANCIAL DERIVATIVES The Corporation uses a variety of off-
balance-sheet financial derivatives as part of its overall
interest rate risk management process and to manage risk
associated with mortgage banking activities.
During 1995, the notional value of financial derivatives was
reduced by $9.8 billion. In connection with asset and liability
management objectives, the Corporation terminated $4.6
billion notional value of receive-fixed index amortizing
interest rate swaps and $5.1 billion notional value pay-fixed
interest rate swaps. In connection with the Midlantic merger,
the Corporation terminated a $5.5 billion notional value
interest rate cap position that reduced exposure to higher
interest rates within a specified range. The terminated caps
were replaced with contracts that reduce exposure to rates
above a specified rate without limitation.
FINANCIAL DERIVATIVES ACTIVITY
January 1 Maturities/ December 31
In millions 1995 Additions Amortization Terminations 1995
- ----------------------------------------------------------------------------------------------------------------------------------
Interest rate risk management
Interest rate swaps
Receive-fixed index amortizing $11,400 $ (3,624) $ (4,565) $ 3,211
Received-fixed 2,644 $ 1,639 (1,498) 2,785
Pay-fixed 6,317 3,700 (2,320) (5,068) 2,629
Basis swaps 300 465 765
Interest rate caps 5,500 5,515 (5) (5,500) 5,510
Eurodollar futures 2,500 (2,500)
-------------------------------------------------------------
Total interest rate risk management 26,161 13,819 (9,947) (15,133) 14,900
Mortgage banking activities
Commitments to purchase forward contracts - originations 16 2,637 (2,222) 431
Commitments to sell forward contracts - originations 350 4,702 (4,301) 751
Interest rate floors- MSR 500 500
Receive-fixed interest rate swaps - MSR 125 125
-------------------------------------------------------------
Total mortgage banking activities 366 7,964 (6,523) 1,807
-------------------------------------------------------------
Total financial derivatives $26,527 $21,783 $(16,470) $(15,133) $16,707
- ----------------------------------------------------------------------------------------------------------------------------------
31
11
CORPORATE FINANCIAL REVIEW 1995 VERSUS 1994
Financial derivatives involve, to varying degrees, interest rate
and credit risk in excess of the amount recognized in the
balance sheet, but less than the notional amount of the
contract. For interest rate swaps, caps and floors, only periodic
cash payments and, with respect to caps and floors, premiums,
are exchanged; therefore, cash requirements and exposure to
credit risk are significantly less than the notional value. The
Corporation manages these risks as part of its asset/liability
management process and through the Corporation's credit
policies and procedures. The Corporation seeks to minimize
credit risk by entering into transactions with only a select
number of high-quality institutions, establishing credit limits,
requiring bilateral-netting agreements, and in certain
instances, segregated collateral. At December 31, 1995, credit
exposure related to interest rate swaps and caps totaled $32.7
million.
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. The
notional values of receive-fixed index amortizing swaps
amortize on predetermined dates and in predetermined
amounts based on market movements of the designated index.
Basis swaps are agreements under which both the receive and
pay portion of the contract are based on a variable index. The
Corporation's swaps do not contain leverage or any similar
features. For interest rate risk management purposes, the
Corporation uses interest rate swaps to convert fixed-rate
assets or liabilities to floating-rate instruments, convert
floating-rate assets or liabilities to fixed-rate instruments, or
convert floating-rate instruments from one index to another.
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. These
contracts can also include a contractually specified limit of
such rate differentials under which payment is required. In
connection with interest rate risk management activities,
interest rate caps and floors are used to convert fixed-rate
assets or liabilities to variable-rate instruments or convert
variable-rate assets or liabilities to fixed-rate instruments
above or below contractually specified rates.
In connection with mortgage banking activities, the
Corporation uses interest rate swaps and floors and other
financial instruments primarily to hedge the economic value
of MSR.
Forward contracts provide for the delivery of financial
instruments at a specified future date and at a specified price
or yield. The Corporation uses forward contracts to manage
risk positions associated with certain mortgage banking
activities. Forward contracts are traded in over-the-counter
markets and do not have standardized terms. Counterparties to
the Corporation's forward contracts are primarily U.S.
Government agencies and brokers and dealers in mortgage-
backed securities. In the event the counterparty is unable to
meet its contractual obligations, the Corporation may be
exposed to selling or purchasing mortgage loans at prevailing
market prices. Substantially all forward contracts mature
within 90 days of origination.
32
12
The following table sets forth the maturity distribution and
weighted average interest rates of financial derivatives used
for interest rate risk management. The expected maturity
distribution of receive-fixed index amortizing swaps is based
on implied forward rates. Weighted average interest rates paid
or received represent contractual interest rates in effect on
December 31, 1995 and expected rates based on implied
forward rates.
The expected weighted average maturity of receive-fixed
index amortizing swaps shortened to 7 months at December
31, 1995, compared with 2 years and 10 months at year-end
1994, reflecting the impact of terminations, amortization and
lower interest rates. Should interest rates increase, the maturity
of such swaps would extend. Subsequent to year-end 1995, the
Corporation terminated $2.1 billion of receive-fixed index
amortizing swaps resulting in a loss of $5.3 million. The loss
was deferred and will be amortized over the remaining life of
the contracts.
MATURITY DISTRIBUTION OF FINANCIAL DERIVATIVES
Weighted Average Rates
------------------------------------------------
Expected Based on
At December 31, 1995 Implied Forward Rates
------------------------------------------------
December 31, 1995 Notional
Dollars in millions Value Paid Received Paid Received
- ----------------------------------------------------------------------------------------------------
Interest rate swaps
Receive fixed index amortizing
1996 $3,169 5.90% 5.25% 5.34% 5.25%
1997 42 5.96 5.54 5.15 5.54
------
Total $3,211 5.90 5.25 5.34 5.25
------------------------------------------------------------
Receive fixed
1996 $1,855 5.89% 5.88% 5.31% 5.88%
1997 280 5.92 6.18 5.21 6.18
1998 575 5.84 7.01 5.27 7.01
1999 and beyond 75 5.85 7.00 5.54 7.00
------
Total $2,785 5.88 6.17 5.30 6.17
------------------------------------------------------------
Pay-fixed
1996 $1,515 5.77% 5.68% 5.77% 5.32%
1997 989 5.04 5.81 5.04 5.19
1998 50 8.28 5.88 8.28 5.31
1999 and beyond 75 9.43 5.94 9.43 5.60
------
Total $2,629 5.65 5.74 5.65 5.28
------------------------------------------------------------
Basis swaps
1996 $ 765 5.84% 5.63% 5.59% 5.21%
------------------------------------------------------------
Interest rate caps
1996 $ 10 NM NM NM NM
1997 5,500 NM NM NM NM
------
Total $5,510
- ----------------------------------------------------------------------------------------------------
<FN>
NM - Not meaningful
Interest rate caps with a notional value of $5.5 billion require the
counterparty to pay the Corporation the excess, if any, of 3-month LIBOR over
the specified cap rate. At December 31, 1995, 3-month LIBOR was 5.63 percent
and the specified cap rate was 6.50 percent.
33
13
CORPORATE FINANCIAL REVIEW 1995 VERSUS 1994
FINANCIAL DERIVATIVES
December 31, 1995
Weighted Average Rates
Notional ---------------------- Estimated
Dollars in millions Value Paid Received Fair Value
- ----------------------------------------------------------------------------------------------------------------------------
Interest rate risk management
Asset rate conversion
Interest rate swaps
Pay fixed designated to
Securities $ 599 4.68% 5.87% $ 6
Commercial loans 290 8.01 5.87 (24)
Receive-fixed index amortizing designated to commercial loans 2,471 5.90 5.23 (14)
Receive fixed designated to
Commercial loans 975 5.89 6.31 19
Short-term investments 200 5.84 7.23 9
Basis swaps designated to commercial real estate loans 300 5.96 5.85
Interest rate caps designated to
Securities 5,500 NM NM 6
Mortgage loans 10 NM NM
------- ----
Total asset rate conversion 10,345 2
Liability rate conversion
Interest rate swaps
Pay fixed designated to
Other borrowings 1,125 5.68 5.60 (5)
Bank notes 600 5.41 5.79
Deposits 15 4.98 5.94
Receive-fixed index amortizing designated to deposits 740 5.93 5.32 (4)
Receive fixed designated to
Certificates of deposit 625 5.94 5.76 7
Bank notes 650 5.85 5.90 14
Other borrowings 330 5.82 6.37 13
Deposit notes 5 5.93 8.48
Basis swaps designated to bank notes 465 5.76 5.49 8
------- ----
Total liability rate conversion 4,555 33
------- ----
Total interest rate risk management 14,900 35
Mortgage banking activities
Commitments to purchase forward contracts - originations 431 NM NM
Commitments to sell forward contracts - originations 751 NM NM (4)
Interest rate floors - MSR 500 NM NM 9
Receive-fixed interest rate swaps - MSR 125 NM NM 7
------- ----
Total mortgage banking 1,807 12
------- ----
Total financial derivatives $16,707 $ 47
- ----------------------------------------------------------------------------------------------------------------------------
<FN>
NM - not meaningful
The floating rate portion of interest rate contracts is based on money-market
indices. As a percent of notional value, 71 percent were based on 3-month
LIBOR, 19 percent on 1-month LIBOR and the remainder on other short-term
indices.
Interest rate caps with a notional value of $5.5 billion require the
counterparty to pay the Corporation the excess, if any, of 3-month LIBOR over
the specified cap rate. At December 31, 1995, 3-month LIBOR was 5.63 percent
and the specified cap rate was 6.50 percent
34
14
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 services
institution. Designations, assignments and allocations may
change from time to time as the management accounting
system is enhanced and business or product lines change.
In 1995, the Corporation realigned its line of business
management structure along customer segments. The principal
change was segregating the trust business, previously
managed separately, into the corporate and consumer banking
organizations. In addition, consistent with the Corporation's
strategic focus and balance sheet realignment, asset/liability
management has been redefined as a support function for the
core lines of business. Results for 1994 are presented on a
basis consistent with this new management reporting structure.
For management reporting purposes, the Corporation has
designated five lines of business: Consumer Banking,
Corporate Banking, Real Estate Banking, Mortgage Banking
and Asset Management. The financial results presented in this
section reflect each line of business as if it operated on a
stand-alone basis. Securities or borrowings, and related
interest rate spread, have been assigned to each line of
business based on its net asset or liability position. In 1995,
Consumer Banking was a generator of funds and, accordingly,
was assigned securities, while the other lines of business
received an assignment of borrowings as net asset generators.
An assignment of securities is accompanied by an assignment
of equity in accordance with the methodology described
below. The interest rate spread on the remaining securities, the
impact of financial derivatives used for interest rate risk
management and securities transactions are excluded from line
of business results and are reported separately in asset/liability
management activities.
Capital is assigned to each business unit based on
management's assessment of inherent risks and equity levels at
independent companies that provide similar products and
services. Capital assignments are not equivalent to regulatory
capital guidelines and the total amount assigned may vary
from consolidated shareholders' equity.
After-tax profit margin represents earnings expressed as a
percentage of revenue. The overhead ratio is the percentage of
noninterest expense to revenue. For purposes of these ratio
computations, revenue includes net interest income on a fully
taxable-equivalent basis and noninterest income.
Total earnings contributed by the lines of business were $820
million in 1995 compared with $894 million in 1994. The
decline primarily resulted from an increase in Corporate
Banking's allocated provision for credit losses which was a
credit in the prior year. Line of business earnings differed
from reported consolidated net income in both years due to
asset/liability management activities, differences between
specific reserve allocations to the lines of business and the
consolidated provision for credit losses, special charges and
certain unallocated revenues and expenses. The decline in
earnings from asset/liability management activities was
primarily due to actions taken to reposition the balance sheet.
LINE OF BUSINESS HIGHLIGHTS
Average Return on
Year ended December 31 Balance Sheet Revenue Earnings Assigned Capital
----------------------------------------------------------------------------------
Dollars in millions 1995 1994 1995 1994 1995 1994 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
Consumer Banking $37,240 $36,052 $2,043 $1,926 $420 $384 21% 20%
Corporate Banking 16,193 15,728 788 827 236 301 12 16
Real Estate Banking 3,896 4,032 185 237 79 109 13 17
Mortgage Banking 12,379 10,751 374 408 49 69 8 13
Asset Management 344 246 193 142 36 31 38 49
---------------------------------------------------------------
Total lines of business 70,052 66,809 3,583 3,540 820 894 16 18
Asset/liability management activities 4,261 6,566 (458) (7) (335) (18)
Unallocated provision 71 (28)
Special charges (192) (31)
Other unallocated items 818 987 24 36 44 67
----------------------------------------------------------------
Total $75,131 $74,362 $3,149 $3,569 $408 $884 7 16
- ----------------------------------------------------------------------------------------------------------------------------
35
15
CORPORATE FINANCIAL REVIEW 1995 VERSUS 1994
CONSUMER BANKING Consumer Banking provides lending,
deposit, personal trust, brokerage, investment, payment
system access and other financial services to individuals and
small businesses. Services are provided through a network of
community banking offices, alternative delivery systems such
as the National Financial Services Center and ATMs and
regional banking centers offering a wide array of products at
one location. Consumer Banking includes: Private Banking--
affluent consumers and charitable organizations with
specialized banking requirements; and Community Banking--
small business customers having annual sales of up to $5
million and all other consumers who use traditional branch
and direct banking services.
The earnings contribution from Consumer Banking increased
to 51 percent in 1995 from 43 percent a year ago. Earnings
from Private Banking increased in 1995 as the benefit from
loan growth, new trust business and higher brokerage fees
more than offset expense growth from marketing activities in
this sector. Community Banking earnings increased in 1995 as
the result of higher net interest income associated with loan
growth and a $28 million pretax gain on the sale of certain
branches partially offset by expenses associated with
establishing the National Financial Services Center.
CONSUMER BANKING
Private Banking Community Banking Total
Year ended December 31 ----------------------------------------------------------------
Dollars in millions 1995 1994 1995 1994 1995 1994
- -------------------------------------------------------------------------------------------
INCOME STATEMENT
Net interest income $ 82 $ 75 $ 1,420 $ 1,375 $ 1,502 $ 1,450
Noninterest income 217 195 324 281 541 476
----------------------------------------------------------------
Total revenue 299 270 1,744 1,656 2,043 1,926
Provision 1 65 39 66 39
Noninterest expense 213 194 1,102 1,094 1,315 1,288
----------------------------------------------------------------
Pretax earnings 85 76 577 523 662 599
Income taxes 31 27 211 188 242 215
----------------------------------------------------------------
Earnings $ 54 $ 49 $ 366 $ 335 $ 420 $384
----------------------------------------------------------------
AVERAGE BALANCE SHEET
Loans $1,927 $1,507 $13,455 $12,345 $15,382 $13,852
Assigned assets 20,752 21,392 20,752 21,392
Other assets 426 435 680 373 1,106 808
----------------------------------------------------------------
Total assets $2,353 $1,942 $34,887 $34,110 $37,240 $36,052
----------------------------------------------------------------
Net deposits $1,456 $1,251 $32,785 $32,122 $34,241 $33,373
Assigned funds 167 153 167 153
Other funds 494 333 326 284 820 617
Assigned equity 236 205 1,776 1,704 2,012 1,909
----------------------------------------------------------------
Total funds $2,353 $1,942 $34,887 $34,110 $37,240 $36,052
----------------------------------------------------------------
PERFORMANCE RATIOS
After-tax profit margin 18% 18% 21% 20% 21% 20%
Overhead 71 72 63 66 64 67
Return on assigned equity 23 23 21 20 21 20
- -------------------------------------------------------------------------------------------
36
16
CORPORATE BANKING
Large Corporate Middle Market Equity Management Total
Year ended December 31 ---------------------------------------------------------------------------------------
Dollars in millions 1995 1994 1995 1994 1995 1994 1995 1994
- ------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT
Net interest income $ 110 $ 130 $ 439 $ 437 $ (4) $ (3) $ 545 $ 564
Noninterest income 61 72 149 148 33 43 243 263
---------------------------------------------------------------------------------------
Total revenue 171 202 588 585 29 40 788 827
Provision 43 (4) 43 (4)
Noninterest expense 85 84 294 282 3 3 382 369
---------------------------------------------------------------------------------------
Pretax earnings 86 118 251 307 26 37 363 462
Income taxes 27 39 91 109 9 13 127 161
---------------------------------------------------------------------------------------
Earnings $ 59 $ 79 $ 160 $ 198 $ 17 $ 24 $ 236 $ 301
---------------------------------------------------------------------------------------
AVERAGE BALANCE SHEET
Loans $4,212 $4,437 $11,330 $10,604 $ 31 $ 37 $15,573 $15,078
Other assets 106 163 357 341 157 146 620 650
---------------------------------------------------------------------------------------
Total assets $4,318 $4,600 $11,687 $10,945 $188 $183 $16,193 $15,728
---------------------------------------------------------------------------------------
Net deposits $ 505 $ 522 $ 1,655 $ 1,646 $ 2,160 $ 2,168
Assigned funds 3,313 3,487 8,203 7,425 $115 $110 11,631 11,022
Other funds 23 51 444 582 17 19 484 652
Assigned equity 477 540 1,385 1,292 56 54 1,918 1,886
---------------------------------------------------------------------------------------
Total funds $4,318 $4,600 $11,687 $10,945 $188 $183 $16,193 $15,728
---------------------------------------------------------------------------------------
PERFORMANCE RATIOS
After-tax profit margin 35% 39% 27% 34% 58% 60% 30% 36%
Overhead 50 42 50 48 11 7 49 45
Return on assigned equity 12 15 12 15 30 45 12 16
- ------------------------------------------------------------------------------------------------------------------
CORPORATE BANKING Corporate Banking provides traditional and
asset-based financing, liquidity and treasury management,
corporate and employee benefit trust, capital markets, direct
investment, leasing and other financial services to businesses
and governmental entities. It serves customers within the
Corporation's primary markets, as well as from a network of
offices located in major U.S. cities. Corporate Banking
includes: Large Corporate -- customers having annual sales of
more than $250 million; Middle Market -- customers with
annual sales of $5 million to $250 million and those in certain
specialized industries such as communications, health care,
natural resources, metals, public finance, financial services
and automobile dealer finance; and Equity Management --
private equity investments.
Corporate Banking provided 29 percent of line of business
earnings in 1995 compared with 34 percent in 1994. Large
Corporate earnings declined in the comparison due to a
decrease in average loans and the impact of a $15 million
pretax benefit recorded in 1994 from resolution of a problem
asset. Average loans declined primarily due to initiatives to
reduce certain low-spread loans. Middle Market earnings
declined as the benefit of an increase in average loans was
more than offset by an increase in the allocated provision for
credit losses and narrower spreads on loans. A provision was
allocated in 1995 primarily due to loan growth compared with
a credit provision in 1994 that resulted from a significant
reduction of problem assets. The contribution from Equity
Management declined in 1995 as a result of lower venture
capital income.
37
17
CORPORATE FINANCIAL REVIEW 1995 VERSUS 1994
REAL ESTATE BANKING
Year ended December 31
Dollars in millions 1995 1994
- --------------------------------------------------------------
INCOME STATEMENT
Net interest income $ 168 $ 178
Noninterest income 17 59
----------------
Total revenue 185 237
Provision (1)
Noninterest expense 66 73
----------------
Pretax earnings 119 165
Income taxes 40 56
----------------
Earnings $ 79 $ 109
----------------
AVERAGE BALANCE SHEET
Loans $3,957 $4,140
Other assets (61) (108)
----------------
Total assets $3,896 $4,032
----------------
Net deposits $ 159 $ 130
Assigned funds 3,131 3,120
Other funds (7) 142
Assigned equity 613 640
----------------
Total funds $3,896 $4,032
----------------
PERFORMANCE RATIOS
After-tax profit margin 43% 46%
Overhead 36 31
Return on assigned equity 13 17
- --------------------------------------------------------------
REAL ESTATE BANKING Real Estate Banking provides lending,
deposit, treasury management, syndication, commercial
mortgage-backed securitizations and other noncredit services
to small, middle market and large customers. Real Estate
Banking services are provided to customers seeking short-
and intermediate-term credit for construction, acquisition and
holding of commercial or residential real estate projects.
Real Estate Banking provided 10 percent of line of business
earnings in 1995 compared with 12 percent in 1994. Earnings
declined in the comparison due to lower loan volume and
nonrecurring gains in 1994 on Midlantic's sales of assets held
for accelerated disposition.
MORTGAGE BANKING
Year ended December 31
Dollars in millions 1995 1994
- ---------------------------------------------------------------
INCOME STATEMENT
Net interest income $ 164 $ 201
Noninterest income 210 207
-----------------
Total revenue 374 408
Provision 6 6
Noninterest expense 291 298
-----------------
Pretax earnings 77 104
Income taxes 28 35
-----------------
Earnings $ 49 $ 69
-----------------
AVERAGE BALANCE SHEET
Loans $10,651 $ 8,748
Other assets 1,728 2,003
-----------------
Total assets $12,379 $10,751
-----------------
Net deposits $ 2,637 $ 2,973
Assigned funds 8,121 6,178
Other funds 1,035 1,086
Assigned equity 586 514
-----------------
Total funds $12,379 $10,751
-----------------
PERFORMANCE RATIOS
After-tax profit margin 13% 17%
Overhead 78 73
Return on assigned equity 8 13
- ---------------------------------------------------------------
MORTGAGE BANKING Mortgage Banking activities include
acquisition, origination, securitization and servicing of
residential mortgages, as well as retention of selected loans in
the portfolio.
Mortgage Banking contributed 6 percent of line of business
earnings in 1995 compared with 8 percent a year ago.
Mortgage Banking continued to operate in a competitive
environment characterized by significantly reduced loan
origination volumes. Earnings declined in 1995 as the benefit
of an increase in portfolio loans was more than offset by
narrower loan spreads and lower gains from sales of servicing.
MORTGAGE SERVICING PORTFOLIO
In millions 1995 1994
- --------------------------------------------------------------
January 1 $40,389 $34,768
Originations 5,423 6,437
Acquisitions 364 10,599
Repayments (4,751) (5,945)
Sales (4,126) (5,470)
-----------------
December 31 $37,299 $40,389
- --------------------------------------------------------------
38
18
During 1995, the Corporation funded $5.4 billion of
residential mortgages of which 81 percent represented new
financing. The comparable amounts were $6.4 billion and 78
percent, respectively, in 1994. At December 31, 1995, the
Corporation's mortgage servicing portfolio totaled $37.3
billion, had a weighted-average coupon rate of 7.98 percent
and an estimated fair value of $419 million. The servicing
portfolio included $25.1 billion serviced for others with a
MSR carrying value of $268 million. If interest rates decline
and the rate of prepayment increases, the underlying servicing
fee income stream and related MSR fair value would be
reduced. The Corporation seeks to manage this risk by using
certain off-balance-sheet financial derivatives and on-balance-
sheet instruments whose values move in the opposite direction
of MSR value changes. A gain of $11.2 million, included in
noninterest income, from instruments used to hedge the
economic value of MSR was offset by a $10.9 million MSR
impairment charge included in noninterest expense.
ASSET MANAGEMENT Asset Management provides trust and
mutual fund investment management, strategy, research and
asset servicing for institutional and family wealth customers.
It serves customers through one unified money management
organization.
ASSET MANAGEMENT
Year ended December 31
Dollars in millions 1995 1994
- --------------------------------------------------------------
INCOME STATEMENT
Net interest income $ (4) $ 8
Noninterest income 197 134
--------------
Total revenue 193 142
Provision
Noninterest expense 135 93
--------------
Pretax earnings 58 49
Income taxes 22 18
--------------
Earnings $ 36 $ 31
--------------
AVERAGE BALANCE SHEET
Loans $ 68 $105
Assigned assets 113
Other assets 276 28
--------------
Total assets $344 $246
--------------
Net deposits $127 $142
Assigned funds 88
Other funds 33 41
Assigned equity 96 63
--------------
Total funds $344 $246
--------------
PERFORMANCE RATIOS
After-tax profit margin 19% 22%
Overhead 70 65
Return on assigned equity 38 49
- --------------------------------------------------------------
Asset Management contributed 4 percent of line of business
earnings in 1995 compared with 3 percent a year ago. Asset
Management earnings increased due to the impact of
BlackRock, new business and an increase in the value of
managed assets.
During 1995, assets under administration increased by $60.9
billion to $282.4 billion at December 31, 1995. The
BlackRock acquisition added approximately $25 billion in
discretionary assets, including $15 billion of institutional
funds and $10 billion of mutual funds. At year-end 1995, the
composition of discretionary assets under administration was
47 percent fixed income, 27 percent money market, 24 percent
equity and 2 percent other.
ASSETS UNDER ADMINISTRATION
December 31 Non-
In billions Discretionary Discretionary Total
- -------------------------------------------------------------------------
1995
Personal and charitable $30 $ 15 $ 45
Institutional 24 41 65
Mutual funds 42 130 172
--------------------------------
Total $96 $186 $282
- -------------------------------------------------------------------------
1994
Personal and charitable $25 $ 11 $ 36
Institutional 4 75 79
Mutual funds 28 78 106
--------------------------------
Total $57 $164 $221
- -------------------------------------------------------------------------
RISK MANAGEMENT
The Corporation's ordinary course of business involves
varying degrees of risk taking, the most significant of which
are credit, liquidity and interest rate risk. To manage these
risks, the Corporation has risk management processes
designed to provide for risk identification, measurement,
monitoring and control.
CREDIT RISK MANAGEMENT Credit risk represents the possibility
that a customer or counterparty may not perform in
accordance with contractual terms. Credit risk is inherent in
the financial services business and results from extending
credit to customers, purchasing securities, and entering into
certain off-balance-sheet financial derivative transactions. The
Corporation seeks to manage credit risk through
diversification, utilizing exposure limits to any single industry
or customer, requiring collateral and selling participations to
third parties.
Credit Administration, which includes credit policy, loan
review and loan workout, manages and monitors credit risk by
promulgating and enforcing uniform credit policies and
exercising centralized oversight, review and approval
procedures. Credit Policy, at the
39
19
CORPORATE FINANCIAL REVIEW 1995 VERSUS 1994
direction of the board of directors, establishes uniform underwriting
standards that set forth the criteria used in extending credit.
To support consistent application of underwriting standards,
credit officers work with lending officers in evaluating the
creditworthiness of borrowers and structuring transactions.
Credit decisions are made at the specific affiliate or market
level. However, credit requests above certain limits or that
involve exceptions to credit policies require additional
corporate approvals.
NONPERFORMING ASSETS During 1995, nonperforming assets
declined $221 million reflecting continued improvement in
asset quality. The following tables outline nonperforming assets
by category and set forth the changes in nonperforming assets
during 1995 and 1994.
NONPERFORMING ASSETS
December 31
Dollars in millions 1995 1994
- --------------------------------------------------------------
Nonaccrual loans
Commercial $118 $219
Commercial real estate
Commercial mortgage 108 103
Real estate project 45 98
Consumer 10 20
Residential mortgage 54 56
--------------
Total nonaccrual loans 335 496
Restructured loans 23 69
--------------
Total nonperforming loans 358 565
Foreclosed assets
Commercial real estate 105 117
Residential mortgage 24 21
Other 49 54
--------------
Total foreclosed assets 178 192
--------------
Total nonperforming assets $536 $757
--------------
Nonperforming loans to loans .74% 1.28%
Nonperforming assets to loans and
foreclosed assets 1.10 1.71
Nonperforming assets to assets .73 .98
- --------------------------------------------------------------
CHANGE IN NONPERFORMING ASSETS
In millions 1995 1994
- --------------------------------------------------------------
January 1 $ 757 $1,124
Transferred from accrual 399 536
Acquisitions 14 69
Returned to performing (97) (131)
Principal reductions (315) (450)
Sales (111) (205)
Charge-offs and valuation adjustments (111) (186)
---------------
December 31 $ 536 $ 757
- --------------------------------------------------------------
At December 31, 1995, $88.7 million of nonperforming loans
were current as to principal and interest compared with $89.8
million at December 31, 1994. Office, retail and land projects
accounted for 76.0 percent of total nonperforming real estate
project assets at December 31, 1995. The Corporation's primary
markets accounted for 62.0 percent of total nonperforming real
estate project assets. The southeast region of the United States
and metropolitan Washington D.C. area accounted for 16.6
percent and 7.0 percent, respectively.
ACCRUING LOANS CONTRACTUALLY PAST DUE 90 DAYS OR MORE
Amount Percent of Loans
December 31 ---------------------------------
Dollars in millions 1995 1994 1995 1994
- ------------------------------------------------------------------------------
Consumer
Student $ 44 $ 37 2.90% 2.84%
Other 51 31 .44 .31
--------------
Total consumer 95 68 .72 .60
Residential mortgage 63 52 .54 .53
Commercial 22 21 .13 .14
Commercial real estate 45 34 .92 .68
--------------
Total $225 $175 .46 .40
- ------------------------------------------------------------------------------
Loans not included in past due, nonaccrual or restructured
categories, but where known information about possible credit
problems causes management to be uncertain as to the ability
of the borrowers to comply with the present loan repayment
terms over the next six months, totaled $176 million at
December 31, 1995.
ALLOWANCE FOR CREDIT LOSSES In determining the adequacy of the
allowance for credit losses, the Corporation allocates reserves
to specific problem loans based on discounted cash flow
analyses or collateral valuations for impaired loans and to
pools of watchlist and non-watchlist loans. The allocations to
pools of loans are developed by risk rating and industry
classifications and are based on management's judgment
concerning historical loss trends and other relevant factors.
These factors may include, among others, local, regional and
national economic conditions, portfolio concentrations,
industry competition and consolidation, and the impact of
government regulation. Consumer loan allocations are based
on historical loss experience adjusted for portfolio activity and
current economic conditions.
The allowance for credit losses totaled $1.3 billion at
December 31, 1995 compared with $1.4 billion at December
31, 1994. The allowance as a percentage of period-end loans
and nonperforming loans was 2.59 percent and 351.7 percent,
respectively, at December 31, 1995. The comparable year-end
1994 amounts were 3.07 percent and
40
20
239.3 percent, respectively. Net charge-offs were .29 percent of total
loans in 1995 compared with .40 percent in 1994. Management
expects net charge-offs to increase modestly in 1996.
CHARGE-OFFS AND RECOVERIES
Percent
Net of
Year ended December 31 Charge- Charge- Average
Dollars in millions offs Recoveries offs Loans
- --------------------------------------------------------------------------
1995
Consumer $109 $ 41 $ 68 .57%
Residential mortgage 10 2 8 .07
Commercial 84 49 35 .22
Commercial real estate 37 15 22 .44
----------------------------
Total $240 $107 $133 .29
- --------------------------------------------------------------------------
1994
Consumer $ 93 $ 41 $ 52 .46%
Residential mortgage 16 1 15 .17
Commercial 116 59 57 .38
Commercial real estate 64 19 45 .87
----------------------------
Total $289 $120 $169 .40
- --------------------------------------------------------------------------
LIQUIDITY Liquidity represents an institution's ability to
generate cash or otherwise obtain funds at reasonable rates to
satisfy commitments to borrowers and demands of depositors
and debtholders, and invest in strategic initiatives. Liquidity
risk represents the likelihood the Corporation would be unable
to generate cash or otherwise obtain funds at reasonable rates
to satisfy commitments to borrowers, as well as the
obligations to 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
through direct borrowing or securitization of assets such as
automobile and credit card loans.
During 1995, cash and due from banks increased $267 million
to $3.7 billion compared with an increase of $882 million
during the prior year. Net cash provided by operating
activities decreased $718 million in the comparison, primarily
due to an increase in loans held for sale associated with the
Corporation's mortgage banking activities. Cash provided by
investing activities increased to $7.0 billion compared with
$1.3 billion used a year ago reflecting the Corporation's
reduction of the securities portfolio. Net cash used by
financing activities totaled $7.9 billion in 1995 compared with
$311 million provided a year earlier as the Corporation
reduced wholesale liabilities.
Liquid assets consist of cash and due from banks, short-term
investments, loans held for sale and securities available for
sale. At December 31, 1995, such assets totaled $21.8 billion
of which $7.6 billion was pledged as collateral. Liquidity is
also provided by residential mortgages which may be used as
collateral for funds obtained through the Federal Home Loan
Bank system. At December 31, 1995, approximately $5.3
billion of residential mortgages were available as collateral for
borrowings from the Federal Home Loan Bank system. The
reduction in the securities portfolio and related wholesale
funding sources is not expected to materially affect overall
liquidity.
Liquidity for the parent company and its affiliates is also
generated through the issuance of securities in public or
private markets, lines of credit and dividends from
subsidiaries. Under effective shelf registration statements at
December 31, 1995, the Corporation had 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. In addition, the Corporation had a $300
million unused committed line of credit. Funds obtained from
any of these sources can be used for both bank and nonbank
activities.
Management believes the Corporation has sufficient liquidity
to meet its current obligations to customers, debtholders and
others. The impact of replacing liabilities is reflected in the
income simulation model used in the Corporation's overall
asset/liability management process.
INTEREST RATE RISK Interest rate risk arises primarily through the
Corporation's normal business activities of extending loans and
taking deposits. Many factors, including economic and financial
conditions, general movements in market interest rates, and
consumer preferences, affect the spread between interest earned
on assets and interest paid on liabilities. Financial derivatives,
primarily interest rate swaps, caps and floors, are used to alter
the interest rate characteristics of assets and liabilities. For
example, receive-fixed interest rate swaps effectively convert
variable-rate assets to fixed-rate assets.
In managing interest rate risk, the Corporation seeks to
minimize the reliance on a particular interest rate scenario as a
source of earnings. Accordingly, wholesale activities,
including securities, funding, financial derivatives and capital
markets activities, are used in managing core business
exposures within specified guidelines. Interest rate risk is
centrally managed by asset and liability (A&L) management.
Senior management and Board of Directors' committees
oversee A&L management and periodically review interest
rate risk exposures.
41
21
CORPORATE FINANCIAL REVIEW 1995 VERSUS 1994
A number of measures are used to monitor and manage
interest rate risk, including income simulation and interest
sensitivity (gap) analyses. In addition, the Corporation is in
the process of developing longer-term measures of interest
rate sensitivity including duration of equity and equity at risk.
Such models are designed to estimate the impact on the value
of equity resulting from changes in interest rates and
supplement the simulation model and gap analyses.
An income simulation model is the primary tool used to assess
the direction and magnitude of changes in net interest income
resulting from changes in interest rates. Key assumptions
employed in the model include prepayment speeds on
mortgage-related assets, cash flows and maturities of financial
instruments, changes in market conditions, loan volumes and
pricing, deposit sensitivity, customer preferences, and
management's financial and capital plans. These assumptions
are inherently uncertain and, as a result, the model can not
precisely estimate net interest income or precisely predict the
impact of higher or lower interest rates on net interest income.
The Corporation's guidelines provide that net interest income
should not decrease by more than 3 percent if interest rates
gradually increase or decrease from current rates by 100 basis
points over a twelve month period. At December 31, 1995,
based on the results of the simulation model, the Corporation
was within these guidelines. Actual results will differ from
simulated results due to timing, magnitude and frequency of
interest rate changes and changes in market conditions and
management strategies, among other factors.
Additional interest rate scenarios are modeled to address a
wider range of rate movement, yield curve, term structure and
basis risk exposures. Depending on market conditions and
other inherent risks, these scenarios may be modeled more or
less frequently. Such analyses are used as supplemental
measurements only and limits have not been established.
The Corporation also employs interest sensitivity (gap)
analysis to assess interest rate risk. A gap analysis represents a
point-in-time net position of assets, liabilities and off-balance-
sheet instruments subject to repricing in specified time
periods. The Corporation's limit for the cumulative one-year
gap position is 10 percent. A cumulative asset-sensitive gap
position indicates assets are expected to reprice more quickly
than liabilities. Alternatively, a cumulative liability-sensitive
gap position indicates liabilities are expected to reprice more
quickly than assets. The cumulative one-year gap position was
7.0 percent asset sensitive at December 31, 1995. During
January 1996, to reduce exposure to declining rates, the
Corporation added receive-fixed interest rate swaps with a
term of two years which converted assets from variable rates
to fixed rates. As a result, the asset sensitivity of the
cumulative one-year gap position was reduced to 3.8 percent.
Gap analysis alone does not accurately measure the magnitude
of changes in net interest income since changes in interest
rates over time do not impact all categories of assets, liabilities
and off-balance-sheet instruments equally or simultaneously.
INTEREST RATE SENSITIVITY (GAP) ANALYSIS
December 31, 1995 1 to 91 to 181 to 1 to 2 2 to 5 Beyond
In millions 90 Days 180 Days 365 Days Years Years 5 Years Total
- -----------------------------------------------------------------------------------------------------------------------------------
Assets
Loans $23,970 $3,089 $4,039 $4,665 $ 7,550 $ 5,340 $48,653
Securities 4,958 789 2,346 2,100 3,987 1,659 15,839
Other earning assets 2,279 2,279
Other assets 443 22 44 84 292 5,748 6,633
----------------------------------------------------------------------------------------------
Total assets $31,650 $3,900 $6,429 $6,849 $11,829 $12,747 $73,404
----------------------------------------------------------------------------------------------
Liabilities and shareholders' equity
Noninterest-bearing deposits $ 1,416 $ 9,291 $10,707
Interest-bearing deposits 11,892 $3,126 $3,548 $2,694 $ 2,477 12,455 36,192
Borrowings 14,766 929 886 208 453 1,821 19,063
Other liabilities 122 1,552 1,674
Shareholders' equity 5,768 5,768
----------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $28,196 $4,055 $4,434 $2,902 $2,930 $30,887 $73,404
----------------------------------------------------------------------------------------------
Off-balance-sheet items $(2,120) $1,085 $429 $96 $529 $(19)
-----------------------------------------------------------------------------------
Interest rate sensitivity $1,334 $930 $2,424 $4,043 $9,428 $(18,159)
-----------------------------------------------------------------------------------
Cumulative gap $1,334 $2,264 $4,688 $8,731 $18,159
- -----------------------------------------------------------------------------------------------------------------------------------
42
22
CORPORATE FINANCIAL REVIEW 1994 VERSUS 1993
OVERVIEW
Net income for 1994 was $883.9 million, or $2.52 per fully
diluted share, compared with $898.5 million, or $2.60 per
share, for 1993. Return on average assets and return on
average common shareholders' equity were 1.19 percent and
16.09 percent, respectively, in 1994 compared with 1.40
percent and 18.55 percent, respectively, in 1993.
Effective January 1, 1994, the Corporation adopted Statement
of Financial Accounting Standards ("SFAS") No. 112,
"Employers' Accounting for Postemployment Benefits." SFAS
No. 112 requires accrual of a liability for benefits to be paid to
former or inactive employees after employment, but before
retirement. The cumulative effect of the change in accounting
decreased net income by $7.5 million or, $.02 per fully diluted
share.
Effective January 1, 1993, the Corporation adopted SFAS No.
109, "Accounting for Income Taxes," and changed its
accounting method for certain intangible assets. The combined
effect of these changes increased net income by $19.6 million,
or $.06 per fully diluted share.
Income before the cumulative effect of the changes in
accounting principles was $891.5 million or $2.54 per fully
diluted share, in 1994 compared with $878.9, or $2.54 per fully
diluted share, in 1993.
MERGERS AND ACQUISITIONS
During 1994, the Corporation acquired First Eastern Corp.,
Wilkes-Barre, Pennsylvania, and United Federal Bancorp,
Inc., State College, Pennsylvania. The acquisitions added
assets and deposits of $2.8 billion and $2.4 billion,
respectively.
In November 1993, the Corporation acquired PNC Mortgage.
This acquisition added mortgage-related assets of $7.6 billion
and a mortgage servicing portfolio totaling $27 billion,
including $21 billion serviced for others. In June 1994, the
Corporation purchased a $10 billion residential mortgage
servicing portfolio from the Associates Corporation of North
America.
INCOME STATEMENT REVIEW
During 1994, taxable-equivalent net interest income
represented 68.2 percent of total revenue before net securities
transactions compared with 71.8 percent in 1993. Noninterest
income before net securities transactions represented 31.8
percent of total revenue in 1994 and 28.2 percent in 1993.
INCOME STATEMENT HIGHLIGHTS
Change
Year ended December 31 -------------------
Dollars in millions 1994 1993 Amount Percent
- -----------------------------------------------------------------------------
Net interest income
(taxable-equivalent
basis) $2,530 $2,391 $ 139 5.8%
Provision for credit losses 84 350 (266) (76.0)
Noninterest income
before securities
transactions 1,181 941 240 25.5
Net securities gains
(losses) (142) 195 (337) (172.8)
Noninterest expense
before special charges 2,190 1,985 205 10.3
Special charges 48 48 NM
Net income 884 898 (14) (1.6)
- -----------------------------------------------------------------------------
<FN>
NM - not meaningful
NET INTEREST INCOME On a fully taxable-equivalent basis, net
interest income for 1994 increased $139.5 million, or 5.8
percent, primarily due to a $9.4 billion increase in average
earning assets partially offset by a narrower interest rate spread.
NET INTEREST INCOME
Year ended December 31 Change
Taxable-equivalent basis -------------------
Dollars in millions 1994 1993 Amount Percent
- -----------------------------------------------------------------------------
Interest income/expense
before financial
derivatives
Interest income $4,600 $3,852 $ 748 19.4%
Loan fees 83 80 3 3.8
Taxable-equivalent
adjustment 38 51 (13) (25.5)
--------------------------------
Total interest income 4,721 3,983 738 18.5
Interest expense 2,320 1,857 463 24.9
--------------------------------
Net interest income
before financial
derivatives 2,401 2,126 275 12.9
Effect of financial
derivatives on
Interest income 41 91 (50) (54.9)
Interest expense (88) (174) 86 49.4
--------------------------------
Total effect of
financial derivatives 129 265 (136) (51.3)
--------------------------------
Net interest income $2,530 $2,391 $ 139 5.8
- -----------------------------------------------------------------------------
43
23
CORPORATE FINANCIAL REVIEW 1994 VERSUS 1993
The 1994 net interest margin narrowed to 3.64 percent
compared with 3.99 percent in 1993 as deposit and
borrowings costs increased more rapidly than loan yields. In
addition, the narrower margin reflects the impact of actions
begun in the latter half of 1994 to reposition the balance sheet
and to reduce interest rate sensitivity.
PROVISION FOR CREDIT LOSSES The provision for credit losses was
$83.5 million and $350.2 million in 1994 and 1993,
respectively. Continued improvement in economic conditions,
combined with management's ongoing efforts to improve asset
quality, resulted in lower nonperforming asset and charge-off
levels, and a higher reserve coverage of nonperforming loans.
NONINTEREST INCOME Noninterest income before securities
transactions increased $239.7 million, or 25.5 percent, to $1.2
billion in 1994. Investment management and trust revenue
increased $20.0 million, or 6.4 percent, due to an increase in
new business partially offset by a decline in the value of
managed assets. Mortgage banking income increased $148.0
million to $198.5 million as a result of the PNC Mortgage
acquisition and the purchase of the Associates mortgage
servicing portfolio.
Other noninterest income increased $57.9 million to $156.9
million due to gains from Midlantic's sales of assets held for
accelerated disposition totaling $32.3 million, sales of other
assets, and higher venture capital income.
Net securities losses totaled $141.6 million in 1994 compared
with net securities gains of $194.7 million in 1993. During
1994, securities were sold in connection with initiatives to
downsize the securities portfolio and to reduce interest rate
sensitivity.
NONINTEREST EXPENSE Noninterest expense totaled $2.2 billion in
1994 compared with $2.0 billion in 1993. The increase was
primarily due to acquisitions and a $48.3 million special
charge related to the consolidation of telebanking centers and
rationalization of the retail branch network.
Staff expense totaled $1.0 billion in 1994 compared with
$901.2 million in 1993. The increase was primarily due to
acquisitions in the mortgage banking and consumer banking
businesses. Average full-time equivalent employees increased
13.5 percent.
Net occupancy and equipment expense increased $32.8
million and intangible amortization increased $48.4 million
primarily attributable to acquisitions. Other noninterest
expense decreased 3.0 percent to $626.2 million primarily due
to lower foreclosed asset expense.
BALANCE SHEET REVIEW
Total assets increased $1.4 billion to $77.5 billion at
December 31, 1994 primarily due to acquisitions.
Total consumer and residential mortgage loans increased $2.0
billion primarily due to acquisitions and portfolio
management strategies. Commercial loans outstanding were
$15.5 billion at December 31, 1994 and 1993. Total
commercial real estate loans were $5.1 and $5.2 billion at
December 31, 1994 and December 31, 1993, respectively.
Securities totaled $23.7 billion at December 31, 1994
compared with $25.5 billion at December 31, 1993. Securities
represented 33.9 percent of earning assets at December 31,
1994 compared with 35.8 percent at the prior year end. The
reduction reflects management's actions to reduce the size of
the securities portfolio and to reduce interest rate sensitivity.
Deposits increased $1.1 billion to $45.8 billion in the year-to-
year comparison as increases from acquired deposits were
partially offset by lower brokered and time deposits.
Borrowed funds totaled $12.2 billion at December 31, 1994
compared with $12.3 billion at December 31, 1993. During
1994, certain repurchase agreements and treasury, tax and
loan borrowings were replaced with commercial paper and
term Federal funds purchased.
ASSET QUALITY During 1994, asset quality continued to improve.
Nonperforming assets totaled $757 million at December 31,
1994 compared with $1.1 billion at year-end 1993.
Accruing loans contractually past due 90 days or more as to
the payment of principal or interest totaled $175 million at
December 31, 1994 compared with $171 million at December
31, 1993. Residential mortgage and student loans of $52
million and $37 million were included in the total at
December 31, 1994 compared with $61 million and $42
million, respectively, at year-end 1993.
ALLOWANCE FOR CREDIT LOSSES The allowance for credit losses
was $1.4 billion at December 31, 1994 and 1993, representing
3.07 percent of total loans at December 31, 1994 compared
with 3.26 percent at year-end 1993. As a percentage of period-
end nonperforming loans, the allowance for credit losses was
239.3 percent at December 31, 1994 compared with 160.3
percent at year-end 1993.
CAPITAL Shareholders' equity totaled $5.7 billion and $5.4
billion at December 31, 1994 and 1993, respectively, and the
leverage ratio was 7.10 percent and 7.69 percent in the
comparison. Tier I and total risk-based capital ratios were 9.36
percent and 12.41 percent, respectively, at December 31,
1994. The comparable December 31, 1993 ratios were 9.75
percent and 12.55 percent.
44
24
REPORTS ON CONSOLIDATED FINANCIAL STATEMENTS
MANAGEMENT'S REPORT ON THE FINANCIAL
REPORTING INTERNAL CONTROL STRUCTURE
PNC Bank Corp. is responsible for the preparation, integrity
and fair presentation of its published financial statements. The
consolidated financial statements included in this annual
report have been prepared in accordance with generally
accepted accounting principles and, as such, include
judgments and estimates of management. PNC Bank Corp.
also prepared the other information included in the annual
report and is responsible for its accuracy and consistency with
the consolidated financial statements.
Management is responsible for establishing and maintaining
an effective internal control structure over financial reporting.
The internal control system is augmented by written policies
and procedures and by audits performed by an internal audit
staff which reports to the Audit Committee of the Board of
Directors. Internal auditors monitor the operation of the
internal control system and report findings to management and
the Audit Committee, and corrective actions are taken to
address identified control deficiencies and other opportunities
for improving the system. The Audit Committee, composed
solely of outside directors, provides oversight to the financial
reporting process.
There are inherent limitations in the effectiveness of any
system of internal control, including the possibility of human
error and circumvention or overriding of controls.
Accordingly, even an effective internal control system can
provide only reasonable assurance with respect to financial
statement preparation. Further, because of changes in
conditions, the effectiveness of an internal control system may
vary over time.
Management assessed PNC Bank Corp.'s internal control
structure over financial reporting as of December 31, 1995.
This assessment was based on criteria for effective internal
control over financial reporting described in "Internal Control-
Integrated Framework" issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
Based on this assessment, management believes that PNC
Bank Corp. maintained an effective internal control system
over financial reporting as of December 31, 1995.
/s/ THOMAS H. O'BRIEN /s/ ROBERT L. HAUNSCHILD
- --------------------- -------------------------
Thomas H. O'Brien Robert L. Haunschild
Chairman and Senior Vice President and
Chief Executive Officer Chief Financial Officer
REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS
Shareholders and Board of Directors
PNC Bank Corp.
We have audited the accompanying consolidated balance
sheet of PNC Bank Corp. and subsidiaries as of December 31,
1995 and 1994, and the related consolidated statements of
income, changes in shareholders' equity, and cash flows for
each of the three years in the period ended December 31,
1995. These financial statements are the responsibility of PNC
Bank Corp.'s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we
plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of PNC Bank Corp. and subsidiaries at
December 31, 1995 and 1994, and the consolidated results of
their operations and their cash flows for each of the three
years in the period ended December 31, 1995, in conformity
with generally accepted accounting principles.
As discussed in Notes to Consolidated Financial Statements,
PNC Bank Corp. changed its method of accounting for
mortgage servicing rights in 1995, postemployment benefits in
1994, and income taxes and intangible assets in 1993.
/s/ ERNST & YOUNG LLP
Pittsburgh, Pennsylvania
February 8, 1996
45
25
CONSOLIDATED BALANCE SHEET
December 31
Dollars in millions, except par values 1995 1994
- -------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 3,679 $ 3,412
Short-term investments 1,611 1,550
Loans held for sale 659 487
Securities available for sale 15,839 3,790
Investment securities, fair value of $18,559 19,880
Loans, net of unearned income of $403 and $385 48,653 44,043
Allowance for credit losses (1,259) (1,352)
--------------------
Net loans 47,394 42,691
Other 4,222 5,651
--------------------
Total assets $73,404 $77,461
--------------------
LIABILITIES
Deposits
Noninterest-bearing $10,707 $9,840
Interest-bearing 36,192 35,978
--------------------
Total deposits 46,899 45,818
Borrowed funds
Federal funds purchased 3,817 2,219
Repurchase agreements 2,851 4,302
Commercial paper 753 1,226
Other 1,244 4,446
--------------------
Total borrowed funds 8,665 12,193
Notes and debentures 10,398 12,127
Other 1,674 1,596
--------------------
Total liabilities 67,636 71,734
SHAREHOLDERS' EQUITY
Preferred stock 1 51
Common stock - $5 par value
Authorized: 450,000,000 shares
Issued: 340,863,348 and 343,820,327 shares 1,704 1,719
Capital surplus 545 692
Retained earnings 3,571 3,535
Deferred benefit expense (79) (83)
Net unrealized securities gains (losses) 26 (122)
Common stock held in treasury at cost: 2,814,910 shares (65)
--------------------
Total shareholders' equity 5,768 5,727
--------------------
Total liabilities and shareholders' equity $73,404 $77,461
- --------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
46
26
CONSOLIDATED STATEMENT OF INCOME
Year ended December 31
In thousands, except per share data 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Loans and fees on loans $3,742,877 $3,188,611 $2,641,910
Securities 1,282,929 1,407,104 1,295,067
Other 123,625 127,432 85,794
--------------------------------------------------
Total interest income 5,149,431 4,723,147 4,022,771
INTEREST EXPENSE
Deposits 1,551,816 1,159,242 1,005,658
Borrowed funds 834,654 514,133 360,288
Notes and debentures 621,092 557,778 316,998
--------------------------------------------------
Total interest expense 3,007,562 2,231,153 1,682,944
--------------------------------------------------
Net interest income 2,141,869 2,491,994 2,339,827
Provision for credit losses 6,000 83,458 350,249
--------------------------------------------------
Net interest income less provision for credit losses 2,135,869 2,408,536 1,989,578
NONINTEREST INCOME
Investment management and trust 420,160 335,315 315,308
Service fees 494,649 489,785 475,919
Mortgage banking 186,617 198,548 50,590
Net securities gains (losses) (279,694) (141,582) 194,699
Other 138,687 156,934 99,082
--------------------------------------------------
Total noninterest income 960,419 1,039,000 1,135,598
NONINTEREST EXPENSE
Staff expense 1,065,057 1,040,926 901,198
Net occupancy and equipment 346,064 333,633 300,811
Intangible asset and MSR amortization 114,671 86,297 37,923
Federal deposit insurance 57,669 102,309 99,329
Other 625,889 626,155 645,428
Special charges 259,926 48,300
--------------------------------------------------
Total noninterest expense 2,469,276 2,237,620 1,984,689
--------------------------------------------------
Income before income taxes and cumulative effect of changes in accounting
principles 627,012 1,209,916 1,140,487
Applicable income taxes 218,952 318,460 261,539
--------------------------------------------------
Income before cumulative effect of changes in accounting principles 408,060 891,456 878,948
Cumulative effect of changes in accounting principles, net of tax benefits of
$4,598 and $5,343 (7,528) 19,569
--------------------------------------------------
Net income $ 408,060 $ 883,928 $ 898,517
--------------------------------------------------
EARNINGS PER COMMON SHARE
Primary before cumulative effect of changes in accounting principles $1.19 $2.56 $2.56
Cumulative effect of changes in accounting principles (.02) .06
--------------------------------------------------
Primary $1.19 $2.54 $2.62
--------------------------------------------------
Fully diluted before cumulative effect of changes in accounting principles $1.19 $2.54 $2.54
Cumulative effect of changes in accounting principles (.02) .06
--------------------------------------------------
Fully diluted $1.19 $2.52 $2.60
--------------------------------------------------
CASH DIVIDENDS DECLARED PER COMMON SHARE $1.40 $1.31 $1.175
--------------------------------------------------
AVERAGE COMMON SHARES OUTSTANDING
Primary 339,134 345,214 340,819
Fully diluted 344,922 350,218 346,187
- ----------------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
47
27
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Preferred Common Capital Retained
Dollars in million, except per share data Stock Stock Surplus Earnings Other Total
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at January 1, 1993 $ 51 $1,636 $ 599 $2,363 $(106) $4,543
Net income 898 898
Cash dividends declared (PNC-$1.175 per share) (277) (277)
Common stock issued (14,437,783 shares) 72 84 156
Common stock issued for preferred stock dividend
(335,290 shares) 2 2 (4)
Preferred stock redeemed (9) (9)
Tax benefit of ESOP plans 3 3
Deferred benefit expense 11 11
Treasury stock activity (9) (9)
Net unrealized securities gains 88 88
-----------------------------------------------------------------
Balance at December 31, 1993 51 1,710 676 2,983 (16) 5,404
Net income 884 884
Cash dividends declared (PNC-$1.31, Midlantic-$.62
per share) (333) (333)
Common stock issued (1,796,092 shares) 9 12 21
Common stock issued for preferred stock dividend
(73,341 shares) 1 (1)
Tax benefit of ESOP and stock option plans 3 2 5
Deferred benefit expense 12 12
Treasury stock activity (56) (56)
Net unrealized securities losses (210) (210)
-----------------------------------------------------------------
Balance at December 31, 1994 51 1,719 692 3,535 (270) 5,727
Net income 408 408
Cash dividends declared (PNC-$1.40, Midlantic-$.96
per share) (386) (386)
Common stock issued (4,532,108 shares) 23 (8) 15
Preferred stock redeemed (50) (50)
Treasury stock activity 5 (119) (114)
Midlantic merger - treasury stock issued (38) (146) 184
Tax benefit of ESOP and stock option plans 2 14 16
Deferred benefit expense 4 4
Net unrealized securities gains 148 148
-----------------------------------------------------------------
Balance at December 31, 1995 $ 1 $1,704 $ 545 $3,571 $(53) $5,768
- ----------------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
48
28
CONSOLIDATED STATEMENT OF CASH FLOWS
Year ended December 31
In millions 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 408 $ 884 $ 898
Adjustments to reconcile net income to net cash provided by operating activities
Cumulative effect of changes in accounting principles 8 (20)
Provision for credit losses 6 84 350
Provision for OREO losses 6 66
Depreciation, amortization and accretion 296 252 139
Deferred income taxes 128 6 (133)
Net securities (gains) losses 280 142 (195)
Net gain on sales of assets (77) (104) (20)
Valuation adjustments (15) (13) (22)
Changes in
Loans held for sale (172) 957 (42)
Other 266 (384) 211
--------------------------------------
Net cash provided by operating activities 1,120 1,838 1,232
INVESTING ACTIVITIES
Net change in loans (2,021) (1,279) (2,736)
Repayment
Securities available for sale 1,791 2,746 1,196
Investment securities 1,944 3,478 9,278
Sales
Securities available for sale 7,983 12,318 17,239
Loans 160 575 86
Foreclosed assets 125 178 284
Purchases
Securities available for sale (3,409) (11,116) (13,620)
Investment securities (161) (8,754) (14,208)
Loans (702) (29) (433)
Bulk sales of loans and OREO 6 235 221
Net cash received (paid) for acquisitions/divestitures 49 (475) (175)
Other 1,270 856 87
--------------------------------------
Net cash provided (used) by investing activities 7,035 (1,267) (2,781)
FINANCING ACTIVITIES
Net change in
Noninterest-bearing deposits 272 (385) 1,165
Interest-bearing deposits (2,134) (851) (2,533)
Federal funds purchased 1,595 114 (2,098)
Sale/issuance
Repurchase agreements 74,102 125,322 163,998
Commercial paper 4,376 5,621 5,221
Other borrowed funds 99,245 110,292 48,310
Notes and debentures 11,990 9,627 9,016
Common stock 88 53 162
Redemption/maturity
Repurchase agreements (75,553) (126,624) (165,133)
Commercial paper (4,849) (4,909) (5,687)
Other borrowed funds (102,446) (109,957) (46,569)
Notes and debentures (13,901) (7,569) (4,394)
Preferred stock (50)
Net acquisition of treasury stock (236) (90) (19)
Cash dividends paid to shareholders (387) (333) (276)
--------------------------------------
Net cash provided (used) by financing activities (7,888) 311 1,163
--------------------------------------
INCREASE (DECREASE) IN CASH AND DUE FROM BANKS 267 882 (386)
Cash and due from banks at beginning of year 3,412 2,530 2,916
--------------------------------------
Cash and due from banks at end of year $ 3,679 $ 3,412 $ 2,530
================================================================================================================================
CASH PAID FOR
Interest $ 3,102 $ 2,201 $ 1,592
Income taxes 122 403 311
NONCASH ITEMS
Increase (decrease) in securities available for sale 18,078 (2,745)
Increase (decrease) in investment securities (18,078) 2,745
Transfers from loans to other assets 99 151 369
- --------------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
49
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 ACCOUNTING POLICIES
BUSINESS PNC Bank Corp. provides a broad range of banking
and related financial services through its subsidiaries to
consumers, small businesses and corporate customers and is
subject to intense competition from other financial services
companies with respect to these services and customers. PNC
Bank Corp. is also subject to the regulations of certain federal
and state agencies and undergoes periodic examinations by
certain regulatory authorities.
BASIS OF FINANCIAL STATEMENT PRESENTATION The consolidated
financial statements include the accounts of PNC Bank Corp.
and its subsidiaries ("Corporation"), substantially all 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 consolidated financial statements. The
merger between PNC Bank Corp. and Midlantic Corporation
("Midlantic" or "MC") was completed on December 31, 1995
and accounted for as a pooling of interests. Accordingly, all
financial information has been restated as if the companies
were combined for all periods presented.
In preparing the consolidated financial statements,
management is required to make estimates and assumptions
that affect the amounts reported in the financial statements.
Actual results will differ from such estimates and such
differences may be material to the financial statements.
LOANS HELD FOR SALE Loans held for sale primarily consist of
residential mortgages and are carried at the lower of cost or
aggregate market value. Gains and losses on these loans are
included in mortgage banking income.
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. Gains
and losses on trading securities are included in other income.
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. Gains and losses on sales of securities
available for sale are generally computed on a specific
security basis and recognized in results of operations.
LOANS Interest income with respect to loans is accrued on the
principal amount outstanding, except for lease financing
income and interest on certain consumer loans which are
recognized over their respective terms using methods which
approximate the level yield method. Significant loan fees are
deferred and accreted to interest income over the respective
lives of the loans.
NONPERFORMING ASSETS Nonperforming assets are comprised of
nonaccrual and restructured loans and foreclosed assets.
Generally, a loan is classified as nonaccrual and the accrual of
interest is discontinued when it is determined the collection of
interest or principal is doubtful or when a default of interest or
principal has existed for 90 days or more, unless the loan is
well secured and in the process of collection. When interest
accrual is discontinued, unpaid interest credited to income in
the current year is reversed and unpaid interest accrued in the
prior year, if any, is charged against the allowance for credit
losses. A loan is categorized as restructured if the original
interest rate, repayment terms, or both, are restructured due to
a deterioration in the financial condition of the borrower and it
was not previously classified as nonaccrual. Nonperforming
loans are generally not returned to performing status until the
obligation is brought current, has performed in accordance
with the contractual terms for a reasonable period of time and
the ultimate collectibility of the total contractual principal and
interest is no longer in doubt.
Foreclosed assets are comprised of property acquired through
a foreclosure proceeding or acceptance of a deed-in-lieu of
foreclosure. These assets are recorded at the lower of the
related loan balance or market value of the collateral less
estimated disposition costs at the date acquired. Subsequently,
foreclosed assets are valued at the lower of the amount
recorded at acquisition date or the then current market value
less estimated disposition costs. Any gains or losses realized
upon disposition of the property are reflected in income.
Market values are estimated primarily based upon appraisals.
Interest collected on impaired loans is recognized on the cash
basis or cost recovery method.
ALLOWANCE FOR CREDIT LOSSES Effective January 1, 1995, the
Corporation adopted Statement of Financial Accounting
Standards ("SFAS") No. 114, "Accounting by Creditors for
Impairment of a Loan," as amended. Under this Standard, the
Corporation estimates credit losses on impaired loans based on
the present value of expected cash flows or the fair value of
the underlying collateral if the loan repay-
50
30
ment is expected to come from the sale or operation of such collateral.
For purposes of this Standard, nonaccrual and restructured
commercial and commercial real estate loans are considered to
be impaired. Prior to 1995, credit losses related to these loans
were estimated based on undiscounted cash flows or the fair
value of the underlying collateral.
The allowance for credit losses is established through
provisions for credit losses charged against income. Loans
deemed to be uncollectible are charged against the allowance
account.
The allowance is maintained at a level believed by
management to be sufficient to absorb estimated potential
credit losses. Management's determination of the adequacy of
the allowance is based on periodic evaluations of the credit
portfolio and other relevant factors. This evaluation is
inherently subjective as it requires material estimates,
including the amounts and timing of expected future cash
flows on impaired loans, which may be susceptible to
significant change. The allowance for credit losses on
impaired loans pursuant to SFAS No. 114 is one component
of the methodology for determining the allowance for credit
losses. The remaining components of the allowance for credit
losses provide for estimated losses on consumer loans and
residential mortgages, and general amounts for historical loss
experience, uncertainties in estimating losses and inherent
risks in the various credit portfolios.
INTANGIBLE ASSETS AND MORTGAGE SERVICING RIGHTS 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 accounted for at the lower of amortized cost or the
estimated value of the discounted future net revenues on a
disaggregated basis. Previously, future net revenues were not
discounted for this purpose. The cumulative effect of the
change decreased net income by $10.4 million, or $.03 per
fully diluted share.
In 1995, the Corporation adopted SFAS No. 122, "Accounting
for Mortgage Servicing Rights," on a prospective basis as
required by the Standard. SFAS No. 122 provides for the
recognition of originated mortgage servicing rights ("OMSR")
retained for loans sold by allocating total costs incurred
between the loan and the servicing rights based on their
relative fair values. Previously, the value of OMSR was not
recognized as an asset when the related loan was sold.
Mortgage servicing rights ("MSR") are amortized in
proportion to, and over the period of, estimated net servicing
income. To determine the fair value of MSR, the Corporation
estimates the present value of future cash flows incorporating
numerous assumptions including servicing income, cost of
servicing, discount rates, prepayment speeds and default rates.
SFAS No. 122 also requires establishment of a valuation
allowance for the excess of the carrying amount of capitalized
MSR over estimated fair value. For purposes of measuring
impairment, MSR are disaggregated and stratified on
predominant risk characteristics, primarily loan type, interest
rate and investor type.
The after-tax amount of OMSR recognized in 1995 was $24.1
million, or $.07 per fully diluted share.
Intangible assets, which are included in other assets, are
amortized using accelerated and straight-line methods over
their respective estimated useful lives. Goodwill is amortized
on a straight-line basis over periods ranging from 15 to 25
years.
DEPRECIATION AND AMORTIZATION For financial reporting purposes,
premises and equipment are depreciated principally using the
straight-line method over the estimated useful lives of the
assets. Accelerated methods are used for federal income tax
purposes. Leasehold improvements are amortized over their
estimated useful lives or their respective lease terms,
whichever is shorter.
FINANCIAL DERIVATIVES The Corporation uses off-balance-sheet
financial derivatives as part of the overall asset/liability
management process and in mortgage banking activities.
Substantially all such instruments are used to manage risk
related to changes in interest rates. Financial derivatives
primarily consist of interest rate swaps, caps and floors, and
futures and forward contracts.
Interest rate swaps, including swaps with index-amortizing
characteristics, are agreements with a counterparty to
exchange periodic interest payments calculated on a notional
principal amount. Interest rate swaps used to alter the
repricing structure of interest-bearing assets or liabilities are
accounted for under the accrual method. To qualify for such
accounting, the swaps must be designated to interest-bearing
assets or liabilities and alter their interest rate characteristics
(such as from fixed to variable, variable to fixed, or one
variable index to another) over the expected term of the swap
agreements or the designated instruments, whichever is
shorter. Under this method, the net amount payable or
receivable from interest rate swaps is accrued as an adjustment
to interest income or expense of the designated instruments.
51
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Changes in fair value of interest rate swaps accounted for
under the accrual method are not reflected in the
accompanying financial statements unless designated to an
instrument accounted for at fair value. Realized gains and
losses on terminated interest rate swaps are deferred as an
adjustment to the carrying amount of the designated
instruments and amortized over the shorter of the remaining
original life of the agreements or the designated instruments.
If the designated instruments are disposed of, the fair value of
the interest rate swap or unamortized deferred gains or losses
are included in the determination of the gain or loss on the
disposition of such instruments. Interest rate swaps not
qualifying for accrual accounting are marked to market in the
results of operations.
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 is higher or
lower than a defined rate applied to a notional amount. To
qualify for accrual accounting, interest rate caps and floors
must be designated to interest-bearing assets or liabilities and
modify their interest rate characteristics (such as modifying a
fixed-rate asset to a floating-rate asset when rates exceed the
defined cap rate) over the term of the agreement or the
designated instruments, whichever is shorter. Premiums on
interest rate caps and floors are deferred and amortized over
the life of the agreement as an adjustment to interest income
or interest expense of the designated instruments.
Unamortized premiums are included in other assets. Payments
received on interest rate caps and floors are recognized under
the accrual method as an adjustment to interest income or
expense of the designated instruments. Changes in fair value
of interest rate caps accounted for under the accrual method
are not reflected in the accompanying financial statements
unless designated to an instrument accounted for at fair value.
Upon termination of an interest rate cap or floor, any losses,
measured by the difference between the unamortized premium
and fair value, would be recognized immediately in the results
of operations. Any gains resulting from such terminations
would be deferred and amortized as an adjustment to interest
income or expense of the designated instruments over the
shorter of the remaining life of the interest rate contract or the
designated instrument. If the designated instruments are
disposed of, any unrealized gains associated with the interest
rate caps or floors or unamortized deferred gains, are included
in the determination of the gain or loss on the disposition of
such instruments. Interest rate caps or floors not qualifying for
accrual accounting are marked to market in the results of
operations.
Forward contracts provide for the delivery of financial
instruments at a specified future date and at a specified price
or yield. The Corporation uses forward contracts primarily to
manage risk associated with its mortgage banking activities.
Realized gains and losses on mandatory and optional delivery
forward commitments are recorded in mortgage banking
income in the period settlement occurs. Unrealized gains or
losses are considered in the lower of cost or market valuation
of loans held for sale.
Futures contracts are used to hedge interest rate risk. To
qualify for hedge accounting, the futures contract must be
designated as a hedge of an asset, liability, firm commitment
or anticipated transaction that is probable of occurring and
whose significant terms have been identified. Such
instruments must expose the Corporation to interest rate risk
and the futures contract must reduce such risk. Under hedge
accounting, gains and losses on futures contracts are deferred
and included in the carrying value of related assets and
liabilities. The deferred gains and losses are amortized as a
yield adjustment over the expected life of the hedged
instrument. If the hedged instruments are disposed of, the
unamortized deferred gains or losses are included in the
determination of the gain/loss on the disposition of such
instruments.
In addition, the Corporation enters into foreign currency
exchange contracts to accommodate customers. The fair value
of such activity is recorded in other assets. Realized and
unrealized gains and losses are included in other income.
INCOME TAXES Effective January 1, 1993, the Corporation
adopted SFAS No. 109, "Accounting for Income Taxes,"
which requires 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 law 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
increased 1993 net income by $29.9 million, or $.09 per fully
diluted share.
POSTEMPLOYMENT BENEFITS Effective January 1, 1994, the
Corporation adopted SFAS No. 112, "Employers' Accounting
for Postemployment Benefits." SFAS No. 112 requires accrual
of a liability for benefits to be paid to former or inactive
employees after employment, but before retirement. The
cumulative effect of the change in accounting decreased net
income by $7.5 million, or $.02 per
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fully diluted share. Prior to 1994, the Corporation accounted for
postemployment benefits on a cash basis.
STOCK OPTIONS Employee stock options are accounted for under
Accounting Principles Board Opinion ("APB") No. 25, "Accounting
for Stock Issued to Employees". Stock options are granted at
exercise prices not less than the fair market value of common
stock on the date of grant. Under APB No. 25, no compensation
expense is recognized pursuant to the Corporation's stock option plans.
TREASURY STOCK The Corporation records common stock
purchased for treasury at cost. At the date of subsequent
reissue, the treasury stock account is reduced by the cost of
such stock on the first-in, first-out basis.
EARNINGS PER COMMON SHARE Primary earnings per common
share is calculated by dividing net income adjusted for
preferred stock dividends declared by the sum of the weighted
average number of shares of common stock outstanding and
the number of shares of common stock which would be issued
assuming the exercise of stock options during each period.
Fully diluted earnings per common share is based on net
income adjusted for interest expense, net of tax, on
outstanding convertible debentures and dividends declared on
nonconvertible preferred stock. The weighted average number
of shares of common stock outstanding is increased by the
assumed conversion of outstanding convertible preferred stock
and convertible debentures from the beginning of the year or
date of issuance, if later, and the number of shares of common
stock which would be issued assuming the exercise of stock
options. Such adjustments to net income and the weighted
average number of shares of common stock outstanding are
made only when such adjustments dilute earnings per
common share.
NOTE 2 MERGERS AND ACQUISITIONS
On December 31, 1995, Midlantic merged with the
Corporation. Each share of Midlantic common stock
outstanding was converted into 2.05 shares of the
Corporation's common stock. The Corporation issued
approximately 112 million shares of common stock and cash
in lieu of fractional shares in connection with the merger. The
transaction was accounted for as a pooling of interests and,
accordingly, all financial information has been restated as
if the entities were combined for all prior periods.
The following table sets forth separate company financial
information immediately prior to the merger and, accordingly,
such information does not include special charges related to
the merger.
Year ended December 31, 1995
In millions PNC Midlantic
- ------------------------------------------------------------
Net interest income $1,502 $640
Net income 367 233
- ------------------------------------------------------------
On October 6, 1995, the Corporation acquired Chemical New
Jersey Holdings, Inc., and its wholly-owned subsidiary Chemical
Bank New Jersey, N.A. ("Chemical") consisting of 81 branches in
southern and central New Jersey with total assets of $3.2 billion
and retail core deposits of $2.7 billion. The Corporation paid $492
million in cash and the transaction was accounted for under the
purchase method.
In February 1995, the Corporation acquired BlackRock
Financial Management, L.P., a New York-based, fixed-income
investment management firm with approximately $25 billion
in assets under management at closing. The Corporation paid
$71 million in cash and issued $169 million of unsecured
notes. The transaction was accounted for under the purchase
method.
During 1994, the Corporation acquired United Federal
Bancorp, Inc., State College, Pennsylvania, and First Eastern
Corp., Wilkes-Barre, Pennsylvania. The acquisitions added
assets and deposits of $2.8 billion and $2.4 billion,
respectively. The Corporation paid $486 million and
accounted for the acquisitions under the purchase method.
NOTE 3 CASH FLOWS
For the statement of cash flows, the Corporation defines cash
and due from banks as cash and cash equivalents.
The table below sets forth information pertaining to
acquisitions and divestitures which affect cash flows.
Year ended December 31
In millions 1995 1994 1993
- -------------------------------------------------------------------
Assets acquired $3,932 $3,197 $8,896
Liabilities assumed 3,230 2,594 8,477
Cash paid 661 603 419
Cash and due from banks received 710 128 244
- -------------------------------------------------------------------
53
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 SECURITIES
1995 1994
--------------------------------------------- ---------------------------------------------
Unrealized Unrealized
December 31 Amortized ----------------- Fair Amortized ----------------- Fair
In millions Cost Gains Losses Value Cost Gains Losses Value
- --------------------------------------------------------------------------------------------------------------------------------
Securities available for sale
Debt securities
U.S. Treasury $ 3,211 $ 69 $ 3,280 $ 671 $ 8 $ 663
U.S. Government
agencies and
corporations
Mortgage-related 7,510 24 $75 7,459 2,161 69 2,092
Other 1,030 5 1 1,034 25 4 21
State and municipal 343 25 1 367 8 1 7
Asset-backed private
placement 1,597 7 1,604
Other debt
Mortgage-related 1,121 2 10 1,113 749 17 732
Other 525 3 3 525 149 $ 2 5 146
Corporate stocks and other 455 4 2 457 133 2 6 129
------------------------------------------------------------------------------------------------
Total securities
available for sale 15,792 139 92 15,839 3,896 4 110 3,790
Investment securities
Debt securities
U.S. Treasury 3,317 121 3,196
U.S. Government
agencies and
corporations
Mortgage-related 11,795 1 1,088 10,708
Other 1,000 28 972
State and municipal 360 12 2 370
Asset-backed private
placements 1,597 33 1,564
Other debt
Mortgage-related 726 43 683
Other 775 20 755
Other 310 1 311
------------------------------------------
Total investment
securities 19,880 14 1,335 18,559
------------------------------------------------------------------------------------------------
Total securities $15,792 $139 $92 $15,839 $23,776 $18 $1,445 $22,349
- --------------------------------------------------------------------------------------------------------------------------------
In connection with implementing accounting guidance issued
in November 1995, the Corporation reassessed its investment
securities' classifications. All securities previously classified
as held to maturity were reclassified to the available-for-sale
portfolio. The reclassifications were accounted for at fair
value and included the fair value of associated financial
derivatives. Subsequently, to accelerate the balance sheet
repositioning begun in the latter half of 1994, the Corporation
sold $1.9 billion of U.S. Treasury securities and $4.1 billion of
collateralized mortgage obligations at a loss of $61.3 million.
In connection with the sales, losses totaling $228.2 million,
included in net securities losses, were recognized on
terminated pay-fixed interest rate swaps with a notional value
of $5.1 billion that were designated to such securities.
At December 31, 1995, $6.1 billion notional value of interest
rate swaps and caps were associated with securities available
for sale. The fair value of securities available for sale at year-
end 1995 set forth above includes unrealized gains of $6 million
on related derivatives. No financial derivatives were designated
to securities available for sale at year-end 1994. Interest rate
swaps and caps with a notional value of $11.1 billion, fair value
of $204 million and carrying value of $130 million were designated
to investmentsecurities at December 31, 1994. The fair value of
these derivatives is not included in the values set forth above.
54
34
The following table presents the amortized cost and fair value
of debt securities at December 31, 1995 by remaining
contractual maturity. Based on expected prepayment rates and
historical experience, the expected weighted average maturity
of U.S. Government agency debt and mortgage-related and
asset-backed securities was approximately 2 years and 10
months at December 31, 1995.
December 31, 1995 Amortized Fair
In millions Cost Value
- -------------------------------------------------------------------------------------------------------------------------------
One year or less $ 1,985 $ 1,989
After one year through five years 1,327 1,394
After five years through ten years 87 93
After ten years 254 267
U.S. Government agency debt 1,030 1,034
Mortgage-related securities 8,631 8,572
Asset-backed securities 2,023 2,033
-----------------------------------------
Total $15,337 $15,382
- -------------------------------------------------------------------------------------------------------------------------------
Information relating to sales of securities, including the effects
of related financial derivatives, is set forth in the following
table:
Year ended December 31 Gross Gross
In millions Proceeds Gains Losses
- -------------------------------------------------------------------------------------------------------------------------------
1995 $ 8,125 $ 11.9 $291.6
1994 14,147 65.1 206.7
1993 17,250 199.7 5.0
- -------------------------------------------------------------------------------------------------------------------------------
The carrying value of securities pledged to secure public and
trust deposits, repurchase agreements and for other purposes at
December 31, 1995 was $7.6 billion.
NOTE 5 LOANS AND COMMITMENTS TO EXTEND CREDIT
Loans and commitments to extend credit were as follows:
1995 1994
----------------------- -------------------------
Net Net
Unfunded Underfunded
December 31 Out- Com- Out- Com-
In millions standing mitments standing mitments
- -----------------------------------------------------------------------------------------
Consumer $13,539 $ 7,335 $11,851 $ 6,050
Residential mortgage 11,689 554 9,746 769
Commercial 16,812 24,282 15,545 20,794
Commercial real estate
Commercial mortgage 2,775 9 2,837 20
Real estate project 2,139 742 2,226 649
Other 2,102 892 2,223 917
Unearned income (403) (385)
----------------------------------------------------
Total, net of unearned income $48,653 $33,814 $44,043 $29,199
- -----------------------------------------------------------------------------------------
Commitments to extend credit represent arrangements to lend
funds provided there is no violation of specified contractual
conditions. Such amounts are net of participations and
syndications, primarily to financial institutions, totaling $4.2
billion and $2.5 billion at December 31, 1995 and 1994,
respectively. Commercial commitments generally have fixed
expiration dates, may require payment of a fee, and contain
termination clauses in the event of deterioration in the
customer's credit quality. Most commercial commitments
expire unfunded, and therefore cash requirements are
substantially less than the total commitment. Consumer
commitments are primarily for home equity and credit card
lines.
Loan outstandings and related unfunded commitments are
concentrated within affiliate markets, which include Delaware,
Indiana, Kentucky, New Jersey, Ohio and Pennsylvania. At
December 31, 1995, no specific industry concentration
exceeded 5 percent of total outstandings and unfunded
commitments.
Letters of credit totaled $4.5 billion and $4.6 billion at
December 31, 1995 and 1994, respectively, and consist
primarily of standby letters of credit which commit the
Corporation to make payments on behalf of customers when
certain specified future events occur. Such instruments are
typically issued to support industrial revenue bonds,
commercial paper, and bid or performance related contracts.
At year-end 1995, the largest industry concentration within
standby letters of credit was healthcare, which accounted for
approximately 18 percent of the total. Maturities for standby
letters of credit ranged from 1996 to 2020.
At December 31, 1995, $475 million of loans were pledged to
secure borrowings and for other purposes.
Certain directors and executive officers of the Corporation and
its significant subsidiaries, as well as certain affiliated
companies of these directors and officers, were customers of
and had loans with subsidiary banks in the ordinary course of
business. All such loans were on substantially the same terms,
including interest rates and collateral, as those prevailing at
the time for comparable transactions with other customers and
did not involve more than a normal risk of collectibility. The
aggregate dollar amounts of these loans were $379 million
and $436 million at December 31, 1995 and 1994,
respectively. During 1995, new loans of $657 million were
funded, and repayments totaled $714 million.
55
35
NOTE TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 NONPERFORMING ASSETS
Nonperforming assets are comprised of nonaccrual and
restructured loans, and foreclosed assets. These assets were as
follows:
December 31
In millions 1995 1994
- -------------------------------------------------------------
Nonaccrual loans $335 $496
Restructured loans 23 69
----------------------
Total nonperforming loans 358 565
Foreclosed assets 178 192
----------------------
Total nonperforming assets $536 $757
- -------------------------------------------------------------
Interest on nonperforming loans was as follows:
Year ended December 31
In millions 1995 1994 1993
- -------------------------------------------------------------
Interest computed on
original terms $36 $54 $74
Interest recognized 10 14 19
- -------------------------------------------------------------
At December 31, 1995 and 1994, unfunded commitments to
lend additional funds with respect to nonperforming assets
totaled $4 million and $14 million, respectively. At December
31, 1995 and 1994, foreclosed assets are reported net of
valuation allowances of $37 million and $52 million,
respectively. Gains on sales of foreclosed assets resulted in net
foreclosed asset income of $11 million and $15 million in
1995 and 1994, respectively. Net foreclosed asset expense
totaled $42 million in 1993. Net foreclosed asset income or
expense is included in other noninterest expense.
NOTE 7 ALLOWANCE FOR CREDIT LOSSES
The following table presents changes in the allowance for
credit losses:
In millions 1995 1994 1993
- -------------------------------------------------------------
January 1 $1,352 $1,372 $1,568
Charge-offs (240) (289) (707)
Recoveries 107 120 119
------------------------------
Net charge-offs (133) (169) (588)
Provision for credit losses 6 84 350
Acquisitions 34 65 42
------------------------------
December 31 $1,259 $1,352 $1,372
- -------------------------------------------------------------
Information with respect to impaired loans and the related
allowance determined in accordance with SFAS No. 114 is set
forth below.
In millions 1995
- -------------------------------------------------------------
December 31
Impaired loans
With a related allowance for credit losses $154
Without a related allowance for credit losses 143
-----
Total impaired loans $297
-----
Allowance for credit losses $ 29
Year ended December 31
Average impaired loans $365
Interest income recognized 6
- -------------------------------------------------------------
NOTE 8 PREMISES, EQUIPMENT AND
LEASEHOLD IMPROVEMENTS
Premises, equipment and leasehold improvements, stated at
cost less accumulated depreciation and amortization, were as
follows:
December 31
In millions 1995 1994
- -------------------------------------------------------------
Land $ 101 $ 87
Buildings 553 538
Equipment 1,069 949
Leasehold improvements 186 175
------------------
1,909 1,749
Accumulated depreciation and
amortization (1,002) (899)
------------------
Net book value $ 907 $ 850
- -------------------------------------------------------------
Depreciation and amortization expense on premises,
equipment and leasehold improvements totaled $134.7 million
in 1995, $124.1 million in 1994 and $115.7 million in 1993.
Certain facilities and equipment are leased under agreements
expiring at various dates until the year 2066. Substantially all
such leases are accounted for as operating leases. Rental
expense on such leases amounted to $95.0 million in 1995,
$96.7 million in 1994 and $79.5 million in 1993.
At December 31, 1995 and 1994, required minimum annual
rentals due on noncancelable leases having terms in excess of
one year aggregated $478.3 million and $364.2 million,
respectively. Minimum annual rentals for each of the years
1996 through 2000 are $77.5 million, $67.3 million, $53.1
million, $45.9 million and $37.6 million, respectively.
56
36
NOTE 9 INTANGIBLE ASSETS AND MORTGAGE
SERVICING RIGHTS
Intangible assets and MSR, net of amortization, and, with
respect to mortgage servicing rights, allowances for
impairment, consisted of the following:
December 31
In millions 1995 1994
---------------------------------------------------------------------------
Goodwill and other $ 997 $476
Mortgage servicing rights 268 303
--------------------
Total $1,265 $779
- ---------------------------------------------------------------------------
At December 31, 1995, the fair value of capitalized MSR and
the allowance for impairment totaled $328.7 million and $10.9
million, respectively. Amortization of MSR totaled $71.5
million, $63.1 million and $17.1 million in 1995, 1994 and
1993, respectively.
In March 1995, SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed Of," was issued. This Standard requires that long-
lived assets and certain identifiable intangible assets, such as
goodwill, be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Impairment is measured
based on the present value of expected future cash flows from
the asset and its eventual disposition. Management expects to
adopt this Standard effective January 1, 1996 and such
adoption is not expected to have a material impact on financial
position or results of operations.
NOTE 10 NOTES AND DEBENTURES
Notes and debentures consist of the following:
December 31
In millions 1995 1994
- ------------------------------------------------------------------------
Bank notes $ 6,256 $ 8,825
Federal Home Loan Bank 2,393 1,384
Subordinated notes 1,359 1,019
Senior notes 2 164
Student Loan Marketing Association 500
ESOP 101 110
Other 287 125
-----------------------
Total $10,398 $12,127
- ------------------------------------------------------------------------
Substantially all bank notes mature in 1996 and have various
interest rates that range from 5.23 percent to 6.63 percent.
Obligations to the Federal Home Loan Bank have various
maturities ranging from 1996 to 2002 and interest rates that
range from 1.25 percent to 8.76 percent. The Student Loan
Marketing Association obligations matured in 1995 and had
various interest rates that ranged from 4.97 percent to 6.08
percent.
Senior and subordinated notes are not redeemable prior to
maturity. Interest is payable semiannually, and the payment of
principal and interest is unconditionally guaranteed by the
parent company. The senior and subordinated notes have
various maturities ranging from 1997 to 2008 and interest
rates that range from 6.13 percent to 10.55 percent.
Subordinated notes totaling $200 million are to be exchanged
at maturity for common stock or perpetual preferred stock of
the Corporation having a market value equal to the principal
amount of the notes or, upon satisfaction of certain conditions,
the Corporation may elect to repay the notes in cash.
Subordinated notes totaling $67.7 million are convertible into
common stock at a conversion price of $23.41 per share. The
debentures are redeemable by the Corporation at a price equal
to 100.8 percent of principal amount and at prices declining to
par value on or after July 1, 1996.
The Employee Stock Ownership Plan ("ESOP") borrowing is
unconditionally guaranteed by the parent company and
consists of a series of medium-term, fixed-rate notes with
maturities that range from 1996 to 2000 and interest rates
ranging from 4.25 percent to 5.43 percent. Interest expense on
the borrowing was $5.0 million in 1995, $5.4 million in 1994
and $4.9 million in 1993.
Notes and debentures have scheduled repayments for the years
1996 through 2000 and thereafter of $7.8 billion, $394
million, $152 million, $290 million, $70 million, and $1.6
billion, respectively.
57
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 SHAREHOLDERS' EQUITY
Information related to the Corporation's preferred stock is as
follows:
Shares Outstanding
Redemption/Liquidation --------------------------
December 31 Value Per Share 1995 1994
- -------------------------------------------------------------------------------------------------------
Authorized
$1 par value 17,529,342 17,601,524
No par value 40,000,000
Issued and outstanding
$1.80 Series A $ 40 17,846 19,348
1.80 Series B 40 4,752 7,425
1.60 Series C 20 356,347 393,089
1.80 Series D 20 469,839 501,104
MC - Series A (no par value) 100 500,000
-----------------------------
Total 848,784 1,420,966
- -------------------------------------------------------------------------------------------------------
Series A through D are cumulative and except for Series B,
are redeemable at the option of the Corporation. During 1995,
the MC-Series A preferred stock was redeemed.
Holders of preferred stock are entitled to a number of votes
equal to the number of full shares of common stock into
which such preferred stock is convertible. Holders of
preferred stock are entitled to the following conversion
privileges: (i) one share of Series A or Series B is convertible
into eight shares of common stock; and (ii) 2.4 shares of
Series C or Series D are convertible into four shares of
common stock.
The Corporation has a dividend reinvestment and stock
purchase plan. Holders of preferred stock and common stock
may participate in the plan which provides that additional
shares of common stock may be purchased at market value
with reinvested dividends and voluntary cash payments. The
following numbers of shares of common stock were purchased
by shareholders pursuant to such plan: 1,177,481 shares in
1995; 877,639 shares in 1994; and 591,785 shares in 1993.
The Corporation had reserved approximately 20.3 million
common shares to be issued in connection with certain
employee benefit plans and the conversion of certain debt and
equity securities.
The following table sets forth purchases and issuances of the
Corporation's common stock held in treasury.
TREASURY STOCK ACTIVITY
Shares in thousands, dollars in millions Shares Amount
- ----------------------------------------------------------------------------
January 1, 1993 (3)
Shares purchased (819) $ (19)
Shares issued 533 10
----------------------------
December 31, 1993 (289) (9)
Shares purchased (3,684) (89)
Shares issued 1,158 33
----------------------------
December 31, 1994 (2,815) (65)
Shares purchased (10,252) (236)
Shares issued 5,578 117
Midlantic merger - shares issued 7,489 184
----------------------------
December 31, 1995 - $ -
- ----------------------------------------------------------------------------
NOTE 12 FINANCIAL DERIVATIVES
The Corporation uses a variety of off-balance-sheet financial
derivatives as part of its overall interest rate risk management
process and to manage risk associated with mortgage banking activities.
Financial derivatives involve, to varying degrees, interest rate
and credit risk in excess of the amount recognized in the
balance sheet but less than the notional amount of the contract.
For interest rate swaps, caps and floors, only periodic cash
payments and, with respect to caps and floors, premiums, are
exchanged; therefore, cash requirements and exposure to
credit risk are significantly less than the notional value. The
Corporation manages these risks as part of its asset/liability
management process and through the Corporation's credit
policies and procedures. The Corporation seeks to minimize
the credit risk by entering into transactions with only a select
number of high-quality institutions, establishing credit limits,
requiring bilateral-netting agreements, and, in certain
instances, segregated collateral.
Receive-fixed interest rate swaps are primarily designated to
securities available for sale, commercial loans, interest-
bearing deposits, and borrowed funds. Interest-bearing
deposits include time deposits and transaction accounts, such
as demand and money market. Historical data indicate there is
a fixed-rate component to the rates paid on transaction
accounts. Receive-fixed interest rate swaps convert this fixed
component to a variable rate.
The notional value of index-amortizing interest rate swaps
amortize on predetermined dates and in predetermined
amounts based on market movements of the designated
indices, which are pri-
58
38
marily 3-year U.S. Treasury constant maturities and 3-month LIBOR.
Periodically, the Corporation receives payments based on fixed
interest rates and makes payments based on floating money market
indices, primarily 1-month and 3-month LIBOR, calculated on the
notional amounts.
The following tables set forth the notional value of
financial derivatives at December 31, 1995 and 1994, related
weighted average interest rates and estimated fair values.
FINANCIAL DERIVATIVES Weighted Average Rates
December 31, 1995 Notional ----------------------------- Estimated
Dollars in millions Value Paid Received Fair Value
- ----------------------------------------------------------------------------------------------------------------------------------
Interest rate risk management
Asset rate conversion
Interest rate swaps
Pay fixed designated to
Securities $ 599 4.68% 5.87% $ 6
Commercial loans 290 8.01 5.87 (24)
Receive-fixed index amortizing designated to commercial loans 2,471 5.90 5.23 (14)
Receive fixed designated to
Commercial loans 975 5.89 6.31 19
Short-term investments 200 5.84 7.23 9
Basis swaps designated to commercial real estate loans 300 5.96 5.85
Interest rate caps designated to
Securities 5,500 NM NM 6
Mortgage loans 10 NM NM
------- ----
Total asset rate conversion 10,345 2
Liability rate conversion
Interest rate swaps
Pay fixed designated to
Other borrowings 1,125 5.68 5.60 (5)
Bank notes 600 5.41 5.79
Deposits 15 4.98 5.94
Receive-fixed index amortizing designated to deposits 740 5.93 5.32 (4)
Receive fixed designated to
Certificates of deposit 625 5.94 5.76 7
Bank notes 650 5.85 5.90 14
Other borrowings 330 5.82 6.37 13
Deposit notes 5 5.93 8.48
Basis swaps designated to bank notes 465 5.76 5.49 8
------- ----
Total liability rate conversion 4,555 33
------- ----
Total interest rate risk management 14,900 35
Mortgage banking activities
Commitments to purchase forward contracts - originations 431 NM NM
Commitments to sell forward contracts - originations 751 NM NM (4)
Interest rate floors - MSR 500 NM NM 9
Receive-fixed interest rate swaps - MSR 125 NM NM 7
------- ----
Total mortgage banking 1,807 12
------- ----
Total financial derivatives $16,707 $ 47
- ----------------------------------------------------------------------------------------------------------------------------------
<FN>
NM - not meaningful
The floating rate portion of interest rate contracts is based on money-market
indices. As a percent of notional value, 71 percent were based on 3-month
LIBOR, 19 percent on 1-month LIBOR and the remainder on other short-term
indices.
59
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FINANCIAL DERIVATIVES Weighted Average Rates
December 31, 1994 Notional ----------------------------- Estimated
Dollars in millions Value Paid Received Fair Value
- ----------------------------------------------------------------------------------------------------------------------------------
Interest rate risk management
Asset rate conversion
Interest rate swaps
Pay fixed designated to
Securities $ 5,649 7.53% 3.91% $ 72
Commercial loans and mortgages 303 8.87 6.05 (14)
Receive-fixed index amortizing designated to commercial loans 6,950 6.36 5.54 (498)
Receive fixed designated to commercial loans 1,625 5.85 5.56 (38)
Basis swaps designated to long-term commercial real estate loans 300 5.96 6.04 (3)
Interest rate caps designated to securities 5,500 NM NM 132
------- -----
Total asset rate conversion 20,327 (349)
Liability rate conversion
Interest rate swaps
Pay fixed designated to
Overnight and other borrowings 350 5.94 6.16 (3)
Deposits 15 4.98 6.13
Receive-fixed index amortizing designated to
Deposits 3,950 6.14 5.69 (238)
Certificates of deposit 500 5.76 5.29 (36)
Receive-fixed index amortizing designated to
Certificates of deposit 1,010 5.76 5.75 (19)
Deposits 9 6.13 8.65
------- -----
Total liability rate conversion 5,834 (296)
Mortgage banking activities
Commitments to purchase forward contracts - originations 16 NM NM
Commitments to sell forward contracts - originations 350 NM NM
-------
Total mortgage banking 366
------- -----
Total financial derivatives $26,527 $(645)
- ----------------------------------------------------------------------------------------------------------------------------------
<FN>
NM - not meaningful
The floating rate portion of interest rate contracts is based on money-market
indices. As a percent of notional value, 83 percent were based on 3-month
LIBOR, 13 percent on 1-month LIBOR and the remainder on other short-term
indices.
The Corporation's pay-fixed interest rate and basis swaps are
primarily used to alter the repricing characteristics of
overnight and other short term borrowings. With respect to
pay-fixed swaps, the Corporation receives payments based on
floating money market indices, primarily 3-month LIBOR,
and pays fixed interest rates. Basis swaps convert variable rate
borrowings from one variable index to another. The
Corporation's swaps do not contain leverage or any similar
features.
The Corporation uses a combination of on-balance-sheet
instruments and financial derivatives to manage risk
associated with its mortgage banking activities. The inherent
risk affecting the value of MSR is the potential for the related
mortgages to prepay, thereby eliminating the underlying servicing
fee income stream. Prepayment is primarily related to declining
interest rates. In 1995, the Corporation entered into a combination
of interest rate floors and receive-fixed interest rate swaps
designed to reduce this risk. If interest rates decrease, the value of the
interest rate swaps and floors should increase and the value of the related MSR
should decline.
Forward contracts are used to manage risk positions associated
with mortgage origination activities. Substantially all forward
contracts mature within 90 days of origination. Forward
contracts are traded in over-the-counter markets and do not
have standardized terms. Counterparties to the Corporation's
forward contracts are primarily U.S. Government agencies and
brokers and dealers in mortgage-backed securities. In the
event the counterparty is unable to meet its contractual
obligations, the Corporation may be exposed to selling or
purchasing mortgage loans at prevailing market prices.
60
40
FAIR VALUES OF FINANCIAL DERIVATIVES
Positive Negative Total
December 31 Notional Fair Notional Fair Notional
In millions Value Value Value Value Value
- -----------------------------------------------------------------------------------
1995
Interest rate swaps $ 4,249 $ 77 $ 5,141 $ (48) $ 9,390
Interest rate caps 5,510 6 5,510
Mortgage banking activities 769 16 1,038 (4) 1,807
-------------------------------------------------
Total $10,528 $ 99 $ 6,179 $ (52) $16,707
- -----------------------------------------------------------------------------------
1994
Interest rate swaps $ 5,878 $ 80 $14,783 $(857) $20,661
Interest rate caps 5,500 132 5,500
Mortgage banking activities 366 366
-------------------------------------------------
Total mortgage banking $11,744 $212 $14,783 $(857) $26,527
- -----------------------------------------------------------------------------------
The following table sets forth the maturity distribution and
weighted average interest rates of financial derivatives used
for interest rate risk management. The maturity distribution of
receive-fixed index amortizing swaps is based on implied
forward rates. Weighted average interest rates paid or received
represent contractual interest rates in effect on December 31,
1995 and expected rates based on implied forward rates.
MATURITY DISTRIBUTION OF FINANCIAL DERIVATIVES
Weighted Average Rates
-----------------------------------------------------
Expected Based on
At December 31, 1995 Implied Forward Rates
December 31, 1995 Notional -----------------------------------------------------
Dollars in millions Value Paid Received Paid Received
- -------------------------------------------------------------------------------------------------------------
Interest rate swaps
Receive fixed index amortizing
1996 $3,169 5.90% 5.25% 5.34% 5.25%
1997 42 5.96 5.54 5.15 5.54
------
Total $3,211 5.90 5.25 5.34 5.25
------------------------------------------------------------------
Receive fixed
1996 $1,855 5.89% 5.88% 5.31% 5.88%
1997 280 5.92 6.18 5.21 6.18
1998 575 5.84 7.01 5.27 7.01
1999 and beyond 75 5.85 7.00 5.54 7.00
------
Total $2,785 5.88 6.17 5.30 6.17
------------------------------------------------------------------
Pay-fixed
1996 $1,515 5.77% 5.68% 5.77% 5.32%
1997 989 5.04 5.81 5.04 5.19
1998 50 8.28 5.88 8.28 5.31
1999 and beyond 75 9.43 5.94 9.43 5.60
------
Total $2,629 5.65 5.74 5.65 5.28
------------------------------------------------------------------
Basis swaps
1996 $ 765 5.84% 5.63% 5.59% 5.21%
------------------------------------------------------------------
Interest rate caps
1996 $ 10 NM NM NM NM
1997 5,500 NM NM NM NM
------
Total $5,510
- -------------------------------------------------------------------------------------------------------------
<FN>
NM - Not meaningful
Interest rate caps with a notional value of $5.5 billion require the
counterparty to pay the Corporation the excess, if any, of 3-month LIBOR over
the specified cap rate. At December 31, 1995, 3-month LIBOR was 5.63 percent
and the specified cap rate was 6.50 percent.
61
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During 1995, $4.6 billion notional value of index amortizing
receive-fixed interest rate swaps and $5.1 billion notional
value of pay-fixed interest rate swaps were terminated. The
loss on the index amortizing swaps was deferred and is being
amortized as an adjustment to interest income or expense of
the designated instruments. At December 31, 1995, the
unamortized loss was $6.1 million and will be amortized over
a weighted-average remaining period of 6 months. Losses
totaling $228.2 million on terminated pay-fixed swaps
associated with securities sold are included in net securities
losses.
In connection with the Midlantic merger, $5.5 billion notional
value of interest rate caps that reduced exposure to higher
interest rates within a specified range were terminated at a loss
of $79.9 million. The interest rate cap was terminated as part
of the realignment of the combined asset and liability position
of the Corporation taking into account the interest rate risk
profile of Midlantic. The amount is included as a component
of special charges. Concurrently, the Corporation purchased
$5.5 billion notional value interest rate caps that require the
counterparty to pay the Corporation the excess, if any, of 3-
month LIBOR over a specified cap rate without limitation,
currently 6.50 percent, computed quarterly based on the
notional value of the contracts. At December 31, 1995, 3-
month LIBOR was 5.63 percent. The contracts expire during
the third and fourth quarters of 1997.
At December 31, 1995, credit exposure related to interest rate
swaps and caps totaled $32.7 million.
NOTE 13 SPECIAL CHARGES
In connection with the Midlantic merger, the Corporation
recorded special charges totaling $260 million in 1995. These
charges represent estimated costs of integrating and
consolidating branch networks, back office and administrative
facilities, professional services and the cost to terminate an
interest rate cap position.
Branch network integration and consolidation will begin
during the first half of 1996 with the closing or consolidation
of overlapping and unprofitable facilities and operations.
Consolidation of the back office and administrative facilities is
expected to begin later in 1996.
SPECIAL CHARGES
Year ended December 31
In millions 1995 1994
- -------------------------------------------------------------
Staff related $ 42 $ 18
Net occupancy 72 12
Equipment 17 2
Professional services 31
Other 18 16
Interest rate cap termination 80
-----------------
Total special charges $260 $48
- -------------------------------------------------------------
Special charges in 1994 were for costs to consolidate the
Corporation's telebanking centers and rationalization of the
retail branch networks.
NOTE 14 EMPLOYEE BENEFIT PLANS
INCENTIVE SAVINGS PLANS The Corporation sponsors incentive
savings plans covering substantially all employees. Under the
plans, employee contributions up to 3 percent or 6 percent of
base pay, subject to Internal Revenue Service limitations, are
matched with cash or shares of the Corporation's common
stock. Contributions for one of the plans are matched
primarily by shares of common stock held by the
Corporation's ESOP.
The Corporation makes annual contributions to the ESOP
equal to the debt service requirements on the ESOP borrowing
less dividends received by the ESOP. All dividends received
by the ESOP are used to pay debt service. During 1995, 1994
and 1993, dividends used for debt service totaled $9.9 million,
$9.5 million and $8.5 million, respectively. To satisfy
additional debt service requirements, the Corporation
contributed $8.5 million in 1995, $7.6 million in 1994 and
$8.8 million in 1993.
As the ESOP borrowing is repaid, shares are allocated to
employees who made contributions during the year based on
the proportion of annual debt service to total debt service. The
Corporation includes all ESOP shares as common shares
outstanding in its earnings per share computation. The
components of ESOP shares are as follows:
Year end December 31
In thousands 1995 1994
- -------------------------------------------------------------
Allocated shares 2,503 1,956
Shares released for allocation 792 673
Unallocated shares 3,825 4,617
Shares retired during year (238) (126)
-------------------
Total ESOP shares 6,882 7,120
- -------------------------------------------------------------
62
42
Compensation expense related to the portion of contributions
matched with ESOP shares is determined based on the number
of ESOP shares allocated. Compensation expense related to
these plans was $18.1 million for 1995, $12.7 million for 1994
and $6.8 million for 1993.
DEFINED BENEFIT PLANS The Corporation sponsors funded
defined benefit pension plans covering substantially all
employees. The plans provide pension benefits that are based
on the average base salary for specified years of service prior
to retirement. Pension contributions are made to the extent
deductible under existing federal tax regulations. The
Corporation also has unfunded non-qualified supplemental
defined benefit retirement plans covering certain employees as
defined in the plans.
The following table sets forth the estimated funded status of
defined benefit plans:
December 31
In millions 1995 1994
- -------------------------------------------------------------
Accumulated benefit obligation
Vested $550 $428
Nonvested 35 22
---- ----
Accumulated benefit obligation 585 450
Effect of future compensation levels 149 103
---- ----
Projected benefit obligation for services
rendered to date 734 553
Plan assets at fair value, primarily listed
common stocks, U.S. Government and
agency securities, and collective funds 644 561
---- ----
Plan assets (greater) less than projected
benefit obligation 90 (8)
Unrecognized net gain (loss) due to
experience different from assumptions
and the effect of changes in
assumptions (62) 15
Unrecognized net asset 26 30
Unrecognized prior service cost (19) (22)
---------------
Accrued pension cost $35 $15
- -------------------------------------------------------------
Net periodic defined benefit plan costs include the following
components:
Year ended December 31
In millions 1995 1994 1993
- -------------------------------------------------------------
Service cost - benefits earned
during the period $ 24 $ 29 $ 23
Interest cost on projected benefit
obligation 49 44 37
Actual return on plan assets (112) (9) (63)
Net amortization and deferral 60 (42) 11
------------------------
Net periodic pension costs $ 21 $ 22 $ 8
- -------------------------------------------------------------
Assumptions used to measure the projected benefit obligation
and the expected return on assets included in net periodic
pension costs are set forth in the following table.
December 31 1995 1994 1993
- -------------------------------------------------------------
Discount 7.15% 8.75/8.50% 7.25/7.50%
Increase in compensation
levels 4.75 5.00/5.00 5.18/5.00
Expected long-term
return on assets 9.50 10.00/8.50 10.00/8.50
- -------------------------------------------------------------
In addition to providing pension benefits, the Corporation
provides certain health care and life insurance benefits for
retired employees ("postretirement benefits") through various
plans. A reconciliation of the accrued postretirement benefit
obligation is as follows:
December 31
In millions 1995 1994
- -------------------------------------------------------------
Accumulated postretirement benefit
obligation
Retirees $156 $143
Active employees 8 6
Other active plan participants 59 47
----------------
Total accumulated postretirement
obligation 223 196
Unrecognized prior service cost credit 56 62
Unrecognized net loss (27) (7)
----------------
Accrued postretirement benefit obligation $252 $251
- -------------------------------------------------------------
Net periodic postretirement benefit costs include the following
components:
Year ended December 31
In millions 1995 1994 1993
- -------------------------------------------------------------
Service cost - benefits earned
during period $ 3 $ 3 $ 3
Interest cost on benefit
obligation 15 15 11
Amortization of prior service
cost (4) (3) (3)
--- --- ---
Net periodic
postretirement benefit
costs $14 $15 $11
- -------------------------------------------------------------
Assumptions used in accounting for the plans were:
December 31 1995 1994 1993
- -------------------------------------------------------------
Discount rate 7.15% 8.75/8.00% 7.25/7.00%
Expected health care
cost trend rate
Medical 7.50 9.10/5.00 10.70/5.00
Dental 7.00 7.40 7.80
- --------------------------------------------------------------
63
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The health care cost trend rate declines until it stabilizes at 5.0
percent beginning 2001. A one percent increase in the health
care trend rate would result in an increase of $255 thousand
and $1.0 million in the service cost and interest cost
components, respectively, and a $12.8 million increase in the
accumulated postretirement benefit obligation.
In connection with the Midlantic merger, the Corporation
conformed Midlantic's accounting policy for postretirement
benefits. As a result, a cumulative effect adjustment of $45.8
million net of tax was recorded, effective January 1, 1992.
This change increased net income by $2.3 million for each of
the three years in the period ended December 31, 1995.
The Corporation has an employee stock purchase plan which
covers a maximum of 5.2 million shares of common stock of
which 1.0 million were available to be issued. Persons who
have been continuously employed for at least one year are
eligible to participate. Offering periods cover six months
beginning June 1 and December 1 of each year. Common
stock is purchased by participants at 85 percent of the lesser of
fair market value on the first or last day of each offering
period. No charge to earnings is required with respect to such
noncompensatory plan. Shares issued pursuant to this plan
were as follows:
Year ended December 31 Shares Prices Per Share
- ---------------------------------------------------------------
1995 463,907 $17.32 and $22.95
1994 403,692 $17.64 and $24.76
1993 276,517 $24.12 and $25.18
- ---------------------------------------------------------------
NOTE 15 INCENTIVE PLANS
The Corporation has a senior executive long-term incentive
award plan ("Incentive Plan") that provides for the granting of
incentive stock options, nonqualified options, stock
appreciation rights ("SARs"), performance units and incentive
shares. In any given year, the number of shares of common
stock available for grants under the Incentive Plan may range
from 1.5 percent to 3 percent of total issued shares of common
stock, determined at the end of the preceding calendar year.
Options are granted at exercise prices not less than the fair
market value of common stock on the date of grant. Such
options are exercisable twelve months from the date of grant.
Payment of the option price may be in cash or shares of
common stock at fair market value on the exercise date.
The following table presents share data related to the Incentive
Plan, a similar predecessor plan and other plans assumed in
certain mergers.
Option Price per
Shares in thousands Common Share Shares
- -----------------------------------------------------------------
January 1, 1993 $ 1.59 - $27.56 13,380
Granted 29.25 - 30.13 1,930
SARs exercised (10)
Options exercised 1.59 - 27.56 (1,561)
Terminated (235)
------
December 31, 1993 1.59 - 30.13 13,504
Granted 13.81 - 29.75 4,454
SARs exercised (73)
Options exercised 1.59 - 27.56 (1,127)
Terminated (172)
------
December 31, 1994 1.59 - 30.13 16,586
Granted 16.46 - 29.06 157
Options exercised 1.59 - 29.25 (2,996)
Terminated (420)
Options exchanged for PNC
stock in connection with
Midlantic merger (3,457)
------
December 31, 1995 $11.38 - $29.88 9,840
- -----------------------------------------------------------------
At December 31, 1995, options for 9,729,070 shares of
common stock were exercisable. Shares of common stock
available for the granting of options under the Incentive Plan
and the predecessor plans were as follows: 10,225,990 at
December 31, 1995, 13,094,887 at December 31, 1994 and
12,967,457 at December 31, 1993.
During 1995, incentive share awards for 323,000 shares of
restricted common stock were granted under the Incentive
Plan to certain executive officers. Such shares will
be earned when market prices of the Corporation's common
stock equal or exceed specified levels for defined periods.
Any shares issued will be forfeited if the named executive officer
leaves the Corporation's employ within two years after the
applicable performance condition has been satisfied. During
1995, compensation expense recognized with respect to
incentive share awards was $1.2 million.
64
44
NOTE 16 INCOME TAXES
Income taxes related to operations, the tax effect of securities
transactions, and the current and deferred portions of income
taxes were as follows:
Year ended December 31
In millions 1995 1994 1993
- --------------------------------------------------------------------
Operations $317 $365 $193
Securities transactions
Equity and other 10 1
Debt (98) (57) 68
------------------------------------
Total $219 $318 $262
- --------------------------------------------------------------------
Year ended December 31
In millions 1995 1994 1993
- --------------------------------------------------------------------
Current
Federal $ 77 $293 $381
State 14 19 14
------------------------------------
Total current 91 312 395
Deferred
Federal 84 44 (112)
State 44 (38) (21)
------------------------------------
Total deferred 128 6 (133)
------------------------------------
Total $219 $318 $262
- --------------------------------------------------------------------
Significant components of deferred tax assets and liabilities
are as follows:
December 31
In millions 1995 1994
- --------------------------------------------------------------------
Deferred tax assets
Allowance for credit losses $413 $462
Compensation and benefits 113 116
Foreclosed assets 12 24
Net unrealized securities losses 44
Net operating loss and AMT
carryforwards 23 85
Purchase accounting - deposits and
other borrowings 32 60
Purchase accounting-other 27 22
Other 120 87
--------------------
Total deferred tax assets 740 900
Deferred tax liabilities
Leasing 218 203
Depreciation 37 34
Net unrealized securities gains 19
Purchase accounting - loans and leases 45 48
Other 47 34
--------------------
Total deferred tax liabilities 366 319
--------------------
Net deferred tax asset $374 $581
- --------------------------------------------------------------------
At December 31, 1995, the Corporation had net operating loss
carryforwards totaling $12.5 million which expire in 2008 and
2009, and $18.7 million of alternative minimum tax ("AMT")
credit carryforwards. The AMT credit can be carried forward
indefinitely.
A reconciliation between the statutory and effective tax rates
follows:
Year ended December 31 1995 1994 1993
- --------------------------------------------------------------------
Statutory tax rate 35.0% 35.0% 35.0%
State taxes 6.0 2.2 .8
Tax-exempt interest (4.5) (2.2) (3.0)
Goodwill 1.7 1.8 1.2
Deferred tax valuation
allowance reduction (8.8) (9.6)
Other, net (3.3) (1.7) (1.5)
------------------------------------
Effective tax rate 34.9% 26.3% 22.9%
- --------------------------------------------------------------------
NOTE 17 REGULATORY MATTERS
The Corporation is subject to the regulations of certain federal
and state agencies and undergoes periodic examinations by
such regulatory authorities. At any time, various bank and
nonbank examinations are ongoing. Neither the Corporation
nor any of its subsidiaries is subject to written regulatory
agreements.
Dividends that may be paid by subsidiary banks to the parent
company are subject to certain legal limitations. Without
regulatory approval, the amount available for payment of
dividends by all subsidiary banks was $650 million at
December 31, 1995. Dividends also may be impacted by
capital needs, regulatory requirements and policies, and other
factors deemed relevant.
Under federal law, generally no bank subsidiary may extend
credit to the parent company or its nonbank subsidiaries on
terms and under circumstances which are not substantially the
same as comparable extensions of credit to nonaffiliates. No
extension of credit may be made to the parent company or a
nonbank subsidiary which is in excess of 10 percent of the
capital stock and surplus of such bank subsidiary as to
aggregate extensions of credit to the parent company and its
subsidiaries. In certain circumstances, federal regulatory
authorities may impose more restrictive limitations. Such
extensions of credit, with limited exceptions, must be fully
collateralized. The maximum amount available under statutory
limitations for transfer from subsidiary banks to the parent
company in the form of loans and dividends approximated 23
percent of consolidated net assets at December 31, 1995.
65
45
NOTES TO CONSOLIDTED FINANCIAL STATEMENTS
Federal Reserve Board regulations require depository
institutions to maintain cash reserves with the Federal Reserve
Bank. During 1995, subsidiary banks maintained reserves
which averaged $1.1 billion.
NOTE 18 LITIGATION
A consolidated purported class action complaint is pending
against the Corporation and certain officers, alleging
violations of federal securities laws and common law relating
to disclosures and seeking, among other things, unquantified
damages on behalf of purchasers of the Corporation's
securities during specified portions of 1994. Management
believes there are meritorious defenses to this consolidated
lawsuit and intends to defend it vigorously. Management
believes that the final disposition will not be material to the
Corporation's financial position.
A purported class action lawsuit was filed in 1992 against
PNC National Bank ("PNCNB"), alleging that certain credit
card fees charged to Pennsylvania cardholders violated
Pennsylvania law and seeking, among other things,
unquantified compensatory and triple damages and injunctive
relief. The federal district court dismissed the lawsuit, holding
that Pennsylvania law is preempted by federal banking laws.
The court of appeals, after initially holding that there was
no federal court jurisdiction and remanded the case to state court,
has vacated its opinion and granted a rehearing. The case against
PNCNB is one of a number of similar cases pending against several
credit card issuers. The United States Supreme Court is reviewing
one such case, the outcome of which will affect the lawsuit against
PNCNB. The impact of the final disposition of the lawsuit
brought against PNCNB cannot be assessed at this time.
The Corporation, in the normal course of business, is subject
to various other pending and threatened lawsuits in which
claims for monetary damages are asserted. Management, after
consultation with legal counsel, does not anticipate that the
ultimate aggregate liability, if any, arising out of such other
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 pending or threatened litigation will
have a material adverse effect on the Corporation's results of
operations in any future reporting period.
NOTE 19 OTHER FINANCIAL INFORMATION
Summarized financial information of the parent company is as
follows:
PARENT COMPANY ONLY
BALANCE SHEET
December 31
In millions 1995 1994
- -----------------------------------------------------------------------
ASSETS
Cash and due from banks $ 2 $ 7
Securities available for sale 48 108
Investments in
Bank subsidiaries 6,735 6,551
Nonbank subsidiaries 240 291
Advances to subsidiary banks 8 12
Other assets 115 116
----------------------
Total assets $7,148 $7,085
----------------------
LIABILITIES
Notes and debentures $ 368 $ 374
Nonbank affiliate borrowings 701 679
Accrued expenses and other liabilities 311 305
----------------------
Total liabilities 1,380 1,358
SHAREHOLDERS' EQUITY 5,768 5,727
----------------------
Total liabilities and shareholders'
equity $7,148 $7,085
- ----------------------------------------------------------------------
Notes and debentures have scheduled repayments of $200
million in 1999 and $168 million in 2001 and thereafter.
Commercial paper and all other debt issued by PNC Funding
Corp. is guaranteed by the parent company. In addition, in
connection with certain affiliates' mortgage servicing
operations, the parent company has committed to maintain
such affiliates' net worth above minimum requirements.
In connection with the Midlantic merger, notes and debentures
of Midlantic in the aggregate principal amount of $368
million have been jointly and severally assumed by the parent
company and its wholly-owned subsidiary, PNC Bancorp, Inc.
66
46
PARENT COMPANY ONLY
STATEMENT OF INCOME
Year ended December 31
In thousands 1995 1994 1993
- ------------------------------------------------------------------------------
OPERATING REVENUE
Dividends from
Bank subsidiaries $446,928 $379,362 $358,110
Nonbank subsidiaries 24,903 55,507 11,708
Interest income 3,396 8,542 10,436
Other income 273 979 781
-----------------------------------------
Total operating revenue 475,500 444,390 381,035
OPERATING EXPENSE
Interest expense 73,381 65,478 41,309
Other expense 32,938 28,169 56,440
-----------------------------------------
Total operating expense 106,319 93,647 97,749
Income before income taxes
and equity in undistributed
net income of subsidiaries 369,181 350,743 283,286
Applicable income tax
benefits (35,309) (48,547) (23,556)
-----------------------------------------
Income before equity in
undistributed net income
of subsidiaries 404,490 399,290 306,842
Net equity in undistributed
net income (excess
dividends)*
Bank subsidiaries (18,968) 478,441 566,710
Nonbank subsidiaries 22,538 6,197 39,988
-----------------------------------------
Income before cumulative
effect of changes in
accounting principles 408,060 883,928 913,540
Cumulative effect of changes
in accounting principles (15,023)
-----------------------------------------
Net income $408,060 $883,928 $898,517
- ------------------------------------------------------------------------------
<FN>
*Amounts for 1994 and 1993 include the cumulative effect of changes in
accounting principles at the respective subsidiaries.
PARENT COMPANY ONLY
STATEMENT OF CASH FLOWS
Year ended December 31
In millions 1995 1994 1993
- ------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 408 $ 884 $ 898
Adjustments to reconcile net income
to net cash provided by operating
activities
Cumulative effect of changes in
accounting principles 15
Equity in undistributed net
earnings of subsidiaries (3) (485) (606)
Other 10 (4) 78
-------------------------------------
Net cash provided by operating
activities 415 395 385
INVESTING ACTIVITIES
Net change in interest-earning
deposits with subsidiary bank 4 (8) (4)
Net capital returned from
subsidiaries 548 25 116
Securities available for sale
Sales 646 2,158 2,674
Purchases (586) (2,005) (2,770)
Cash paid in acquisitions (527) (503) (383)
Other (2) (2) (87)
-------------------------------------
Net cash provided (used) by
investing activities 83 (335) (454)
FINANCING ACTIVITIES
Borrowings from nonbank
subsidiary 275 330 250
Redemption of preferred stock (50)
Acquisition of treasury stock (236) (90) (19)
Cash dividends paid to shareholders (387) (333) (276)
Issuance of stock 88 53 162
Repayment of long-term debt (193) (14) (50)
-------------------------------------
Net cash provided (used) by
financing activities (503) (54) 67
-------------------------------------
Increase (decrease) in cash and due
from banks (5) 6 (2)
Cash and due from banks at
beginning of year 7 1 3
-------------------------------------
Cash and due from banks at end of
year $ 2 $ 7 $ 1
- ------------------------------------------------------------------------------
67
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During 1995, 1994 and 1993, the parent company received
income tax refunds of $20.4 million, $23.4 million and $24.8
million, respectively. Such refunds represent the parent
company's portion of consolidated income taxes. During 1995,
1994 and 1993, the parent company paid interest on
contractual debt obligations of $68.0 million, $63.3 million
and $38.4 million, respectively.
Summarized financial information for PNC Bancorp, Inc. and
subsidiaries is as follows:
PNC BANCORP. INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31
In millions 1995 1994
- ----------------------------------------------------------------
ASSETS
Cash and due from banks $ 3,678 $ 3,414
Securities 15,683 23,493
Loans, net of unearned income 48,583 43,911
Allowance for credit losses (1,259) (1,311)
-----------------------
Net loans 47,324 42,600
Other assets 6,053 7,191
-----------------------
Total assets $72,738 $76,698
-----------------------
LIABILITIES
Deposits $47,024 $46,686
Borrowed funds 8,093 11,110
Notes and debentures 9,726 11,280
Other liabilities 1,167 1,071
-----------------------
Total liabilities 66,010 70,147
SHAREHOLDER'S EQUITY 6,728 6,551
-----------------------
Total liabilities and shareholder's
equity $72,738 $76,698
-----------------------
PNC BANCORP. INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
Year ended December 31
In millions 1995 1994 1993
- ------------------------------------------------------------------------------
Interest income $ 5,117 $ 4,687 $ 3,987
Interest expense 2,941 2,173 1,647
--------------------------------------
Net interest income 2,176 2,514 2,340
Provision for credit losses 20 84 350
--------------------------------------
Net interest income less
provision for credit losses 2,156 2,430 1,990
Noninterest income 871 921 1,042
Noninterest expense 2,409 2,184 1,917
--------------------------------------
Income before income taxes and
cumulative effect of changes
in accounting principles 618 1,167 1,115
Applicable income taxes 217 320 247
--------------------------------------
Income before cumulative
effect of changes in
accounting principles 401 847 868
Cumulative effect of changes
in accounting principles (7) 34
--------------------------------------
Net income $ 401 $ 840 $ 902
- ------------------------------------------------------------------------------
NOTE 20 UNUSED LINE OF CREDIT
At December 31, 1995, the Corporation maintained a line of
credit in the amount of $300 million, none of which was
drawn. This line is available for general corporate purposes.
The annual fee paid for the unused line is .13 percent.
68
48
NOTE 21 FAIR VALUES OF FINANCIAL INSTRUMENTS
The following tables set forth the carrying value and estimated
fair value of financial instruments:
1995 1994
-----------------------------------------------------------------------------------------
Related Financial Related Fiancial
Derivatives Derivatives
- -----------------------------------------------------------------------------------------------------------------------------------
December 31 Carrying Fair Carrying Fair Carrying Fair Carrying Fair
In millions Amount Value Amount Value Amount Value Amount Value
- -----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and short-term investments $ 5,826 $ 5,826 $ 9 $ 5,923 $ 5,923
Securities 15,839 15,839 $ 6 12 23,670 22,349 $130 $ 204
Loans held for sale 659 659 487 487
Net loans (excludes leases) 46,372 46,384 (14) (19) 41,509 41,359 (27) (553)
LIABILITIES
Demand deposits 27,145 27,145 2 (4) 27,079 27,079 (238)
Time deposits 19,754 20,025 7 18,739 18,533 (55)
Borrowed funds 9,125 9,133 8 12,718 12,709 (3)
Notes and debentures 10,398 10,574 22 12,127 12,061
OFF-BALANCE-SHEET
Commitments to extend credit (32) (48) (23) (25)
Letters of credit (12) (14) (12) (13)
Interest rate swaps and floors 16 16
- -----------------------------------------------------------------------------------------------------------------------------------
Real and personal property, lease financings, loan customer
relationships, deposit customer intangibles, retail branch
networks, fee-based businesses, such as asset management,
mortgage banking and brokerage, trademarks and brand
names are excluded from the amounts set forth above.
Accordingly, the aggregate fair value amounts presented do
not represent the underlying value of the Corporation.
Fair value is defined as the estimated amount at which the
financial instrument could be exchanged in a current
transaction between willing parties, other than in a forced
or liquidation sale. However, it is not management's intention
to immediately dispose of a significant portion of such
financial instruments, and unrealized gains or losses should
not be interpreted as a forecast of future earnings and cash
flows.
The fair value of securities is based primarily on quoted
market prices. For substantially all other financial instruments,
fair values were estimated using discounted cash flow
analyses, pricing models and other valuation techniques.
These derived fair values are subjective in nature, involve
uncertainties and matters of significant judgment and,
therefore, cannot be determined with precision. Changes in
assumptions could significantly impact the derived fair value
estimates.
The following methods and assumptions were used in
estimating fair value amounts for financial instruments:
GENERAL For short-term financial instruments realizable in three
months or less, the carrying amount reported in the balance
sheet approximates fair value. Unless otherwise stated, the
rates used in discounted cash flow analyses are based on
market yield curves.
69
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CASH AND SHORT-TERM INVESTMENTS The carrying amounts
reported in the consolidated balance sheet for cash and short-
term investments approximate those assets' fair values
primarily due to their short-term nature. For purposes of this
disclosure only, short-term investments include due from
banks, interest-earning deposits with banks, federal funds sold
and resale agreements, trading securities, customer's
acceptance liability, accrued interest receivable and loans held
for accelerated disposition.
SECURITIES The fair value of investment securities and securities
available for sale are based on quoted market prices, where
available. If quoted market prices are not available, fair value
is estimated using the quoted market prices of comparable
instruments.
NET LOANS AND LOANS HELD FOR SALE For demand and variable-
rate commercial and certain consumer loans that reprice at
least quarterly, fair values are estimated by reducing carrying
amounts by estimated credit loss factors. For other
commercial loans, including nonaccrual loans, fair values are
estimated using discounted cash flow analyses, with cash
flows reduced by estimated credit loss factors and discount
rates equal to rates currently charged by the Corporation for
similar loans. In the case of nonaccrual loans, scheduled cash
flows exclude interest payments.
For automobile, home equity, student and credit card loans,
fair values are determined by using internal pricing models
incorporating assumptions about prepayment rates, credit
losses and servicing fees and costs and discounting the future
net revenues at an appropriate risk-weighted rate of return. For
credit cards and revolving home equity loans, this fair value
does not include any amount for new loans or the related fees
that will be generated from the existing customer
relationships. The fair value of residential mortgages was
estimated based on quoted market prices of similar loans sold
in conjunction with securitization transactions, adjusted for
differences in loan characteristics. Loans held for sale are
reported at the lower of cost or market value in the
consolidated balance sheet. For purposes of this disclosure
only, the carrying value approximates fair value.
DEPOSITS The carrying amounts of noninterest-bearing demand
and interest-bearing, money market and savings deposits
approximate fair values. For time deposits, fair values are
based on the discounted value of scheduled cash flows. The
discount rates used vary by instrument and are based on dealer
quotes or rates currently offered for deposits with similar
maturities.
BORROWED FUNDS The carrying amounts of federal funds
purchased, commercial paper, acceptances outstanding and
accrued interest payable are considered fair value because of
their short-term nature. Repurchase agreements and term
federal funds purchased are valued using discounted cash flow
analyses.
NOTES AND DEBENTURES The fair value of variable-rate notes and
debentures is equivalent to carrying value. For fixed-rate notes
and debentures, scheduled cash flows are discounted using
rates for similar debt with the same maturities.
UNFUNDED LOAN COMMITMENTS AND LETTER OF CREDIT Fair values
for commitments to extend credit and letters of credit are
estimated based upon the amount of deferred fees and the
creditworthiness of the counterparties.
FINANCIAL DERIVATIVES The fair value of index-amortizing
interest rate swaps, caps and floors is based on dealer quotes.
The fair value of other interest rate swaps is the discounted
value of the expected net cash flows. These fair values
represent the estimated amounts the Corporation would
receive or pay to terminate the contracts, taking into account
current interest rates.
70
50
STATISTICAL INFORMATION
SELECTED CONSOLIDATED FINANCIAL DATA
The merger between PNC Bank Corp. and Midlantic Corporation was completed on
December 31, 1995 and accounted for as a pooling of interests. Accordingly, all
financial information has been restated as if the companies were combined for
all periods presented.
Year ended December 31 1995 1994 1993 1992 1991
- ----------------------------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS (In thousands)
Interest income $5,149,431 $4,723,147 $4,022,771 $4,281,178 $5,399,913
Interest expense 3,007,562 2,231,153 1,682,944 2,103,691 3,327,114
--------------------------------------------------------------------------------------
Net interest income 2,141,869 2,491,994 2,339,827 2,177,487 2,072,799
Provision for credit losses 6,000 83,458 350,249 493,830 1,152,431
Noninterest income before net
securities gains/losses 1,240,113 1,180,582 940,899 930,885 995,822
Net securities gains (losses) (279,694) (141,582) 194,699 246,256 60,564
Noninterest expense 2,469,276 2,237,620 1,984,689 2,072,804 2,015,332
--------------------------------------------------------------------------------------
Income (loss) before income taxes and
cumulative effect of changes in
accounting principles 627,012 1,209,916 1,140,487 787,994 (38,578)
Applicable income taxes 218,952 318,460 261,539 251,526 114,939
--------------------------------------------------------------------------------------
Income (loss) before cumulative effect
of changes in accounting principles 408,060 891,456 878,948 536,468 (153,517)
Cumulative effect of changes in accounting
principles, net of tax benefits of
$4,598, $5,343 and $77,458 (7,528) 19,569 (148,287)
--------------------------------------------------------------------------------------
Net income (loss) $ 408,060 $ 883,928 $ 898,517 $ 388,181 $ (153,517)
--------------------------------------------------------------------------------------
PER COMMON SHARE DATA
Book value
As reported $16.87 $16.59 $15.61 $13.63 $13.51
Excluding net unrealized securities
gains/losses 16.79 16.95 15.35 13.63 13.51
Cash dividends declared 1.40 1.31 1.175 1.08 .795
Earnings (loss)
Primary before cumulative effect of
changes in accounting principles $1.19 $2.56 $2.56 $1.72 $(.58)
Cumulative effect of changes in
accounting principles (.02) .06 (.48)
--------------------------------------------------------------------------------------
Primary $1.19 $2.54 $2.62 $1.24 $(.58)
--------------------------------------------------------------------------------------
Fully diluted before cumulative effect
of changes in accounting principles $1.19 $2.54 $2.54 $1.70 $(.58)
Cumulative effect of changes in
accounting principles (.02) .06 (.47)
--------------------------------------------------------------------------------------
Fully diluted $1.19 $2.52 $2.60 $1.23 $(.58)
--------------------------------------------------------------------------------------
BALANCE SHEET HIGHLIGHTS
(December 31, in millions)
Total assets $73,404 $77,461 $76,012 $65,802 $63,024
Securities 15,839 23,670 25,496 22,849 16,805
Loans, net of unearned income 48,653 44,043 42,113 35,943 38,762
Deposits 46,899 45,818 44,703 42,030 46,109
Borrowed funds 8,665 12,193 12,336 12,182 10,074
Notes and debentures 10,398 12,127 9,972 4,734 1,751
Shareholders' equity 5,768 5,727 5,404 4,543 4,044
SELECTED RATIOS
Return on average total assets .54% 1.19% 1.40% .64% (.24)%
Return on average shareholders' equity 7.05 16.09 18.55 9.38 (4.30)
Average common shareholders' equity to
average total assets 7.64 7.34 7.52 6.67 5.79
Dividend payout 94.76 37.42 30.79 61.72 (95.29)
Overhead 78.42 62.69 56.28 60.66 62.51
- ----------------------------------------------------------------------------------------------------------------------------------
71
51
STATISTICAL INFORMATION
SELECTED QUARTERLY FINANCIAL DATA
The merger between PNC Bank Corp. and Midlantic Corporation was completed on
December 31, 1995 and accounted for as a pooling of interests. Accordingly, the
unaudited selected quarterly financial data has been restated as if the
companies were combined for all periods presented.
1995 1994
-----------------------------------------------------------------------------------------------
Fourth Third Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
-----------------------------------------------------------------------------------------------
SUMMARY OF
OPERATIONS
(In thousands)
Interest income $1,300,002 $1,293,509 $1,294,643 $1,261,277 $1,249,571 $1,228,631 $1,146,856 $1,098,089
Interest expense 747,254 766,490 771,821 721,997 674,297 581,562 509,880 465,414
-----------------------------------------------------------------------------------------------
Net interest income 552,748 527,019 522,822 539,280 575,274 647,069 636,976 632,675
Provision for credit losses 1,500 1,500 1,500 1,500 (433) 14,863 35,857 33,171
Noninterest income before net
securities gains (losses) 312,244 338,282 305,284 284,303 276,346 324,671 303,377 276,188
Net securities gains (losses) (288,958) 44 7,966 1,254 (124,313) (44,202) (4,722) 31,655
Noninterest expense 825,827 547,435 542,663 553,351 604,206 550,087 536,512 546,815
-----------------------------------------------------------------------------------------------
Income (loss) before income taxes
and cumulative effect of change
in accounting principle (251,293) 316,410 291,909 269,986 123,534 362,588 363,262 360,532
Applicable income taxes (benefits) (75,116) 105,673 97,956 90,439 17,206 97,771 102,565 100,918
-----------------------------------------------------------------------------------------------
Income (loss) before cumulative
effect of change in accounting
principle (176,177) 210,737 193,953 179,547 106,328 264,817 260,697 259,614
Cumulative effect of change in
accounting principle, net of
tax benefit of $4,598 (7,528)
-----------------------------------------------------------------------------------------------
Net income (loss) $(176,177) $210,737 $193,953 $179,547 $106,328 $264,817 $260,697 $252,086
-----------------------------------------------------------------------------------------------
PER COMMON SHARE
DATA
Book value:
As reported $16.87 $17.55 $17.24 $16.90 $16.59 $16.49 $15.96 $15.60
Excluding net unrealized
securities gains/losses 16.79 17.67 17.35 17.10 16.95 16.90 16.41 15.87
Earnings (losses)
Primary before cumulative
effect of change in
accounting principle $(.52) $.62 $.57 $.52 $.30 $.76 $.75 $.75
Cumulative effect of change
in accounting principle (.02)
-----------------------------------------------------------------------------------------------
Primary $(.52) $.62 $.57 $.52 $.30 $.76 $.75 $.73
-----------------------------------------------------------------------------------------------
Fully diluted before
cumulative effect of
change in accounting
principle $(.52) $.62 $.56 $.52 $.30 $.76 $.74 $.74
Cumulative effect of change
in accounting principle (.02)
-----------------------------------------------------------------------------------------------
Fully diluted $(.52) $.62 $.56 $.52 $.30 $.76 $.74 $.72
-----------------------------------------------------------------------------------------------
AVERAGE BALANCE
SHEET
HIGHLIGHTS (In millions)
Total assets $75,707 $75,266 $75,343 $74,841 $76,102 $75,287 $73,174 $72,863
Securities 19,450 22,045 23,137 23,984 25,351 24,460 23,981 23,605
Loans, net of unearned income 48,304 45,646 44,765 43,710 43,717 43,741 41,778 41,022
Deposits 46,216 45,077 44,365 43,667 44,193 44,936 43,399 43,193
Borrowed funds 11,511 14,016 14,140 13,902 12,102 11,862 11,612 12,260
Notes and debentures 10,637 8,829 9,586 10,109 12,966 11,731 11,404 10,519
Shareholders' equity 5,893 5,802 5,727 5,710 5,687 5,588 5,419 5,430
- ---------------------------------------------------------------------------------------------------------------------------------
72
52
ANALYSIS OF YEAR-TO-YEAR CHANGES IN NET INTEREST INCOME
1995/1994 1994/1993
---------------------------------------------------------------------------------
Increase/(Decrease) in Income/Expense Increase/(Decrease) in Income/Expense
Due to Changes in: Due to changes in:
Taxable-equivalent basis
In thousands Volume Rate Total Volume Rate Total
- ----------------------------------------------------------------------------------------------------------------------------------
INTEREST-EARNINGS ASSETS
Short-term investments $(37,146) $29,512 $(7,634) $434 $14,457 $14,891
Loans held for sale (1,693) 4,790 3,097 23,469 3,299 26,768
Securities
U.S. Treasury (11,828) 19,995 8,167 46,394 11,240 57,634
U.S. Government agencies and corporations (170,403) (55,167) (225,570) 2,079 (24,867) (22,788)
State and municipal (813) (2,139) (2,952) (11,420) 1,221 (10,199)
Other debt 67,100 29,296 96,396 52,173 21,030 73,203
Corporate stocks and other (797) 3,031 2,234 10,504 10,504
---------------------------------------------------------------------------------
Total securities (131,303) 9,578 (121,725) 119,462 (11,108) 108,354
Loans, net of unearned income
Consumer 70,864 77,886 148,750 106,245 (35,861) 70,384
Residential mortgage 146,315 58,135 204,450 347,196 (53,075) 294,121
Commercial 50,719 109,077 159,796 67,451 57,570 125,021
Commercial real estate (13,394) 55,004 41,610 (51,389) 59,552 8,163
Other (18,661) 24,278 5,617 30,004 10,063 40,067
---------------------------------------------------------------------------------
Total loans, net of unearned income 237,040 323,183 560,223 534,184 3,572 537,756
Other interest-earning assets 569 252 821 180 (274) (94)
---------------------------------------------------------------------------------
Total interest-earning assets $7,476 $427,306 $434,782 $645,395 $42,280 $687,675
---------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES
Interest-bearing deposits
Demand and money market $(27,425) $103,549 $76,124 $14,070 $53,383 $67,453
Savings (6,539) 24,656 18,117 5,038 10,298 15,336
Other time 69,376 158,703 228,079 36,207 (9,462) 26,745
Deposits in foreign offices 51,161 19,093 70,254 38,598 5,452 44,050
---------------------------------------------------------------------------------
Total interest-bearing deposits 24,344 368,230 392,574 89,747 63,837 153,584
Borrowed funds
Federal funds purchased 13,670 50,302 63,972 44,850 27,994 72,844
Repurchase agreements 43,183 126,782 169,965 (64,566) 40,395 (24,171)
Commercial paper (17,781) 12,101 (5,680) 15,482 11,147 26,629
Other 27,933 64,331 92,264 54,610 23,933 78,543
---------------------------------------------------------------------------------
Total borrowed funds 66,999 253,522 320,521 43,194 110,651 153,845
Notes and debentures (99,086) 162,400 63,314 228,641 12,139 240,780
---------------------------------------------------------------------------------
Total interest-bearing liabilities 10,572 765,837 776,409 313,990 234,219 548,209
---------------------------------------------------------------------------------
Change in net interest income $3,870 $(345,497) $(341,627) $359,168 ($219,702) $139,466
- ----------------------------------------------------------------------------------------------------------------------------------
Changes attributable to rate/volume are prorated into rate and volume
components. Average balances are based on amortized historical cost (excluding
SFAS 115 adjustments to fair value).
73
53
STATISTICAL INFORMATION
AVERAGE CONSOLIDATED BALANCE SHEET AND NET INTEREST ANALYSIS
1995 1994
---------------------------------------------------------------------------------
Year ended December 31
Taxable-equivalent basis
Average balances in millions, Average Average Average Average
interest in thousands Balances Interest Yields/Rates Balances Interest Yields/Rates
- ----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Interest-earning assets
Short-term investments $ 1,034 $ 68,570 6.63% $ 1,721 $ 76,204 4.43%
Loans held for sale 725 54,361 7.50 749 51,264 6.84
Securities
U.S. Treasury 4,179 216,323 5.18 4,421 208,156 4.71
U.S. Government agencies and corporations 13,527 766,116 5.66 16,494 991,686 6.01
State and municipal 363 35,596 9.81 371 38,548 10.40
Other debt 3,757 259,291 6.90 2,742 162,895 5.94
Corporate stocks and others 314 21,646 6.89 327 19,412 5.93
------------------------ ------------------------
Total securities 22,140 1,298,972 5.87 24,355 1,420,697 5.83
Loans, net of unearned income
Consumer 12,013 1,078,420 8.98 11,192 929,670 8.31
Residential mortgage 10,812 807,848 7.47 8,806 603,398 6.85
Commercial 15,852 1,284,993 8.11 15,185 1,125,197 7.41
Commercial real estate 5,014 472,423 9.42 5,171 430,813 8.33
Other 1,933 129,602 6.70 2,245 123,985 5.52
--------------------------- ---------------------------
Total loans, net of unearned income 45,624 3,773,286 8.27 42,599 3,213,063 7.54
Other interest-earning assets 12 884 7.40 3 63 3.18
--------------------------- ---------------------------
Total interest-earning assets/interest income 69,535 5,196,073 7.47 69,427 4,761,291 6.86
Noninterest-earning assets
Allowance for credit losses (1,319) (1,391)
Cash and due from banks 3,044 2,951
Other assets 3,871 3,375
------------ ------------
Total assets $75,131 $74,362
---------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities
Interest-bearing deposits
Demand and money market $12,254 356,893 2.91 $13,481 280,769 2.08
Savings 3,732 89,448 2.40 4,081 71,331 1.75
Other time 17,758 984,440 5.54 16,353 756,361 4.63
Deposits in foreign offices 1,974 121,035 6.13 1,083 50,781 4.69
--------------------------- ---------------------------
Total interest-bearing deposits 35,718 1,551,816 4.34 34,998 1,159,242 3.31
Borrowed funds
Federal funds purchased 3,142 188,103 5.99 2,850 124,131 4.35
Repurchase agreements 6,514 398,003 6.11 5,576 228,038 4.09
Commercial paper 737 43,779 5.94 1,072 49,459 4.61
Other 2,993 204,769 6.84 2,462 112,505 4.57
--------------------------- ---------------------------
Total borrowed funds 13,386 834,654 6.24 11,960 514,133 4.30
Notes and debentures 9,790 621,092 6.34 11,662 557,778 4.78
--------------------------- ---------------------------
Total interest-bearing
liabilities/interest expense 58,894 3,007,562 5.10 58,620 2,231,153 3.81
Noninterest-bearing liabilities and
shareholders' equity
Demand and other noninterest-bearing deposits 9,112 8,939
Accrued expenses and other liabilities 1,341 1,272
Shareholders' equity 5,784 5,531
------------ ------------
Total liabilities and shareholders' equity $75,131 $ 74,362
---------------------------------------------------------------------------------
Interest rate spread 2.37 3.05
Impact of noninterest-bearing liabilities .78 .59
-------------------------------------------------------------------
Net interest income/margin on earning assets $2,188,511 3.15% $2,530,138 3.64%
- ----------------------------------------------------------------------------------------------------------------------------------
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.
74
54
1993 1992 1991
- ----------------------------------------------------------------------------------------------------------------------------------
Average Average Average Average Average Average
Balances Interest Yields/Rates Balances Interest Yields/Rates Balances Interest Yields/Rates
- ----------------------------------------------------------------------------------------------------------------------------------
$ 1,709 $ 61,313 3.59% $ 1,498 $ 58,940 3.93% $ 1,979 $ 126,221 6.38%
402 24,496 6.10 258 18,915 7.33 249 17,952 7.21
3,425 150,522 4.40 3,307 204,127 6.17 3,065 236,662 7.72
16,460 1,014,474 6.16 14,288 1,066,101 7.46 9,750 876,519 8.99
481 48,747 10.14 716 70,748 9.89 947 98,634 10.42
1,818 89,692 4.93 976 61,539 6.31 865 73,963 8.55
150 8,908 5.93 108 5,598 5.18 160 7,432 4.63
- --------------------------- --------------------------- ---------------------------
22,334 1,312,343 5.88 19,395 1,408,113 7.26 14,787 1,293,210 8.75
9,924 859,286 8.66 9,586 907,111 9.46 9,939 1,095,354 11.02
3,834 309,277 8.07 3,182 311,083 9.78 3,893 411,904 10.58
14,257 1,000,176 7.02 15,035 1,054,014 7.01 19,093 1,698,677 8.90
5,838 422,650 7.24 7,263 508,837 7.01 9,100 746,615 8.20
1,688 83,918 4.97 1,207 76,574 6.34 1,295 99,374 7.67
- --------------------------- --------------------------- ---------------------------
35,541 2,675,307 7.53 36,273 2,857,619 7.88 43,320 4,051,924 9.35
1 157 20.68 2 205 8.99 38 5,466 14.26
- --------------------------- --------------------------- ---------------------------
59,987 4,073,616 6.79 57,426 4,343,792 7.56 60,373 5,494,773 9.10
(1,510) (1,663) (1,665)
2,757 2,637 2,911
2,819 2,613 2,937
- ------------ ------------ ------------
$64,053 $61,013 $64,556
- ----------------------------------------------------------------------------------------------------------------------------------
$12,685 213,316 1.68 $12,545 371,299 2.96 $11,763 594,714 5.06
3,760 55,995 1.49 3,434 96,139 2.80 3,917 188,950 4.82
15,571 729,616 4.69 18,578 1,051,088 5.66 26,680 1,928,832 7.23
222 6,731 3.03 676 28,050 4.15 452 27,069 6.00
- --------------------------- --------------------------- ---------------------------
32,238 1,005,658 3.12 35,233 1,546,576 4.39 42,812 2,739,565 6.40
1,686 51,287 3.04 1,917 68,460 3.57 2,102 121,183 5.76
7,263 252,209 3.47 5,606 209,933 3.74 3,726 219,062 5.88
691 22,830 3.30 576 20,848 3.62 379 22,658 5.97
1,128 33,962 3.01 1,494 54,927 3.68 1,562 86,739 5.55
- --------------------------- --------------------------- ---------------------------
10,768 360,288 3.35 9,593 354,168 3.69 7,769 449,642 5.79
6,882 316,998 4.61 3,391 202,947 5.98 1,795 137,907 7.68
- --------------------------- --------------------------- ---------------------------
49,888 1,682,944 3.37 48,217 2,103,691 4.36 52,376 3,327,114 6.35
7,986 7,539 7,464
1,293 1,104 888
4,886 4,153 3,828
- ------------ ------------ ------------
$64,053 $61,013 $64,556
- ----------------------------------------------------------------------------------------------------------------------------------
3.42 3.20 2.75
.57 .70 .84
-------------------------- -------------------------- --------------------------
$2,390,672 3.99% $2,240,101 3.90% $2,167,659 3.59%
- ----------------------------------------------------------------------------------------------------------------------------------
75
55
STATISTICAL INFORMATION
SECURITIES
CARRYING VALUE OF SECURITIES
December 31
In millions 1995 1994 1993
- --------------------------------------------------------------------------------
Securities available for sale
Debt securities
U.S. Treasury $ 3,280 $ 663 $ 2,402
U.S. Government agencies and corporations
Mortgage related 7,459 2,092 8,097
Other 1,034 21 24
State and municipal 367 7 2
Asset-backed private placements 1,604
Other
Mortgage related 1,113 732 705
Other 525 146 97
Corporate stocks and other 457 129 61
-------------------------------
Total securities available for sale 15,839 3,790 11,388
Investment securities
Debt securities
U.S. Treasury $ 3,317 $ 1,280
U.S. Government agencies and corporations
Mortgage related 11,795 11,311
Other 1,000
State and municipal 360 394
Asset-backed private placements 1,597
Other
Mortgage related 726 513
Other 775 339
Other 310 271
-------------------
Total investment securities 19,880 14,108
-------------------------------
Total securities $15,839 $23,670 $25,496
- -------------------------------------------------------------------------------
76
56
CONTRACTUAL MATURITY DISTRIBUTION OF SECURITIES
After After
One Year Five Years
December 31, 1995 One Year Through Through After No Fixed
Dollars in millions or Less Five Years Ten Years Ten Years Maturity Total
- ---------------------------------------------------------------------------------------------------------------------------------
Securities available for sale
Debt securities
U.S. Treasury $1,948 $1,314 $18 $ 3,280
U.S. Government agencies and corporations
Mortgage-related $ 7,459 7,459
Other 5 1,029 1,034
State and municipal 37 75 68 $187 367
Asset-backed private placements 1,604 1,604
Other debt
Mortgage-related 1,113 1,113
Other 4 5 7 80 429 525
Other 457 457
-------------------------------------------------------------------------
Total securities available for sale $1,994 $1,394 $93 $267 $12,091 $15,839
-------------------------------------------------------------------------
Percent of total securities available for sale 12.59% 8.80% .59% 1.69% 76.33% 100.00%
Weighted average yield 5.01 7.46 9.67 9.89 6.43 6.42
- ---------------------------------------------------------------------------------------------------------------------------------
The table above sets forth the contractual maturity distribution
of the securities portfolio at December 31, 1995. U.S.
Government agency debt and mortgage-backed and asset-
backed securities are included in the No Fixed Maturity
category. Based on expected prepayment rates and historical
experience, the weighted average expected maturity of such
securities was approximately 2 years and 10 months at
December 31, 1995.
Weighted average yields are based on historical cost with
effective yields weighted for the contractual maturity of each
security. Tax-exempt securities have been adjusted to a
taxable-equivalent basis using a federal income tax rate of 35
percent. At December 31, 1995, $6.1 billion notional value of
interest rate swaps and caps designated to the securities
portfolio altered the contractual weighted average yield from
6.42 percent to 6.45 percent.
LOANS
December 31
In millions 1995 1994 1993 1992 1991
- ----------------------------------------------------------------------------------------------------------
Consumer $13,539 $11,851 $10,940 $ 9,585 $ 9,881
Residential mortgage 11,689 9,746 8,611 3,577 3,737
Commercial 16,812 15,545 15,521 14,766 16,445
Commercial real estate 4,914 5,063 5,169 6,503 7,685
Other 2,102 2,223 2,231 1,900 1,643
---------------------------------------------------------------
Total loans 49,056 44,428 42,472 36,331 39,391
Unearned income (403) (385) (359) (388) (629)
---------------------------------------------------------------
Loans, net of unearned income $48,653 $44,043 $42,113 $35,943 $38,762
- ----------------------------------------------------------------------------------------------------------
77
57
STATISTICAL INFORMATION
LOAN MATURITIES AND INTEREST SENSITIVITY
December 31, 1995 One Year One Through After Gross
In millions or Less Five Years Five Years Loans
- -------------------------------------------------------------------------------
Commercial $6,197 $7,448 $3,167 $16,812
Real estate project 601 1,152 386 2,139
----------------------------------------------
Total $6,798 $8,600 $3,553 $18,951
----------------------------------------------
Loans with predetermined rate $ 963 $1,858 $ 673 $ 3,494
Loans with floating rate 5,835 6,742 2,880 15,457
----------------------------------------------
Total $6,798 $8,600 $3,553 $18,951
- -------------------------------------------------------------------------------
At December 31, 1995, $4.0 billion of interest rate swaps
designated to commercial and commercial real estate loans
altered the interest rate characteristics of such loans. The
impact of the interest rate swaps is not reflected in the table
above.
NONPERFORMING ASSETS
Generally, a loan is classified as nonaccrual when it is
determined that the collection of interest or principal is
doubtful, or when a default of interest or principal has existed
for 90 days or more, unless such loan is well secured and in
the process of collection. When interest accrual is
discontinued, unpaid interest credited to income in the current
year is reversed, and unpaid interest accrued in prior years is
charged to the allowance for credit losses. A loan is
categorized as restructured if the original interest rate on such
loan, repayment terms, or both were restructured due to a
deterioration in the financial condition of the borrower.
December 31
Dollars in millions 1995 1994 1993 1992 1991
- ----------------------------------------------------------------------------------------------------------------------------------
Nonaccrual loans $335 $496 $ 656 $1,620 $2,431
Restructured loans 23 69 200 185 21
------------------------------------------------
Total nonperforming loans 358 565 856 1,805 2,452
Foreclosed assets 178 192 268 436 443
------------------------------------------------
Total nonperforming assets $536 $757 $1,124 $2,241 $2,895
------------------------------------------------
Nonperforming loans to period-end loans .74% 1.28% 2.03% 5.02% 6.33%
Nonperforming assets to period-end loans and foreclosed assets 1.10 1.71 2.65 6.16 7.38
Nonperforming assets to total assets .73 .98 1.48 3.41 4.59
Interest computed on original terms $ 36 $ 54 $ 74 $ 150 $ 260
Interest recognized 10 14 19 19 40
- ----------------------------------------------------------------------------------------------------------------------------------
PAST DUE LOANS
The following table presents information concerning accruing
loans which are contractually past due 90 days or more as to
principal or interest payments and excludes loans reported as
either nonaccrual or restructured.
December 31
In millions 1995 1994 1993 1992 1991
- --------------------------------------------------------------------------------------------------------------
Past due loans $225 $175 $171 $237 $272
As a percentage of total loans, net of unearned income .46% .40% .41% .66% .70%
- --------------------------------------------------------------------------------------------------------------
78
58
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses is based on periodic
evaluations of the loan portfolio by management. These
evaluations consider, among other factors, historic losses
within specific industries, current economic conditions, loan
portfolio trends, specific credit reviews and estimates based on
subjective factors.
During 1995 and 1994, stronger economic conditions
combined with management's ongoing efforts to improve asset
quality resulted in lower nonperforming assets and net charge-
offs, and a higher reserve coverage of nonperforming loans.
SUMMARY OF LOAN LOSS EXPERIENCE
Year ended December 31
Dollars in millions 1995 1994 1993 1992 1991
- --------------------------------------------------------------------------------
Balance at beginning of year $1,352 $1,372 $1,568 $1,645 $1,526
Charge-offs
Consumer 107 92 102 111 139
Residential mortgage 10 16 8 4 7
Commercial 84 116 168 339 555
Commercial real estate
Commercial mortgage 23 15 49 23 58
Real estate project 14 37 186 210 272
Other 2 1 1 8 12
------------------------------------------
Total loans charged off 240 277 514 695 1,043
Recoveries
Consumer 39 40 36 31 28
Residential mortgage 2 1 1
Commercial 49 59 56 66 43
Commercial real estate
Commercial mortgage 9 5 4 1 4
Real estate project 6 10 8 7 7
Other 2 1 3 2 2
------------------------------------------
Total recoveries 107 116 108 107 84
------------------------------------------
Net charge-offs 133 161 406 588 959
Net charge-offs on bulk loan
sales and assets held for
accelerated disposition (8) (182)
Provision for credit losses 6 84 350 495 1,152
Acquisitions/divestitures 34 65 42 16 (74)
------------------------------------------
Balance at end of year $1,259 $1,352 $1,372 $1,568 $1,645
------------------------------------------
Allowance as a percent of
period-end
Loans 2.59% 3.07% 3.26% 4.36% 4.24%
Nonperforming loans 351.68 239.29 160.28 86.87 67.09
As a percent of average loans
Net charge-offs including bulk
loan sales and assets held
for accelerated disposition .29 .40 1.65 1.62 2.21
Net charge-offs excluding
bulk loan sales and assets
held for accelerated
disposition .29 .38 1.14 1.62 2.21
Provision for credit losses .01 .20 .99 1.36 2.66
Allowance for credit losses 2.76 3.17 3.86 4.32 3.80
Allowance as a multiple of net
charge-offs including bulk loan
sales and assets held for
accelerated disposition 9.47x 8.00x 2.33x 2.67x 1.72x
Allowance as a multiple of net
charge-offs excluding bulk loan
sales and assets held for
accelerated disposition 9.47 8.40 3.38 2.67 1.72
- -------------------------------------------------------------------------------
79
59
STATISTICAL INFORMATION
During 1993, management revised its methodology for
allocating the allowance for credit losses. The revisions had
the effect of reclassifying certain previously unallocated
reserves to loan categories. For purposes of this presentation,
remaining unallocated reserves have been assigned to loan
categories based on the relative specific allocation amounts.
Prior year unallocated reserve amounts have been similarly
assigned to loan categories.
ALLOCATION OF ALLOWANCE FOR CREDIT LOSSES
December 31
In millions 1995 1994 1993 1992 1991
- -------------------------------------------------------------------------------
Commercial $ 585 $ 603 $ 572 $ 643 $ 912
Commercial real estate 332 419 498 746 569
Consumer 203 184 202 153 139
Residential mortgage 112 116 86 8 5
Other 27 30 14 18 20
----------------------------------------------
Total $1,259 $1,352 $1,372 $1,568 $1,645
- -------------------------------------------------------------------------------
The following table presents the percentage distribution of the
allocation of allowance for credit losses and the categories of
loans as a percentage of gross loans.
1995 1994 1993 1992 1991
--------------------------------------------------------------------------------------------------------------
December 31 Allowance Loans Allowance Loans Allowance Loans Allowance Loans Allowance Loans
- -----------------------------------------------------------------------------------------------------------------------------------
Commercial 46.5% 34.3% 44.6% 35.0% 41.7% 36.5% 41.0% 40.7% 55.4% 41.7%
Commercial real
estate 26.4 10.0 31.0 11.4 36.3 12.2 47.6 17.9 34.6 19.5
Consumer 16.1 27.6 13.6 26.7 14.7 25.7 9.8 26.4 8.5 25.1
Residential mortgage 8.9 23.8 8.6 21.9 6.3 20.3 .5 9.8 .3 9.5
Other 2.1 4.3 2.2 5.0 1.0 5.3 1.1 5.2 1.2 4.2
--------------------------------------------------------------------------------------------------------------
Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
- -----------------------------------------------------------------------------------------------------------------------------------
MATURITY OF TIME DEPOSITS OF $100,000
OR MORE
A majority of foreign deposits were in denominations of
$100,000 or more. The table below provides maturities of
domestic item deposits of $100,000 or more.
December 31, 1995 Certificates Other Time
In millions of Deposit Deposits Total
- -------------------------------------------------------------------------------
Three months or less $ 744 $107 $ 851
Over three through six months 262 53 315
Over six through twelve months 187 123 310
Over twelve months 1,219 157 1,376
--------------------------------------
Total $2,412 $440 $2,852
- -------------------------------------------------------------------------------
80
60
BORROWED FUNDS
Federal funds purchased represent overnight borrowings.
Repurchase agreements generally have maturities of 18
months or less. At December 31, 1995, 1994, and 1993, $361
million, $51 million and $2.7 billion, respectively, of
repurchase agreements had original maturities which exceeded
one year. Commercial paper is issued in maturities not to
exceed nine months and is stated net of discount.
Other borrowed funds consist primarily of term federal funds
purchased and U.S. Treasury, tax and loan borrowings which
are payable on demand. At December 31, 1995 and 1994, $1.5
billion and $350 million, respectively, notional value of
interest rate swaps were designated to borrowed funds. The
effect of these swaps is not included in the rates set forth in
the table.
1995 1994 1993
----------------------------------------------------------------
Dollars in millions Amount Rate Amount Rate Amount Rate
- ------------------------------------------------------------------------------------------------------------------
Federal funds purchased
Year-end balance $3,817 5.29% $2,219 5.88% $2,101 3.06%
Average during year 3,142 5.99 2,850 4.35 1,686 3.04
Maximum month-end balance during year 6,446 4,706 3,711
Repurchase agreements
Year-end balance 2,851 5.89 4,302 5.59 5,604 3.56
Average during year 6,514 6.11 5,576 4.09 7,263 3.47
Maximum month-end balance during year 7,981 6,971 9,256
Commercial paper
Year-end balance 753 5.74 1,226 5.71 514 3.24
Average during year 737 5.94 1,072 4.61 691 3.30
Maximum month-end balance during year 1,207 1,861 1,117
Other
Year-end balance 1,244 5.63 4,446 5.46 4,117 3.11
Average during year 2,993 6.84 2,462 4.57 1,128 3.01
Maximum month-end balance during year 4,134 5,601 6,027
- ------------------------------------------------------------------------------------------------------------------
TAXABLE-EQUIVALENT ADJUSTMENT
Interest income earned on certain loans, and obligations of
states, municipalities and other public entities is not subject to
federal income tax. In addition, certain interest expense
incurred to fund these assets is not deductible for federal
income tax purposes.
In order to make pre-tax income and resultant yields
comparable to taxable loans and investments, a taxable-
equivalent adjustment, less the effect of disallowed interest
expense, is added equally to interest income and to income tax
expense, with no effect on after-tax income.
The taxable-equivalent adjustment shown in the table below is
based on a federal income tax rate of 35 percent for 1995,
1994 and 1993, and 34 percent for all other years.
Year ended December 31
In thousands 1995 1994 1993 1992 1991
- ----------------------------------------------------------------------------------------------------------------------------
Interest income, book basis $5,149,431 $4,723,147 $4,022,771 $4,281,178 $5,399,913
Taxable-equivalent adjustment 46,642 38,144 50,845 62,614 94,860
--------------------------------------------------------------------------
Interest income taxable-equivalent basis 5,196,073 4,761,291 4,073,616 4,343,792 5,494,773
Interest expense 3,007,562 2,231,153 1,682,944 2,103,691 3,327,114
--------------------------------------------------------------------------
Net interest income, taxable-equivalent basis $2,188,511 $2,530,138 $2,390,672 $2,240,101 $2,167,659
- ----------------------------------------------------------------------------------------------------------------------------
81
61
COMMON STOCK PRICES/DIVIDENDS DECLARED
The table below sets forth by quarter the range of high and low sale prices for
PNC Bank Corp. common stock and the cash dividends declared per common share.
Cash Dividends
1995 QUARTER High Low Declared
- -----------------------------------------------------------------------------
First $25.750 $21.125 $.35
Second 28.125 24.250 .35
Third 28.625 23.625 .35
Fourth 32.375 26.125 .35
----------------
Total $1.40
- -----------------------------------------------------------------------------
1994 QUARTER
- -----------------------------------------------------------------------------
First $29.875 $25.250 $.32
Second 31.625 26.125 .32
Third 30.000 25.625 .32
Fourth 26.375 20.000 .35
----------------
Total $1.31
- -----------------------------------------------------------------------------
REGISTRAR AND TRANSFER AGENT
Chemical Bank
85 Challenger Road
Overpeck Center
Ridgefield Park, NJ 07660
800-982-7652
TO EXCHANGE MIDLANTIC STOCK CERTIFICATES
Midlantic Bank, N.A.
Metro Park Plaza
P.O. Box 600
Edison, NJ 08818
Attn: Corporate Securities Services
908-205-4517
DIVIDEND POLICY
Holders of PNC Bank Corp. common stock are entitled to receive dividends
when declared by the board of directors out of funds legally available. The
board presently intends to continue the policy of paying quarterly cash
dividends. However, future dividends will depend upon earnings, the financial
condition of PNC Bank Corp. and other factors including applicable government
regulations and policies.
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.
82