1
Exhibit 99.1
l FINANCIAL HIGHLIGHTS l
Three months ended Six months ended
June 30 June 30
------------------------------------------------------------
1995 1994 1995 1994
-----------------------------------------------------------------------------------------------------------------------
FINANCIAL PERFORMANCE (Dollars in thousands, except per
share data)
Net interest income (taxable-equivalent basis) $370,571 $501,363 $762,739 $1,007,167
Net income 136,988 187,845 262,639 393,534
Fully diluted earnings per common share .59 .79 1.13 1.65
Return on average assets .89% 1.26% .86% 1.34%
Return on average common shareholders' equity 12.59 17.70 12.16 18.51
Net interest margin 2.58 3.58 2.65 3.63
After-tax profit margin 21.55 25.75 20.76 26.34
Overhead ratio 67.09 57.33 68.29 56.57
SELECTED AVERAGE BALANCES (In millions)
Assets $61,918 $59,625 $61,806 $59,297
Earning assets 57,220 56,062 57,333 55,625
Loans, net of unearned income 36,191 32,531 35,755 32,278
Securities 19,858 21,859 20,378 21,550
Deposits 33,787 32,252 33,422 31,996
Borrowings 13,281 10,967 13,302 11,253
Shareholders' equity 4,369 4,268 4,363 4,299
-----------------------------------------------------------------------------------------------------------------------
JUNE 30 December 31 June 30
1995 1994 1994
----------------------------------------------------------------------------------------------------------------------
SELECTED RATIOS
Capital
Risk-based
Tier I 8.07% 8.62% 8.99%
Total 11.63 11.45 11.88
Leverage 6.29 6.59 6.99
Common shareholders' equity to assets 7.04 6.82 6.77
Average common shareholders' equity to average assets 7.03 7.09 7.22
Asset quality
Net charge-offs to average loans .23 .29 .32
Nonperforming loans to loans .84 .90 1.11
Nonperforming assets to loans and foreclosed assets 1.21 1.25 1.55
Nonperforming assets to assets .71 .69 .85
Allowance for credit losses to loans 2.62 2.83 2.97
Allowance for credit losses to nonperforming loans 311.53 314.17 267.09
Book value per common share
As reported $19.37 $18.76 $18.37
Excluding net unrealized securities losses 19.55 19.26 19.02
----------------------------------------------------------------------------------------------------------------------
l TABLE OF CONTENTS l
2 Corporate Financial Review 23 Consolidated Financial Statements
32 Statistical Information 34 Corporate Information
2
l CORPORATE FINANCIAL REVIEW l
THE FOLLOWING CORPORATE FINANCIAL REVIEW SHOULD BE READ IN CONJUNCTION WITH THE
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS OF PNC BANK CORP. AND SUBSIDIARIES
("CORPORATION") INCLUDED HEREIN AND THE CORPORATE FINANCIAL REVIEW AND AUDITED
CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN THE CORPORATION'S 1994 ANNUAL
REPORT.
overview
---------------------------------------------------------------
Net income for the first quarter of 1995 was $262.6 million, or $1.13 per fully
diluted share, compared with $393.5 million, or $1.65 per share, for the first
six months of 1994. Return on assets and return on common shareholders' equity
were .86 percent and 12.16 percent, respectively, in the first six months of
1995 compared with 1.34 percent and 18.51 percent a year ago. The results for
the first six months of 1995 reflect the impact of a strategic realignment of
the Corporation's balance sheet to reduce investment and wholesale funding
activities.
In the first six months of 1995, the nation's real gross domestic product grew
at a preliminary annual rate of 1.6 percent and consumer price inflation was
estimated to be approximately 3 percent, according to the United States
Departments of Commerce and Labor, respectively. In July 1995, after seven rate
increases since February 1994, the Federal Reserve lowered the federal funds
rate by 25 basis points in response to indications of less inflationary
pressures and a slower rate of growth in the economy. Management expects such
economic conditions to continue throughout 1995, and accordingly expects
short-term rates to decline modestly. Should interest rates be higher than
management's expectations or a relatively flat yield curve persists, the
Corporation's financial results would likely be adversely affected.
mergers and acquisitions
---------------------------------------------------------------
In July 1995, the Corporation entered into a definitive merger agreement with
Midlantic Corporation ("Midlantic"), a regional bank holding company
headquartered in Edison, New Jersey. At June 30, 1995, Midlantic had assets and
deposits of $13.7 billion and $10.9 billion, respectively. Under terms of the
agreement, the Corporation will exchange 2.05 shares of its common stock for
each share of Midlantic common stock. Based on share data as of June 30, 1995,
the Corporation expects to issue 110.8 million shares of its common stock to
consummate the merger. In addition, the Corporation and Midlantic have granted
each other options to purchase up to 19.9 percent of each other's outstanding
common stock, under certain circumstances. The transaction is valued at
approximately $3 billion and will be accounted for as a pooling of interests.
The merger is targeted to be completed by year-end 1995, pending approval by
shareholders of both companies and various regulatory agencies.
In March 1995, the Corporation announced a definitive agreement to acquire
Chemical Holdings, Inc., and its wholly-owned subsidiary Chemical Bank New
Jersey ("Chemical"). The transaction includes approximately $3.2 billion of
assets and $2.7 billion of retail deposits, and 82 branches in southern and
central New Jersey. The purchase price will approximate $490 million and the
transaction will be accounted for under the purchase method. The Corporation
expects to complete this transaction in the fourth quarter of 1995.
Upon completion of the Midlantic and Chemical transactions, the Corporation
expects to have the second largest deposit market share in both the New Jersey
and greater Philadelphia, Pennsylvania regions. The in-market nature of the
transactions is expected to generate substantial economies by reducing costs
associated with overlapping and duplicative operations and to enhance revenue
growth through the marketing of the Corporation's products and services to an
expanded customer base. The Corporation's balance sheet is also expected to be
enhanced by the addition of a large and stable base of customer deposits.
In February 1995, the Corporation completed the acquisition of BlackRock
Financial Management L.P. ("BlackRock"), a New York-based, fixed-income
investment management firm with approximately $25 billion in assets under
management at closing. The transaction was accounted for under the purchase
method and the Corporation paid $71 million in cash and issued $169 million of
unsecured notes.
In the first quarter of 1995, the Corporation acquired Indian River Federal
Savings Bank, Vero Beach, Florida, and Brentwood Financial Corporation,
Cincinnati, Ohio, for a total of $33 million in cash. The acquisitions added
assets and deposits of approximately $175 million and $140 million,
respectively.
During 1994, the Corporation completed the acquisitions of 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. In addition, in June 1994, the
Corporation purchased a $10 billion residential mortgage servicing portfolio
from the Associates Corporation of North America.
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l CORPORATE FINANCIAL REVIEW l
income statement review
---------------------------------------------------------------
INCOME STATEMENT HIGHLIGHTS
Six months ended
June 30
Change
Dollars in -----------------
millions 1995 1994 Amount Percent
---------------------------------------------------------------
Net interest
income
(taxable-equivalent
basis) $763 $1,007 $(244) (24.3)%
Provision for
credit losses 50 (50) (100.0)
Noninterest income 502 487 15 3.2
Noninterest
expense 864 845 19 2.2
Net income 263 394 (131) (33.3)
---------------------------------------------------------------
NET INTEREST INCOME AND NET INTEREST MARGIN l On a fully taxable-equivalent
basis, net interest income for the first six months of 1995 decreased $244.4
million, compared with the first six months of 1994. A $1.7 billion increase in
average earning assets was more than offset by a narrower net interest margin.
NET INTEREST INCOME
Six months ended
June 30
Taxable-equivalent
basis Change
-------------------
Dollars in millions 1995 1994 Amount Percent
---------------------------------------------------------------
Net interest income
before swaps and
caps
Interest income $2,110 $1,761 $ 349 19.8%
Loan fees 36 35 1 2.9
Taxable-equivalent
adjustment 16 17 (1) (5.9)
-------------------------------
Total interest
income 2,162 1,813 349 19.2
Interest expense 1,308 902 406 45.0
-------------------------------
Net interest income
before swaps
and caps 854 911 (57) (6.3)
Effect of swaps and
caps on
Interest income (79) 34 (113) (332.4)
Interest expense 12 (62) 74 119.4
-------------------------------
Total
swaps and caps (91) 96 (187) (194.8)
-------------------------------
Net interest
income $ 763 $1,007 $(244) (24.3)%
---------------------------------------------------------------
VOLUME/RATE ANALYSIS
Six months ended Increase (Decrease)
June 30 Due to Changes in
1995 versus 1994 ------------------------
Rate/
In millions Volume Rate Volume TOTAL
---------------------------------------------------------------
Interest income $55 $ 273 $21 $ 349
Interest expense 41 343 22 406
Interest rate swaps
and caps 3 (193) 3 (187)
---------
Net interest income 31 (270) (5) $(244)
---------------------------------------------------------------
Net interest income and net interest margin declines reflect the Corporation's
strategic actions begun in the latter half of 1994 to reposition the balance
sheet by reducing wholesale funding and investment activities, and the cost of
actions taken to reduce interest rate sensitivity. These factors are expected to
continue to adversely impact net interest income and net interest margin in 1995
compared with the prior year. However, management expects net interest income
and margin to stabilize in the third quarter and increase in subsequent
quarters.
NET INTEREST MARGIN
Six months ended June 30 Basis Point
Taxable-equivalent basis 1995 1994 Change
---------------------------------------------------------------
Interest rate spread before
swaps and caps
Book-basis yield on
earning assets 7.36% 6.36% 100
Effect of loan fees .12 .13 (1)
Taxable-equivalent
adjustment .06 .06
-----------------------------------
Taxable-equivalent yield
on earning assets 7.54 6.55 99
Rate on interest-bearing
liabilities 5.25 3.80 145
-----------------------------------
Interest rate spread
before swaps and caps 2.29 2.75 (46)
Effect of
Noninterest-bearing
sources .68 .50 18
Interest rate swaps and
caps on
Interest income (.27) .12 (39)
Interest expense .05 (.26) 31
-----------------------------------
Total swaps and caps (.32) .38 (70)
-----------------------------------
Net interest margin 2.65% 3.63% (98)
---------------------------------------------------------------
3
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l CORPORATE FINANCIAL REVIEW l
PROVISION FOR CREDIT LOSSES l The Corporation did not record a provision for
credit losses in the first six months of 1995 compared with $50 million in the
first six months of 1994. Stronger economic conditions combined with
management's ongoing attention to asset quality resulted in a stable level of
nonperforming assets and lower net charge-offs. Based on the current risk
profile of the loan portfolio and assuming economic trends continue, management
does not expect to record a provision for credit losses during the remainder of
1995. 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.
NONINTEREST INCOME l Noninterest income before securities transactions increased
8.0 percent to $493.1 million in the first six months of 1995 compared with the
prior year period. Excluding securities transactions, noninterest income was
39.3 percent of total revenue in the first six months of 1995 compared with 31.2
percent a year earlier. Net securities gains totaled $9.0 million in the first
six months of 1995 and $30.3 million in the year-earlier period.
NONINTEREST INCOME
Six months ended June 30 Change
---------------------
Dollars in thousands 1995 1994 Amount Percent
--------------------------------------------------------------------------------------------------------------------------
Investment management and trust
Trust $113,196 $ 98,805 $14,391 14.6%
Mutual funds 63,453 47,656 15,797 33.1
------------------------------------------
Total investment management and trust 176,649 146,461 30,188 20.6
Service charges, fees and commissions
Deposit account and corporate services 78,338 82,225 (3,887) (4.7)
Credit card and merchant services 24,269 26,797 (2,528) (9.4)
Brokerage 20,061 17,223 2,838 16.5
Corporate finance 22,252 21,227 1,025 4.8
Other services 35,488 32,569 2,919 9.0
------------------------------------------
Total service charges, fees and commissions 180,408 180,041 367 .2
Mortgage banking
Servicing 60,884 60,702 182 .3
Sale of servicing 21,930 16,590 5,340 32.2
Marketing 12,506 3,071 9,435 307.2
------------------------------------------
Total mortgage banking 95,320 80,363 14,957 18.6
Other 40,734 49,619 (8,885) (17.9)
------------------------------------------
Total noninterest income before securities transactions 493,111 456,484 36,627 8.0
Net securities gains 9,036 30,307 (21,271) (70.2)
------------------------------------------
Total $502,147 $486,791 $15,356 3.2%
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l CORPORATE FINANCIAL REVIEW l
INVESTMENT MANAGEMENT AND TRUST
Assets at June 30
-------------------------------------------------------------------------- Revenue for the
Six months
Discretionary Nondiscretionary Total ended June 30
---------------------- ------------------------- ------------------------- -------------------
In millions 1995 1994 1995 1994 1995 1994 1995 1994
-----------------------------------------------------------------------------------------------------------------------------
Personal and charitable $25,039 $23,853 $ 12,220 $ 9,560 $ 37,259 $ 33,413 $ 76 $ 73
Institutional 19,513 6,535 34,984 70,978 54,497 77,513 37 25
---------------------------------------------------------------------------------------------------
Total trust 44,552 30,388 47,204 80,538 91,756 110,926 113 98
Mutual funds 39,546 23,164 102,257 55,463 141,803 78,627 64 48
---------------------------------------------------------------------------------------------------
Total $84,098 $53,552 $149,461 $136,001 $233,559 $189,553 $177 $146
-----------------------------------------------------------------------------------------------------------------------------
Investment management and trust revenue increased $30.2 million, or 20.6
percent, to $176.6 million in the first six months of 1995 compared with the
prior-year period. The BlackRock acquisition, which was completed on February
28, 1995, contributed approximately $22.7 million of the increase with the
remainder attributable to new business and an increase in the value of managed
assets.
Compared with a year ago, total trust and mutual funds assets increased $44.0
billion to $233.6 billion at June 30, 1995. BlackRock added approximately $25
billion in discretionary assets, $15 billion of which are institutional funds
and the remainder are mutual funds. At June 30, 1995, the composition of total
discretionary assets was 46 percent fixed-income, 31 percent money market, 22
percent equity and one percent other assets. The PNC Family of Funds is included
in the discretionary mutual funds category. Assets in these funds totaled $6.8
billion at June 30, 1995 compared with $4.3 billion a year ago.
Service charges, fees and commissions remained relatively flat year-to-year.
Deposit account and corporate services declined in the comparison due to lower
business volumes. The decline in credit card and merchant services reflects the
impact of the Corporation's agreements with Card Issuer Program Management
Corporation and First Data Resources Inc. to provide certain administrative and
marketing services and data processing, customer support and related services,
respectively, for the Corporation's credit card business. Fee income and
operating expenses related to the credit card business are each expected to be
reduced by approximately $15 million during the remainder of 1995 as a result of
this relationship.
Brokerage, corporate finance, and other services fee income increased in the
comparison due to higher business volumes and an increase in consumer-related
fees, primarily related to automated teller machines.
During the first six months of 1995, mortgage banking income increased $15.0
million to $95.3 million primarily due to marketing gains. The increase in
marketing gains was due to originated mortgage servicing rights totaling $12.1
million. During the second quarter of 1995, the Corporation adopted Statement of
Financial Accounting Standards ("SFAS") No. 122, "Accounting for Mortgage
Servicing Rights," which provides for the immediate recognition of the value of
originated mortgage servicing rights retained on loans sold.
MORTGAGE SERVICING PORTFOLIO
In millions 1995 1994
------------------------------------------------------------
Balance at January 1 $40,966 $35,527
Originations 2,309 3,943
Acquisitions 64 10,866
Repayments (1,975) (3,956)
Sales (2,726) (1,959)
---------------------------
Balance at June 30 $38,638 $44,421
------------------------------------------------------------
During the first six months of 1995, the Corporation funded $2.3 billion of
residential mortgages, approximately 90 percent of which represented new
financing. PNC Mortgage directly originated 69 percent of total volume in 1995.
At June 30, 1995, the Corporation's mortgage servicing portfolio totaled $38.6
billion, including $26.7 billion serviced for others. The servicing portfolio
had a weighted-average coupon rate of 7.92 percent, an unamortized carrying
value of $298 million and an estimated fair value of $461 million. The value of
the mortgage servicing portfolio and capitalized servicing rights is affected,
in part, by the level of interest rates.
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l CORPORATE FINANCIAL REVIEW l
Should interest rates decline and the rate of prepayments increase, these values
may be adversely impacted.
Other noninterest income decreased $8.9 million primarily due to lower venture
capital income and lower gains from sales of assets.
NONINTEREST EXPENSE l Noninterest expense increased 2.2 percent to $863.8
million in the first six months of 1995 primarily due to acquisitions. Excluding
acquisitions, noninterest expense decreased 4.5 percent in the comparison,
reflecting the Corporation's continued emphasis on developing alternative
lower-cost delivery systems and reducing the costs of traditional banking
operations.
NONINTEREST EXPENSE
Six months ended June 30
Change
Dollars in ---------------
thousands 1995 1994 Amount Percent
---------------------------------------------------------------
Compensation $330,207 $ 329,402 $ 805 .2%
Employee benefits 76,241 81,469 (5,228) (6.4)
-----------------------------
Total staff
expense 406,448 410,871 (4,423) (1.1)
Net occupancy 69,712 66,562 3,150 4.7
Equipment 67,047 65,580 1,467 2.2
Amortization of
intangible
assets 43,186 37,830 5,356 14.2
Federal deposit
insurance 36,649 36,339 310 .9
Taxes other than
income 24,405 21,878 2,527 11.6
Other 216,335 206,081 10,254 5.0
-----------------------------
Total $863,782 $ 845,141 $18,641 2.2%
---------------------------------------------------------------
The overhead ratio was 68.3 percent in the first six months of 1995 compared
with 56.6 percent in the year-earlier period. The higher overhead ratio
primarily reflects the impact of lower net interest income.
Staff expense decreased 1.1 percent in the year-to-year comparison primarily
due to lower staff levels. Average full-time equivalent employees decreased to
approximately 20,200 for the first six months of 1995 compared with
approximately 20,900 a year ago. The impact of approximately 1,300 employees
added from acquisitions was more than offset by lower staffing levels, primarily
in the Consumer Banking line of business. The Mass Market sector experienced
reductions due to centralization and branch rationalization initiatives.
Mortgage Banking benefitted from the consolidation of operations centers and
efficiencies gained from the use of technology. Pension and postretirement
benefit expense declined $4.2 million due to lower staff levels and a higher
discount rate used to estimate pension obligations.
Amortization of intangibles increased $5.4 million reflecting additional
goodwill from recent acquisitions. The increase in the remaining noninterest
expense categories was primarily due to acquisitions.
In connection with the closing in the fourth quarter of 1995 of its pending
merger with Midlantic, the Corporation expects to record merger related and
nonrecurring charges of approximately $130 million. Such charges are related to
anticipated staff reductions, back office, operations, and facilities
consolidations and expenses to complete the merger.
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l CORPORATE FINANCIAL REVIEW l
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, as applicable. 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 the first six months of 1994 are presented on a basis
consistent with this new structure.
For management reporting purposes, the Corporation has designated three lines
of business: Corporate Banking, Consumer 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. Consumer Banking and Asset Management were net
generators of funds and, accordingly, were assigned securities, while Corporate
Banking received an assignment of borrowings as a net asset generator. 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, 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. Equity levels at independent companies that provide products and
services similar to those provided by the respective business unit are also
considered. Capital assignments are not equivalent to risk-based capital
guidelines and the total amount assigned may vary from consolidated
shareholders' equity.
LINE OF BUSINESS HIGHLIGHTS
Return on
Average Assigned
Six months ended June 30 Balance Sheet Revenue Earnings Equity
--------------------------------------------------------------------------------
Dollars in millions 1995 1994 1995 1994 1995 1994 1995 1994
----------------------------------------------------------------------------------------------------------------------------
Corporate Banking
Large Corporate $ 3,894 $ 3,778 $ 72 $ 91 $ 25 $ 39 11% 18%
Middle Market 11,224 10,224 263 266 81 115 11 18
Equity Management 185 175 13 21 7 12 26 50
------------------------------------------------------------
Total Corporate Banking 15,303 14,177 348 378 113 166 12 19
------------------------------------------------------------
Consumer Banking
Private Banking 1,029 842 116 105 20 18 28 29
Mass Market 25,627 24,273 602 566 110 107 16 17
Mortgage Banking 11,250 9,963 183 191 25 25 10 11
------------------------------------------------------------
Total Consumer Banking 37,906 35,078 901 862 155 150 15 16
------------------------------------------------------------
Asset Management 276 273 83 64 20 15 53 57
------------------------------------------------------------
Total lines of business 53,485 49,528 1,332 1,304 288 331 14 18
Asset/liability management activities 8,084 9,016 (58) 180 (43) 113
Unallocated provision 19 (41)
Other unallocated items 237 753 (9) 10 (1) (9)
------------------------------------------------------------
Total $61,806 $59,297 $1,265 $1,494 $263 $394 12% 18%
---------------------------------------------------------------------------------------------------------------------------------
7
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l CORPORATE FINANCIAL REVIEW l
Total earnings contributed by the lines of business were $288 million in the
first six months of 1995 compared with $331 million in the first six months of
1994. The decline primarily resulted from an increase in Corporate Banking's
allocated provision for credit losses which was negative in the prior-year
period. Line of business earnings differed from reported consolidated net income
in both periods due to asset/liability management activities, differences
between specific reserve allocations to the lines of business and the
consolidated provision for credit losses, and certain unallocated revenues and
expenses. The decline in earnings from asset/liability management activities was
primarily due to the impact of interest rate swaps and caps and lower net
securities gains.
CORPORATE BANKING l Corporate Banking provides traditional financing, liquidity
and treasury management, corporate and employee benefit trust, capital markets,
direct investment 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 real estate,
communications, health care, natural resources, leasing and automobile dealer
finance; and Equity Management--private equity investments.
Corporate Banking provided 39 percent of line of business earnings in the
first six months of 1995 compared with 50 percent in the first six months of
1994. Large Corporate earnings declined in 1995 as the benefit of an increase in
average loans was more than offset by the impact of narrower spreads in the loan
portfolio and a $15 million pretax benefit a year ago from resolution of a
problem asset. Middle Market earnings declined primarily due to the allocation
of provision for credit losses. A modest provision was allocated in 1995
compared with a negative provision in 1994 resulting from a significant
reduction of problem assets. Asset quality continued to improve in the current
period, however the impact was less and was offset by a provision allocation
associated with loan growth.
CONSUMER BANKING l Consumer Banking provides lending, deposit, personal trust,
brokerage and investment, payment system access and other financial services to
consumers and small businesses. It provides services through a network of
community banking and mortgage offices, alternative delivery systems such as
ATMs and telephone banking, and regional banking centers offering a wide-array
of products at a single point of contact. Consumer Banking includes: Private
Banking--affluent consumers and charitable organizations with specialized
banking requirements; Mass Market--small business customers having annual sales
of up to $5 million and all other consumers who use traditional branch and
direct banking services; and Mortgage Banking--residential and loan origination,
acquisition and servicing activities and residential mortgage loans held in
portfolio.
The earnings contribution from Consumer Banking increased to 54 percent in the
first six months of 1995 from 45 percent a year ago. Earnings from Private
Banking increased in the first six months of 1995 as the benefit from loan
growth, new trust business and higher brokerage fees. Mass Market earnings
benefitted from an increase in average loans and deposits as a result of
acquisitions and a greater assigned value for core deposits in the higher
interest rate environment in 1995. Mortgage Banking continued to operate in an
environment characterized by significantly reduced volumes. Earnings remained
flat year to year as the benefit of an increase in portfolio loans, gains from
originated mortgage servicing rights and higher gains from sales of servicing
were offset by the impact of lower originations and narrower spreads in the loan
portfolio.
ASSET MANAGEMENT l 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 contributed 7 percent of line of business earnings in the
first six months of 1995 compared with 5 percent a year ago. Asset Management
earnings increased due to the impact of BlackRock, new business and an increase
in the level of managed assets.
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l CORPORATE FINANCIAL REVIEW l
balance sheet review
----------------------------------------------------------------
AVERAGE ASSETS
Six months ended June 30
In millions 1995 1994
------------------------------------------------------------
Assets $61,806 $59,297
Earning assets 57,333 55,625
Loans, net of
unearned income 35,755 32,278
Securities 20,378 21,550
------------------------------------------------------------
LOANS l Average loans for the first six months of 1995 increased 10.8 percent
over the comparable period in 1994, to $35.8 billion. Acquisitions increased the
loan portfolio primarily in the Consumer Banking line of business. Excluding the
impact of acquisitions, average loans increased 7.3 percent, of which the
majority was in residential mortgages.
The proportion of average loans to average earning assets increased to 62.4
percent in the first six months of 1995 compared with 58.0 percent a year ago.
Management expects this ratio to increase further in 1995 as a result of loan
growth and a decline in the securities portfolio.
The Corporation manages credit risk associated with its lending activities
through underwriting policies and procedures, portfolio diversification and loan
monitoring practices. The composition of loan outstandings did not change
significantly since year-end 1994.
LOAN PORTFOLIO COMPOSITION
JUNE 30 December 31
Percent of gross loans 1995 1994
--------------------------------------------------------------
Commercial 34.7% 34.9%
Real estate project 4.6 4.6
Real estate mortgage
Residential 28.2 26.0
Commercial 3.2 3.5
Total real estate
mortgage 31.4 29.5
Consumer 24.6 25.8
Other 4.7 5.2
----------------------------
Total 100.0% 100.0%
--------------------------------------------------------------
At June 30, 1995, loan outstandings and net unfunded commitments increased
$3.1 billion, or 5.0 percent, since year-end 1994. Unfunded commitments are net
of participations and syndications.
In addition, the Corporation had letters of credit outstanding totaling $4.0
billion and $4.3 billion at June 30, 1995 and December 31, 1994, respectively,
primarily consisting of standby letters of credit.
Total commercial loan outstandings increased $342 million from year-end 1994,
partially offset by a reduction in certain low-spread loans. Growth in
commercial unfunded commitments was broad based and increased $1.4 billion, or
7.4 percent, in the comparison.
Total real estate project exposure increased slightly since year-end 1994.
Real estate projects primarily consist of retail and office, multi-family,
hotel/motel and residential projects. Approximately 70 percent of total
outstandings are located in the Corporation's primary markets. The remaining
projects are geographically dispersed throughout the United States.
Real estate mortgage outstandings increased 10.0 percent primarily due to
acquisitions and portfolio management strategies. As part of its overall
asset/liability management strategy, the Corporation retains certain originated
residential mortgage products in the loan portfolio. The remainder of its
originations are securitized and sold.
Consumer loan outstandings totaled $9.1 billion at June 30, 1995 compared with
$9.2 billion at year-end 1994. The decline was primarily due to a planned
reduction in indirect automobile loans.
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l CORPORATE FINANCIAL REVIEW l
LOANS
JUNE 30, 1995 December 31, 1994
-----------------------------------------------------------------
NET UNFUNDED Net Unfunded
In millions OUTSTANDINGS COMMITMENTS Outstandings Commitments
--------------------------------------------------------------------------------------------------------------------------
Commercial
Manufacturing $ 2,473 $ 5,991 $ 2,434 $ 6,011
Retail/Wholesale 2,342 2,368 2,148 2,123
Service providers 1,589 1,643 1,534 1,384
Communications
Cable 695 191 691 215
Telephone/cellular 330 1,114 285 923
Other 191 213 125 93
-----------------------------------------------------------------
Total communications 1,216 1,518 1,101 1,231
Financial services 552 2,742 691 2,502
Real estate related 677 281 610 180
Health care 658 862 606 958
Public utilities 204 1,094 254 1,079
Other 3,076 3,809 3,067 3,447
-----------------------------------------------------------------
Total commercial 12,787 20,308 12,445 18,915
Real estate project
Construction and development 467 258 394 254
Medium-term financings 1,240 43 1,234 56
-----------------------------------------------------------------
Total real estate project 1,707 301 1,628 310
Real estate mortgage
Residential 10,406 1,192 9,283 769
Commercial 1,194 13 1,261 19
-----------------------------------------------------------------
Total real estate mortgage 11,600 1,205 10,544 788
Consumer
Home equity 2,602 1,638 2,625 1,761
Automobile 2,385 2,534
Student 1,316 6 1,258 30
Credit card 849 3,685 817 3,423
Other 1,941 242 1,953 330
-----------------------------------------------------------------
Total consumer 9,093 5,571 9,187 5,544
Other 1,729 880 1,843 917
Unearned income (226) (240)
-----------------------------------------------------------------
Total, net of unearned income $36,690 $28,265 $35,407 $26,474
--------------------------------------------------------------------------------------------------------------------------
10
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l CORPORATE FINANCIAL REVIEW l
SECURITIES l The securities portfolio declined $1.8 billion from year-end 1994
to $19.1 billion at June 30, 1995. Securities represented 33.5 percent of
earning assets at June 30, 1995 compared with 36.3 percent at December 31, 1994
and 39.0 percent a year ago. As part of the Corporation's strategic balance
sheet realignment, management expects the securities portfolio to approximate 30
percent of earning assets by the end of 1995, excluding the impact of pending
acquisitions.
At June 30, 1995, the securities portfolio included $11.2 billion and $1.9
million of collateralized mortgage obligations and mortgage-backed securities,
respectively. The characteristics of these investments include principal
guarantees, primarily by U.S. Government agencies, marketability, and
availability as collateral for additional liquidity. The expected lives of
mortgage-related securities can vary as a result of changes in interest rates.
In a declining rate environment, prepayments may accelerate and, therefore,
shorten expected lives. 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 which the
maturity may be extended or called at the option of the issuer. Other debt
securities consist primarily of private label collateralized mortgage
obligations.
SECURITIES
JUNE 30, 1995 December 31, 1994
--------------------------------------------------------------------------------------------
AMORTIZED UNREALIZED Amortized Unrealized
------------------ -------------------
In millions COST GAINS LOSSES FAIR VALUE Cost Gains Losses Fair Value
------------------------------------------------------------------------------------------------------------------------------
Investment securities
Debt securities
U.S. Treasury $ 1,796 $29 $ 1,825 $ 1,794 $ 93 $ 1,701
U.S. Government agencies and
corporations
Mortgage-related 10,354 13 $286 10,081 10,920 1,025 9,895
Other 1,000 1 1,001 1,000 28 972
State and municipal 337 21 1 357 348 $12 2 358
Asset-backed private
placements 1,597 12 1,609 1,597 33 1,564
Other debt
Mortgage-related 677 1 13 665 726 43 683
Other 591 2 589 769 20 749
Other 306 1 307 310 1 311
--------------------------------------------------------------------------------------------
Total $16,658 $78 $302 $16,434 $17,464 $13 $1,244 $16,233
--------------------------------------------------------------------------------------------
Securities available for sale
Debt securities
U.S. Treasury $ 94 $ 1 $ 95 $ 401 $ 8 $ 393
U.S. Government agencies and
corporations
Mortgage-related 1,437 20 $10 1,447 2,161 69 2,092
Other 25 2 23 25 4 21
Other debt
Mortgage-related 670 1 2 669 749 17 732
Other 108 1 109 117 $2 119
Corporate stocks and other 104 2 2 104 105 1 6 100
-------------------------------------------------------------------------------------------
Total $2,438 $25 $16 $2,447 $3,558 $3 $104 $3,457
------------------------------------------------------------------------------------------------------------------------------
11
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l CORPORATE FINANCIAL REVIEW l
EXPECTED MATURITY DISTRIBUTION OF SECURITIES
Weighted
1997 and Average
Dollars in millions 1995 1996 beyond Total Life
-----------------------------------------------------------------------------------------------------------------------------
Investment securities
Debt securities
U.S. Treasury $ 1,796 $ 1,796 3.6 yr
U.S. Government agencies and corporations
Mortgage-related $ 1,184 $ 2,242 6,928 10,354 2.6
Other 1,000 1,000 1.1
State and municipal 10 22 305 337 8.9
Asset-backed private placements 1,347 250 1,597 1.2
Other debt
Mortgage-related 65 144 468 677 2.9
Other 163 237 191 591 1.3
Other 306 306 NM
------------------------------------------------------
Total investment securities 1,422 4,992 10,244 16,658 2.6
Securities available for sale
Debt securities
U.S. Treasury 51 3 40 94 2.3
U.S. Government agencies and corporations
Mortgage-related 178 261 998 1,437 5.6
Other 5 20 25 2.6
Other debt
Mortgage-related 83 151 436 670 3.4
Other 3 4 101 108 7.0
Corporate stocks and other 104 104 NM
------------------------------------------------------
Total securities available for sale 315 424 1,699 2,438 4.9
------------------------------------------------------
Total $ 1,737 $ 5,416 $11,943 $19,096 2.9 yr
------------------------------------------------------
Percent of total 9.1% 28.4% 62.5% 100.0%
------------------------------------------------------
Securities with interest rates that are
Fixed $ 1,495 $ 2,693 $10,394 $14,582
Variable 242 2,723 1,549 4,514
-----------------------------------------------------------------------------------------------------------------------------
NM--not meaningful
The expected weighted average life of the securities portfolio was 2 years and
eleven months at June 30, 1995 compared with 4 years at year-end 1994.
Mortgage-related securities and other instruments are distributed based on
expected weighted average lives determined by historical experience.
Securities available for sale are recorded at fair value in the consolidated
balance sheet and net unrealized gains or losses, net of tax, are reflected as
an adjustment to shareholders' equity. The Corporation may sell such securities
as part of the overall asset/liability management process should market
conditions or other factors warrant. Gains and losses from such transactions
would be reflected in results of operations.
12
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l CORPORATE FINANCIAL REVIEW l
Management is currently reviewing the asset and liability management position
of Midlantic and is considering various actions to maintain the Corporation's
existing interest rate risk position. As a result of further analyses, certain
investment securities may be reclassified or sold and, under such circumstances,
will be accounted for at fair value. On a pro forma basis, the combined
investment securities held to maturity of the Corporation and Midlantic, had a
net unrealized pretax loss of $274 million at June 30, 1995. In addition,
certain interest rate swaps are associated with investment securities. If such
securities are reclassified or sold, the fair value of such securities will also
reflect the estimated fair value of the related interest rate swaps, if any. On
a pro forma basis, interest rate swaps designated to investment securities had
an estimated net unrealized pretax loss of $249 million at June 30, 1995.
Management has not made a determination with respect to such matters.
AVERAGE FUNDING SOURCES
Six months ended June 30
In millions 1995 1994
-------------------------------------------------------------
Deposits $33,422 $31,996
Borrowed funds 13,302 11,253
Notes and debentures 9,475 10,589
Shareholders' equity 4,363 4,299
-------------------------------------------------------------
FUNDING SOURCES l Average deposits increased $1.4 billion, or 4.5 percent,
compared with the first six months of 1994 primarily due to acquisitions.
Average noninterest-bearing sources were 12.9 percent of total funding sources
during the first six months of 1995 compared with 14.1 percent a year ago.
FUNDING SOURCES
JUNE 30 December 31
In millions 1995 1994
-------------------------------------------------------------
Deposits
Demand, savings and money
market $17,549 $19,313
Time 14,341 13,100
Foreign 3,400 2,598
--------------------------
Total deposits 35,290 35,011
Borrowed funds
Repurchase agreements 5,793 3,785
Treasury, tax and loan 1,425 1,989
Federal funds purchased 2,153 2,181
Commercial paper 576 1,226
Other 2,439 2,427
--------------------------
Total borrowed funds 12,386 11,608
Notes and debentures
Bank notes 5,132 8,825
Federal Home Loan Bank 1,826 1,384
Other 2,037 1,545
--------------------------
Total notes and debentures 8,995 11,754
--------------------------
Total $56,671 $58,373
-------------------------------------------------------------
Total deposits at June 30, 1995 were relatively unchanged from year-end 1994.
Demand, savings and money market deposits declined $1.8 billion to $17.5 billion
and time deposits increased $1.2 billion to $14.3 billion at June 30, 1995. The
change in composition of such deposit products was primarily due to customers
shifting to higher rate deposit products. The rate of customer product migration
is expected to decline during the remainder of 1995.
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l CORPORATE FINANCIAL REVIEW l
Brokered deposits totaled $2.3 billion at June 30, 1995 compared with $2.8
billion at December 31, 1994. Retail brokered deposits are issued or
participated-out by brokers in denominations of $100,000 or less. Such deposits
represented 75.8 percent of the total brokered at June 30, 1995 compared with
77.2 percent at year-end 1994.
The change in the composition of borrowed funds and notes and debentures
reflects asset/liability management activities to utilize less costly sources of
funds. In addition, the Corporation extended the maturity structure of
approximately $24 billion of interest-bearing funding sources that matured in
the first six months of 1995. These initiatives were achieved through a variety
of funding sources, primarily repurchase agreements and term Federal funds, with
maturities ranging from six months to one year.
CAPITAL l Acquisition capability, funding alternatives, new business activities,
deposit insurance costs, and the level and nature of expanded regulatory
oversight depend in large part on a banking institution's capital strength. 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 June 30, 1995, the capital position of each bank affiliate was
classified as well capitalized.
RISK-BASED CAPITAL AND CAPITAL RATIOS
JUNE 30 December 31
Dollars in millions 1995 1994
------------------------------------------------------------
RISK-BASED CAPITAL
Shareholders' equity $4,436 $4,394
Goodwill (615) (373)
Net unrealized securities
losses 41 119
--------------------------
Tier I risk-based capital 3,862 4,140
Subordinated debt 1,102 752
Eligible allowance for credit
losses 603 605
--------------------------
Total risk-based capital $5,567 $5,497
--------------------------
ASSETS
Risk-weighted assets and
off-balance-sheet
instruments $47,880 $48,007
Average tangible assets 61,363 62,842
CAPITAL RATIOS
Tier I risk-based capital 8.07% 8.62%
Total risk-based capital 11.63 11.45
Leverage 6.29 6.59
------------------------------------------------------------
The decline in Tier I risk-based capital reflects the impact of goodwill from
acquisitions and the stock repurchase program. Goodwill increased in the
comparison due to the acquisition of BlackRock in February 1995. The pending
merger with Midlantic is expected to enhance capital ratios.
In January 1995, the board of directors approved a stock repurchase program
which authorized the Corporation to purchase up to 24 million additional common
shares over the following two years. As of June 30, 1995, approximately 6.5
million shares were purchased by the Corporation pursuant to this plan at an
average price of $24.74 per share. The Corporation expects its ability to
repurchase additional shares will be significantly limited due to pooling of
interests constraints associated with the pending Midlantic merger.
The Corporation maintains its capital positions primarily through the issuance
of debt and equity instruments, its dividend policy and retained earnings.
14
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l CORPORATE FINANCIAL REVIEW l
risk management
---------------------------------------------------------------
The Corporation's ordinary course of business involves varying degrees of risk
taking, the most significant of which are interest rate, credit and liquidity
risk. In order to manage these risks, the Corporation has risk management
processes designed to provide for risk identification, measurement, monitoring
and control.
INTEREST RATE RISK l Interest rate risk is the sensitivity of net interest
income and the market value of financial instruments to the magnitude, direction
and frequency of changes in interest rates. Interest rate risk results from
various repricing frequencies, changes in the relationship or spread between
interest rates and the maturity structure of assets, liabilities, and
off-balance-sheet positions. Asset/liability management uses a variety of
investments, funding sources and off-balance-sheet instruments in managing the
overall interest rate risk profile of the Corporation.
A number of tools are used to measure interest rate risk including income
simulation modeling 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 estimate the impact on the value of equity resulting from
changes in interest rates and are designed to supplement the simulation model
and gap analyses.
An income simulation model is the primary mechanism used by management to
measure interest rate risk. The primary purpose of the simulation model is to
assess the direction and magnitude of the impact of most likely (a "base case"
which management believes is reasonably likely to occur) and higher and lower
("alternative") interest rate scenarios on net interest income.
The results of the simulation model are highly dependent on numerous
assumptions. These assumptions generally fall into two categories: those
relating to the interest rate environment and those relating to general business
and economic factors. Assumptions related to the interest rate environment
include the level of various interest rates, the shape of the yield curve, and
the relationship among these factors as rates change. Also included are other
rate-related factors, such as prepayment speeds on mortgage-related assets and
the cash flows and maturities of financial instruments including
index-amortizing interest rate swaps. Assumptions related to general business
and economic factors include changes in market conditions, loan volumes and
pricing, deposit sensitivity, customer preferences, competition, and
management's financial and capital plans. The assumptions are developed based on
current business and asset/liability management strategies, historical
experience, the current economic environment, forecasted economic conditions and
other analyses. These assumptions are inherently uncertain and subject to change
as time passes. Accordingly, they are updated on at least a quarterly basis and
will not necessarily provide a precise estimate of net interest income or the
impact of higher or lower interest rates.
Using these assumptions, the model simulates net interest income under the
base case scenario and evaluates the relative risk of changes in interest rates
by simulating the impact on net interest income of gradual parallel shifts in
interest rates of 100 basis points higher and lower than the base case scenario.
In such alternative scenarios, certain assumptions that are directly dependent
on the interest rate environment are adjusted for the respective higher or lower
interest rate environment. Other assumptions related to general and economic
factors are held constant with those developed for the base case scenario. As a
result, the alternative interest rate scenarios indicate what may happen to net
interest income if interest rates were to change to the levels of the higher and
lower scenarios but do not predict what may happen to net interest income if
business and economic assumptions are not realized.
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l CORPORATE FINANCIAL REVIEW l
Actual results will differ from the simulated results of the base case
scenario and of each alternative scenario due to various factors including
timing, direction, magnitude and frequency of interest rate changes, the
relationship or spread between various interest rates, changes in market
conditions, loan volumes and pricing, deposit sensitivity, customer preferences,
competition, and the actual interaction of the numerous assumptions. In
addition, the actual results will be affected by the impact of mergers or
acquisitions and business and asset/ liability management strategies that differ
from those assumed in the model. While the simulation model measures the
relative risk of changes in interest rates on net interest income, the actual
impact on net interest income could exceed or be less than the amounts projected
in the base case and in each alternative scenario. If interest rates exceed
those assumed in the high alternative scenario, or if interest rates are less
than those assumed in the low alternative scenario, the actual impact on net
interest income could further differ from the simulated results.
In July 1995, the Federal Reserve lowered the federal funds rate by 25 basis
points in response to indications of less inflationary pressures and a slower
rate of growth in the economy. Management expects economic growth in 1995 to
continue to be at a slower pace.
The following table sets forth interest rates for the periods indicated
including management's base case scenario and the industry consensus for the
twelve months ended June 30, 1996 as reported in the Blue Chip Financial
Forecasts.
INTEREST RATES
[CAPTION]
Industry
Consensus
Base case scenario Average for
------------------ Twelve Months
June December June Ended June
1995 1995 1996 1996
-----------------------------------------------------------------
Federal funds 6.00 5.25 5.00 5.58
3-month LIBOR 6.01 5.35 5.20 5.75
5-year U.S.
Treasury Note 5.93 5.70 5.70 5.98
Spread between Fed
funds and 5-year
Treasury (7)BP 45bp 70bp 40bp
------------------------------------------------------------------
If interest rates increase evenly over the next four quarters by 100 basis
points more than the base case scenario, the simulation model projects net
interest income would decline from the base case scenario by 1.26 percent.
Conversely, if interest rates decline by 100 basis points, net interest would
remain substantially unchanged from the base case scenario.
The simulated results of management's base case scenario for 1995 are
consistent with previously reported expectations. However, the model does not
reflect the impact of pending acquisitions.
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l CORPORATE FINANCIAL REVIEW l
An interest sensitivity (gap) analysis represents a point-in-time net position
of assets, liabilities and off-balance-sheet instruments subject to repricing in
specified time periods. A cumulative liability-sensitive gap position indicates
liabilities are expected to reprice more quickly than assets over a specified
time period. Alternatively, a cumulative asset-sensitive gap position indicates
assets are expected to reprice more quickly than liabilities. The 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.
The cumulative one-year gap position was 2.6 percent asset sensitive at June 30,
1995, compared with a liability sensitive position of 1.5 percent and 18.4
percent at year end 1994 and June 30, 1994, respectively.
FINANCIAL DERIVATIVES
[CAPTION]
Positive Negative Total
Notional Fair Notional Fair Notional
In millions Value Value Value Value Value
-----------------------------------------------------------------------------
June 30, 1995
Interest rate
swaps
Receive-fixed $ 589 $11 $ 9,479 $ (142) $10,068
Pay-fixed 10 5,608 (293) 5,618
Basis swap 465 8 465
-------------------------------------------------
Total swaps 1,064 19 15,087 (435) 16,151
Interest rate
caps 5,500 27 5,500
-------------------------------------------------
Total $6,564 $46 $15,087 $ (435) $21,651
-------------------------------------------------
December 31, 1994
Interest rate
swaps
Receive-fixed $ 119 $ 4 $11,375 $ (772) $11,494
Pay-fixed 5,060 26 658 (19) 5,718
-------------------------------------------------
Total swaps 5,179 30 12,033 (791) 17,212
Interest rate
caps 5,500 132 5,500
-------------------------------------------------
Total $10,679 $162 $12,033 $ (791) $22,712
---------------------------------------------------------------
In the ordinary course of business, the Corporation utilizes off-balance-sheet
financial derivatives as part of its overall interest rate risk management
process. Such instruments primarily consist of interest rate swaps, interest
rate caps, futures, and forward contracts which are used to manage interest
rate risk.
Financial derivatives involve, to varying degrees, interest rate and credit
risk in excess of the amount recognized in the balance sheet. The Corporation
manages overall interest rate risk, including that related to financial
derivatives, as part of its asset/liability management process. Financial
derivative transactions are also subject to the Corporation's credit policies
and procedures.
Interest rate swaps are agreements to exchange fixed and floating interest
rate payments that are calculated on a notional principal amount. The floating
rate is based on a money market index, primarily short-term LIBOR indices. The
Corporation uses interest rate swaps to convert fixed rate assets or liabilities
to floating rate instruments or convert floating rate assets or liabilities to
fixed rate instruments. The Corporation's swaps do not contain leverage or any
similar features.
Substantially all receive-fixed swaps are index amortizing and are primarily
associated with commercial loans and deposits. 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. The notional values of the
receive-fixed swaps amortize on predetermined dates and in predetermined amounts
based on market movements of the designated index, which are primarily 3-year
U.S. Treasury constant maturities and 3-month LIBOR.
Approximately $5.0 billion of the Corporation's pay-fixed interest rate swaps
are associated with collateralized mortgage and U.S. Treasury obligations in the
investment securities portfolio. The Corporation receives payments based on
floating money market indices, primarily 3-month LIBOR, and pays fixed interest
rates. In March 1995, the Corporation entered into forward start, pay-fixed
interest rate swap contracts with a $2.0 billion notional value to alter the
repricing characteristics of overnight borrowings. The Corporation paid 6.20
percent and received the average Federal funds rate over the term of the
contracts. The contracts were effective April 3, 1995 and matured June 30, 1995.
The Corporation's basis swap modifies the interest rate characteristics of
one-year bank notes. The bank notes bear interest based on the 6-month Treasury
bill index. Under this swap the Corporation receives payments based on the
6-month Treasury bill index and makes payments based on 1-month LIBOR.
17
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l CORPORATE FINANCIAL REVIEW l
Interest rate caps 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 a defined cap rate, up to a contractually specified limit, applied
to a notional amount. The Corporation entered into interest rate caps to reduce
exposure to higher interest rates. In November 1994, the Corporation paid a
$129.6 million premium for interest rate caps with a notional value of $5.5
billion. The effect of these caps is to modify the interest rate characteristics
of certain fixed-rate collateralized mortgage obligations to be variable within
certain ranges. The caps require the counterparty to pay the Corporation the
excess of 3-month LIBOR over a specified cap rate, currently 6.00 percent,
computed quarterly based on the notional value of the contracts. At June 30,
1995, 3-month LIBOR was 6.01 percent. The cap rate adjusts to 6.50 percent
during the fourth quarter of 1995 and the contracts expire during the fourth
quarter of 1997. The agreements limit the amount payable to the Corporation to
150 basis points over the cap rate.
Futures contracts are agreements to purchase or sell a financial instrument at
a specified future date, quantity and price or yield. Futures contracts have
standardized contractual terms and are traded on organized exchanges. The
futures contracts hedged interest rate risk associated with the anticipated
reissuance of approximately $2.5 billion of short-term borrowings that matured
in June 1995.
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 interest rate risk associated with its mortgage
banking activities. Commitments to purchase and sell forward contracts totaled
$327 million and $828 million, respectively, at June 30, 1995. Substantially all
contracts mature within 90 days.
During the first six months of 1995, interest rate swaps and caps negatively
affected net interest income by $90.8 million compared with a benefit of $96.1
million in 1994. Based on its base case scenario, and as reflected in the
results of the simulation model, management expects interest rate swaps and caps
will continue to adversely impact net interest income in 1995.
FINANCIAL DERIVATIVES ACTIVITY
Notional value January 1 Maturities/ June 30
In millions 1995 Additions Amortization Terminations 1995
----------------------------------------------------------------------------------------------------------------------------
Interest rate swaps
Receive-fixed $11,494 $ 489 $(1,915) $10,068
Pay-fixed 5,718 2,200 (2,260) $(40) 5,618
Basis swaps 465 465
Interest rate caps 5,500 5,500
Eurodollar futures 2,500 (2,500)
--------------------------------------------------------------------------------
Total $22,712 $5,654 $(6,675) $(40) $21,651
----------------------------------------------------------------------------------------------------------------------------
In connection with the management of its overall asset and liability position,
the Corporation continues to evaluate various alternatives regarding financial
derivatives, including termination of certain contracts. The fair values of
financial derivatives are estimates of amounts that would be received or paid
upon termination of the related contracts. Such fair values are not recorded in
the Corporation's financial statements. If interest rate swaps are terminated,
the net loss would be deferred and amortized over the shorter of the remaining
original life of the agreements or the designated instrument. If the underlying
designated instrument is terminated or matures, the net loss would be recognized
immediately. Subsequent to June 30, 1995, the Corporation terminated $2.0
billion of pay-fixed interest rate swaps. The terminations resulted in a loss of
$99.3 million, which will be deferred and amortized as an adjustment to interest
income or expense of the designated instruments, ratably over 2 years and 9
months.
Based upon a preliminary review of Midlantic's asset and liability management
position, the Corporation anticipates terminating its interest rate cap position
concurrent with, or shortly after, consummation of the merger, which is expected
by year-end 1995. Upon termination, the Corporation expects to record a pretax
loss of approximately $60 million, measured
18
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l CORPORATE FINANCIAL REVIEW l
by the difference between the unamortized premium and the estimated fair value.
The weighted average expected maturity of receive-fixed interest rate swap
contracts shortened to 8 months at June 30, 1995 compared with 2 years and 10
months at year-end 1994, reflecting expected amortization of index-amortizing
swaps as a result of lower interest rates. Should interest rates increase, the
maturity of such swaps would extend. Substantially all index-amortizing swaps
contractually mature by the end of 1998. The following table sets forth the
expected maturity distribution of the notional value of interest rate swaps and
the associated weighted average interest rates on the instruments maturing in
the respective year, assuming management's base case interest rate scenario.
Variable rates paid or received are subject to change as the underlying index
floats with changes in the market. For purposes of the following table, $2.0
billion of pay-fixed interest rate swaps terminated subsequent to June 30, 1995,
are included in the 1995 amount.
EXPECTED MATURITY DISTRIBUTION OF INTEREST RATE SWAPS
1999 and
Dollars in millions 1995 1996 1997 1998 beyond Total
------------------------------------------------------------------------------------------------------------------------------
Receive-fixed
Notional value $3,828 $5,545 $695 $10,068
Weighted average fixed interest rate received 5.71% 5.35% 5.24% 5.48%
Weighted average variable interest rate paid 5.56 5.40 5.38 5.46
Pay-fixed
Notional value $2,060 $365 $1,040 $2,050 $103 $5,618
Weighted average variable interest rate received 5.97% 5.43% 5.55% 5.61% 5.67% 5.72%
Weighted average fixed interest rate paid 7.93 6.86 7.90 7.94 9.37 7.88
------------------------------------------------------------------------------------------------------------------------------
For interest rate swaps and caps, interest payments and with respect to caps,
the premium, respectively, are exchanged; therefore, cash requirements and
exposure to credit risk are significantly less than the notional principal
amount. The Corporation seeks to minimize the credit risk associated with its
interest rate swaps and cap activities primarily by entering into transactions
with only a select number of high-quality institutions, establishing credit
limits with counterparties and, where applicable, requiring segregated
collateral or bilateral-netting agreements.
CREDIT RISK l Credit risk represents the possibility that a customer or
counterparty may not perform in accordance with contractual terms. Credit risk
is inherent in the lending business and results from extending credit to
customers, purchasing securities, and entering into certain off-balance-sheet
financial instruments. 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.
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l CORPORATE FINANCIAL REVIEW l
NONPERFORMING ASSETS
June 30 December 31
Dollars in millions 1995 1994
-------------------------------------------------------------
Nonaccrual loans
Commercial $110 $143
Real estate project 95 70
Real estate mortgage
Commercial 44 44
Residential 52 53
--------------------------
Total nonaccrual loans 301 310
Restructured loans 7 9
--------------------------
Total nonperforming loans 308 319
Foreclosed assets
Real estate project 88 77
Real estate mortgage
Commercial 4 5
Residential 25 21
Other 21 24
--------------------------
Total foreclosed assets 138 127
--------------------------
Total $446 $446
--------------------------
Nonperforming loans to loans .84% .90%
Nonperforming assets to loans
and foreclosed assets 1.21 1.25
Nonperforming assets to assets .71 .69
-------------------------------------------------------------
The following table sets forth changes in nonperforming assets during the
first six months of 1995.
CHANGE IN NONPERFORMING ASSETS
In millions 1995
----------------------------------------------------------
Balance at January 1 $446
Transferred from accrual 153
Acquisitions 1
Returned to performing (15)
Principal reductions (83)
Sales (23)
Charge-offs and valuation adjustments (33)
--------
Balance at June 30 $446
----------------------------------------------------------
Accruing loans contractually past due 90 days or more as to the payment of
principal or interest totaled $151 million at June 30, 1995 compared with $148
million at December 31, 1994. Residential mortgages and student loans totaling
$59 million and $33 million, respectively, were included in the total at June
30, 1995 compared with $50 million and $36 million, respectively, at year-end
1994.
In determining the adequacy of the allowance for credit losses, the
Corporation allocates reserves to specific problem loans based on a
collectibility review and pools of watchlist and non-watchlist loans for various
credit risk factors. Effective January 1, 1995, the Corporation adopted SFAS No.
114, "Accounting by Creditors for Impairment of a Loan," as amended by SFAS No.
118. 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 repayment is expected to come from the sale or
operation of such collateral.
The allowance for credit losses totaled $961 million at June 30, 1995 compared
with $1.0 billion at December 31, 1994. The allowance as a percentage of
period-end loans and nonperforming loans was 2.62 percent and 311.5 percent,
respectively, at June 30, 1995. The comparable year-end 1994 amounts were 2.83
percent and 314.2 percent, respectively.
CHARGE-OFFS AND RECOVERIES
Percent of
Dollars in Net Average
millions Charge-offs Recoveries Charge-offs Loans
------------------------------------------------------------------
Six months ended
June 30, 1995
Commercial $26 $13 $13 .21%
Real estate
project 1 1
Real estate
mortgage
Commercial 2 2 .33
Residential 6 1 5 .10
Consumer 39 17 22 .49
---------------------------------
Total $74 $32 $42 .23%
-------------------------------------------
Six months ended
June 30, 1994
Commercial $28 $12 $16 .28%
Real estate
project 9 1 8 .93
Real estate
mortgage
Commercial 2 1 1 .20
Residential 10 1 9 .23
Consumer 32 15 17 .40
---------------------------------
Total $81 $30 $51 .32%
-------------------------------------------------------------
20
21
l CORPORATE FINANCIAL REVIEW l
LIQUIDITY RISK l 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 other
strategic initiatives. Liquidity risk represents the inability 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.
Liquid assets consist of cash and due from banks, short-term investments,
loans held for sale and securities available for sale. At June 30, 1995, such
assets totaled $6.3 billion. Liquidity is also provided by residential mortgages
which may be used as collateral for funds obtained through the Federal Home Loan
Bank system and by mortgage-related securities available as collateral for
securities sold under agreements to repurchase. At June 30, 1995, approximately
$5.5 billion of residential mortgages were available as collateral for
borrowings from the Federal Home Loan Bank system. Mortgage-related securities
available as collateral for securities sold under agreements to repurchase
totaled $5.3 billion at June 30, 1995. The planned reduction in the securities
portfolio and related wholesale funding sources is not expected to affect
materially 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
June 30, 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. In addition to current parent company
funds, the funding for pending or potential acquisitions may include the
issuance of instruments that qualify as regulatory capital, such as preferred
stock or subordinated debt.
Management believes the Corporation has sufficient liquidity to meet its
current obligations to customers, debtholders and others. The impact of
replacing maturing liabilities is reflected in the income simulation model used
in the Corporation's overall asset/liability management process. At June 30,
1995, the model assumed short term rates and the cost of replacement funding
would decline modestly.
21
22
l CORPORATE FINANCIAL REVIEW l
second quarter 1995 versus
second quarter 1994
---------------------------------------------------------------
Net income for the second quarter of 1995 was $137.0 million, or $.59 per
fully diluted common share, compared with $187.8 million, or $.79 per share, in
the comparable quarter of 1994. Return on average assets and return on average
common shareholders' equity were .89 percent and 12.59 percent, respectively, in
the second quarter of 1995. The corresponding returns in 1994 were 1.26 percent
and 17.70 percent.
On a fully taxable-equivalent basis, net interest income for the second
quarter of 1995 was $370.6 million, a decrease of $130.8 million, or 26.1
percent, from the comparable year-earlier period. The decline in net interest
income reflects the impact of interest rate swaps and caps and actions taken to
reduce investment and wholesale funding activities.
The Corporation did not record a provision for credit losses in the second
quarter of 1995. The provision for credit losses was $25.0 million in the second
quarter of 1994. Continuing improvement in economic conditions combined with
management's ongoing efforts to improve asset quality resulted in lower
nonperforming assets and charge-offs, and a higher reserve coverage of
nonperforming loans.
Excluding the results of securities transactions, noninterest income increased
$29.0 million, or 12.7 percent, to $257.3 million during the second quarter of
1995. Investment management and trust increased $24.0 million to $97.5 million.
The BlackRock acquisition contributed approximately $18 million to the increase.
Service charges, fees and commissions decreased $3.2 million to $89.0 million
reflecting the impact of the Corporation's credit card alliance, which was
effective May 1, 1995. Mortgage banking income increased to $50.7 million, or
18.8 percent, compared with $42.7 million in 1994. Gains from originated
mortgage servicing rights totaling $12.1 million in the second quarter of 1995
more than offset a modest decline in servicing revenue and lower gains on sales
of servicing. Net securities gains totaled $7.8 million in the second quarter of
1995 compared with net losses of $85 thousand a year ago.
Noninterest expense increased to $426.4 million, compared with $418.3 million
a year ago, primarily due to acquisitions. Excluding acquisitions, noninterest
expense decreased 5.5 percent when compared with the second quarter of 1994.
22
23
l CONSOLIDATED BALANCE SHEET l
December
JUNE 30 31
Dollars in millions, except par values 1995 1994
---------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 2,612 $ 2,592
Short-term investments 502 809
Loans held for sale 773 487
Securities available for sale 2,447 3,457
Investment securities, fair value of $16,434 and $16,233 16,658 17,464
Loans, net of unearned income of $226 and $240 36,690 35,407
Allowance for credit losses (961) (1,002)
----------------------------
Net loans 35,729 34,405
Other 4,042 4,931
----------------------------
Total assets $62,763 $64,145
----------------------------
LIABILITIES
Deposits
Noninterest-bearing $ 6,660 $ 6,992
Interest-bearing 28,630 28,019
----------------------------
Total deposits 35,290 35,011
Borrowed funds
Federal funds purchased 2,154 2,181
Repurchase agreements 5,793 3,785
Commercial paper 576 1,226
Other 3,863 4,416
----------------------------
Total borrowed funds 12,386 11,608
Notes and debentures 8,995 11,754
Other 1,656 1,378
----------------------------
Total liabilities 58,327 59,751
----------------------------
SHAREHOLDERS' EQUITY
Preferred stock - $1 par value
Authorized: 17,562,360 and 17,601,524 shares
Issued and outstanding: 881,802 and 920,966 shares
Aggregate liquidation value: $18 and $19 1 1
Common stock - $5 par value
Authorized: 450,000,000 shares
Issued: 236,486,596 and 236,063,418 shares 1,182 1,180
Capital surplus 461 462
Retained earnings 3,119 3,018
Deferred ESOP benefit expense (83) (83)
Net unrealized securities losses (41) (119)
Common stock held in treasury at cost: 8,425,134 and 2,814,910 shares (203) (65)
----------------------------
Total shareholders' equity 4,436 4,394
----------------------------
Total liabilities and shareholders' equity $62,763 $64,145
---------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
23
24
l CONSOLIDATED STATEMENT OF INCOME l
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------------------------------------------------
In thousands, except per share data 1995 1994 1995 1994
----------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Loans and fees on loans $ 737,967 $594,011 $1,445,006 $1,166,847
Securities 283,364 316,647 578,787 612,455
Other 21,308 24,336 42,929 50,796
------------------------------------------------------------
Total interest income 1,042,639 934,994 2,066,722 1,830,098
INTEREST EXPENSE
Deposits 320,284 217,512 612,618 417,516
Borrowed funds 214,908 110,574 418,867 207,311
Notes and debentures 145,119 113,949 288,935 214,971
------------------------------------------------------------
Total interest expense 680,311 442,035 1,320,420 839,798
------------------------------------------------------------
Net interest income 362,328 492,959 746,302 990,300
Provision for credit losses 25,030 50,045
------------------------------------------------------------
Net interest income less provision for credit losses 362,328 467,929 746,302 940,255
NONINTEREST INCOME
Investment management and trust 97,509 73,494 176,649 146,461
Service charges, fees and commissions 88,984 92,205 180,408 180,041
Mortgage banking 50,670 42,658 95,320 80,363
Net securities gains (losses) 7,782 (85) 9,036 30,307
Other 20,089 19,968 40,734 49,619
------------------------------------------------------------
Total noninterest income 265,034 228,240 502,147 486,791
NONINTEREST EXPENSE
Staff expense 204,590 203,972 406,448 410,871
Net occupancy and equipment 67,909 66,860 136,759 132,142
Other 153,904 147,463 320,575 302,128
------------------------------------------------------------
Total noninterest expense 426,403 418,295 863,782 845,141
------------------------------------------------------------
Income before income taxes 200,959 277,874 384,667 581,905
Applicable income taxes 63,971 90,029 122,028 188,371
------------------------------------------------------------
Net income $ 136,988 $187,845 $ 262,639 $ 393,534
------------------------------------------------------------
EARNINGS PER COMMON SHARE
Primary $.59 $.79 $1.13 $1.66
Fully diluted .59 .79 1.13 1.65
CASH DIVIDENDS DECLARED PER COMMON SHARE .35 .32 .70 .64
AVERAGE COMMON SHARES OUTSTANDING
Primary 230,178 237,241 231,388 236,974
Fully diluted 231,960 239,086 233,412 238,887
----------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
24
25
l CONSOLIDATED STATEMENT OF CASH FLOWS l
Six months ended June 30 In millions 1995 1994
---------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 263 $ 394
Adjustments to reconcile net income to net cash provided by operating activities
Provision for credit losses 50
Depreciation, amortization and accretion 112 126
Deferred income taxes 41 (3)
Net securities gains (9) (30)
Net gain on sales of assets (26) (54)
Valuation adjustments on assets, net of gains on sales (1) (11)
Changes in
Loans held for sale (286) 642
Other 14 (311)
------------------------------
Net cash provided by operating activities 108 803
INVESTING ACTIVITIES
Net change in loans (1,143) (600)
Repayment
Securities available for sale 199 1,630
Investment securities 831 1,901
Sales
Securities available for sale 960 7,325
Loans 153 561
Foreclosed assets 25 54
Purchases
Securities available for sale (398) (7,329)
Investment securities (19) (4,922)
Loans (247) (17)
Net cash paid for acquisitions (68) (462)
Other 1,977 392
------------------------------
Net cash provided (used) by investing activities 2,270 (1,467)
FINANCING ACTIVITIES
Net change in
Noninterest-bearing deposits (364) (1,128)
Interest-bearing deposits 460 (1,396)
Federal funds purchased (31) 53
Sale/issuance
Repurchase agreements 42,773 72,192
Commercial paper 2,683 2,152
Other borrowed funds 54,876 50,964
Notes and debentures 4,833 3,948
Common stock 23 20
Redemption/maturity
Repurchase agreements (40,765) (72,640)
Commercial paper (3,333) (1,504)
Other borrowed funds (55,435) (49,477)
Notes and debentures (7,761) (2,190)
Net acquisition of treasury stock (154) (6)
Cash dividends paid to shareholders (163) (152)
------------------------------
Net cash provided (used) by financing activities (2,358) 836
------------------------------
INCREASE IN CASH AND DUE FROM BANKS 20 172
Cash and due from banks at beginning of year 2,592 1,817
------------------------------
Cash and due from banks at end of period $ 2,612 $ 1,989
---------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
25
26
l NOTES TO CONSOLIDATED FINANCIAL STATEMENTS l
accounting policies
---------------------------------------------------------------
BUSINESS l 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 such regulatory authorities.
BASIS OF FINANCIAL STATEMENT PRESENTATION l The unaudited consolidated interim
financial statements have been prepared in accordance with generally accepted
accounting principles and include the accounts of PNC Bank Corp. and its
subsidiaries ("Corporation"), substantially all of which are wholly owned. In
the opinion of management, the financial statements reflect all adjustments,
which are of a normal recurring nature, necessary for a fair statement of the
results for the interim periods presented.
In preparing the unaudited consolidated interim financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the balance sheet
and revenues and expenses for the period. Actual results could differ from such
estimates.
The notes included herein should be read in conjunction with the audited
consolidated financial statements included in the Corporation's 1994 Annual
Report.
ALLOWANCE FOR CREDIT LOSSES l 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 by SFAS No. 118. 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 repayment is expected to come from the sale or operation
of such collateral. For purposes of this Standard, nonaccrual and restructured
commercial, real estate project and commercial real estate loans are considered
to be impaired. Prior to 1995, the credit losses related to these loans were
estimated based on undiscounted cash flows or the fair value of the underlying
collateral.
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 real estate mortgages, and
general amounts for historical loss experience, uncertainties in estimating
losses and inherent risks in the various credit portfolios.
NONPERFORMING ASSETS l Foreclosed assets are comprised of property acquired
through a foreclosure proceeding or acceptance of a deed-in-lieu of foreclosure
and loans where the Corporation has possession of the underlying collateral.
Foreclosed assets are recorded as other assets in the consolidated balance
sheet.
The interest collected on impaired loans is recognized on the cash basis or
cost recovery method depending on the collectibility of the loans.
EARNINGS PER COMMON SHARE l 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
26
27
l NOTES TO CONSOLIDATED FINANCIAL STATEMENTS l
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.
FINANCIAL DERIVATIVES l The Corporation uses off-balance-sheet financial
derivatives as part of its overall asset/liability management process.
Substantially all such instruments are used to manage interest rate risk and
consist of interest rate swaps, interest rate caps, and futures and forward
contracts.
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 exposing 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.
change in accounting principle
---------------------------------------------------------------
In the second quarter, the Corporation adopted SFAS No. 122, "Accounting for
Mortgage Servicing Rights" which amended SFAS No. 65, "Accounting for Certain
Mortgage Banking Activities". This Standard 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. Under SFAS No. 65, the costs of OMSR were not
recognized as assets when the related loan was sold. Mortgage servicing rights
are amortized in proportion to, and over the period of, estimated net servicing
income.
SFAS No. 122 also requires that all capitalized mortgage servicing rights be
evaluated for impairment based on the excess of the carrying amount of the
mortgage servicing rights over their estimated fair value. The fair value of
mortgage servicing rights is evaluated on a disaggregated method based on
predominant risk characteristics of the portfolio. At June 30, 1995 no reserve
for impairment was required.
SFAS No. 122 requires prospective adoption with respect to OMSR recognition.
The adoption of SFAS No. 122 increased net income and fully diluted earnings per
share by $7.9 million and $.03, respectively, for the three months and six
months ended June 30, 1995.
mergers and acquisitions
---------------------------------------------------------------
In July 1995, the Corporation entered into a definitive merger agreement with
Midlantic Corporation ("Midlantic"), a regional bank holding company
headquartered in Edison, New Jersey. At June 30, 1995, Midlantic had assets and
deposits of $13.7 billion and $10.9 billion, respectively. Under terms of the
agreement, the Corporation will exchange 2.05 shares of its common stock for
each share of Midlantic common stock. Based on share data as of June 30, 1995
the Corporation expects to issue 110.8 million shares of its common stock to
consummate the merger. In addition, the Corporation and Midlantic have granted
each other options to purchase up to 19.9 percent of each other's outstanding
common stock, under certain circumstances. The transaction is valued at
approximately $3 billion and will be accounted for as a pooling of interests.
The merger is targeted to be completed by year-end 1995, pending approval by
shareholders of both companies and various regulatory agencies.
In March 1995, the Corporation announced a definitive agreement to acquire
Chemical Holdings, Inc., and its wholly-owned subsidiary Chemical Bank New
Jersey ("Chemical"). The transaction includes approximately $3.2 billion of
assets and $2.7 billion of retail deposits and 82 branches in southern and
central New Jersey. The total purchase price will approximate $490 million and
the transaction will be accounted for under the purchase method. The Corporation
expects to complete this transaction in the fourth quarter of 1995.
In February 1995, the Corporation completed the acquisition of 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
transaction was accounted for under the purchase method and the Corporation paid
$71 million in cash and issued $169 million of unsecured notes. In connection
with this acquisition, the Corporation recorded $239 million of intangible
assets.
27
28
l NOTES TO CONSOLIDATED FINANCIAL STATEMENTS l
In the first quarter of 1995, the Corporation acquired Indian River Federal
Savings Bank, Vero Beach, Florida, and Brentwood Financial Corporation,
Cincinnati, Ohio, for $33 million in cash. The acquisitions added assets and
deposits of approximately $175 million and $140 million, respectively.
During 1994, the Corporation completed the acquisitions of 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. In addition, in June 1994, the
Corporation purchased a $10 billion residential mortgage servicing portfolio
from the Associates Corporation of North America.
cash flows
---------------------------------------------------------------
For purposes of the statement of cash flows, the Corporation defines cash and
due from banks as cash and cash equivalents. During the first six months of 1995
and 1994, interest paid on deposits and other contractual debt obligations was
$1.3 billion and $816.5 million, respectively. Income taxes paid were $5.0 and
$258.8 million, respectively. Loans transferred to foreclosed assets aggregated
$34.3 million in 1995 and $18.2 million in the first six months of 1994.
The table below sets forth information pertaining to acquisitions which affect
the statement of cash flows for the six months ended June 30, 1995 and 1994.
Six months ended June 30
In millions 1995 1994
----------------------------------------------------------
Assets acquired $517 $3,197
Liabilities assumed 410 2,619
Cash paid 107 578
Cash and due from banks received 39 116
----------------------------------------------------------
In addition, the Corporation issued $169 million of unsecured notes in
connection with the BlackRock acquisition.
28
29
l NOTES TO CONSOLIDATED FINANCIAL STATEMENTS l
securities
----------------------------------------
The following table sets forth the
amortized cost, unrealized gains and
losses, and the estimated fair value of
the securities portfolio.
SECURITIES
JUNE 30, 1995 December 31, 1994
------------------------------------------ -------------------------------------------
Unrealized Unrealized
Amortized ------------------ Amortized ------------------
In millions COST GAINS LOSSES FAIR VALUE Cost Gains Losses Fair Value
------------------------------------------------------------------------------------------------------------------------------
Investment securities
Debt securities
U.S. Treasury $ 1,796 $29 $ 1,825 $ 1,794 $ 93 $ 1,701
U.S. Government agencies and
corporations
Mortgage-related 10,354 13 $286 10,081 10,920 1,025 9,895
Other 1,000 1 1,001 1,000 28 972
State and municipal 337 21 1 357 348 $12 2 358
Asset-backed private placements 1,597 12 1,609 1,597 33 1,564
Other debt
Mortgage-related 677 1 13 665 726 43 683
Other 591 2 589 769 20 749
Other 306 1 307 310 1 311
------------------------------------------------------------------------------------------
Total $16,658 $78 $302 $16,434 $17,464 $13 $1,244 $16,233
------------------------------------------------------------------------------------------
Securities available for sale
Debt securities
U.S. Treasury $ 94 $1 $ 95 $ 401 $ 8 $ 393
U.S. Government agencies and
corporations
Mortgage-related 1,437 20 $10 1,447 2,161 69 2,092
Other 25 2 23 25 4 21
Other debt
Mortgage-related 670 1 2 669 749 17 732
Other 108 1 109 117 $2 119
Corporate stocks and other 104 2 2 104 105 1 6 100
------------------------------------------------------------------------------------------
Total $2,438 $25 $16 $2,447 $3,558 $3 $104 $3,457
------------------------------------------------------------------------------------------------------------------------------
29
30
l NOTES TO CONSOLIDATED FINANCIAL STATEMENTS l
nonperforming assets
---------------------------------------------------------------
Nonperforming assets are comprised of nonaccrual and restructured loans, and
foreclosed assets. These assets were as follows:
JUNE 30 December 31
In millions 1995 1994
-----------------------------------------------------------
Nonaccrual loans $301 $310
Restructured loans 7 9
------------------------
Total nonperforming loans 308 319
Foreclosed assets 138 127
------------------------
Total nonperforming assets $446 $446
--------------------------------------------------------
Information with respect to impaired loans and the related allowance
determined in accordance with SFAS No. 114 is set forth below.
JUNE 30
In thousands 1995
------------------------------------------------------
Impaired loans
With a related allowance for credit
losses $140,680
Without a related allowance for credit
losses 110,447
-------
Total impaired loans $251,127
-------
Allowance for credit losses $ 22,318
Average impaired loans 244,221
------------------------------------------------------
During the first six months of 1995, interest income recognized on impaired
loans was $933 thousand.
allowance for credit losses
---------------------------------------------------------------
The following table presents changes in the allowance for credit losses:
In millions 1995 1994
------------------------------------------------------------
Balance at January 1 $1,002 $ 972
Charge-offs (74) (81)
Recoveries 32 30
----------------------
Net charge-offs (42) (51)
Provision for credit losses 50
Acquisitions 1 65
----------------------
Balance at June 30 $ 961 $1,036
------------------------------------------------------------
30
31
l NOTES TO CONSOLIDATED FINANCIAL STATEMENTS l
notes and debentures
---------------------------------------------------------------
Notes and debentures consisted of the following:
JUNE 30 DECEMBER 31
In millions 1995 1994
-------------------------------------------------------------
BANKING SUBSIDIARIES
Bank notes $5,132 $ 8,825
Federal Home Loan Bank 1,826 1,384
Subordinated notes 345
Student Loan Marketing
Association 300 500
Other 527
------------------------------
Total banking subsidiaries 8,130 10,709
OTHER SUBSIDIARIES
Senior notes 13 164
Subordinated notes 747 746
ESOP borrowing 101 110
Other 4 25
------------------------------
Total other subsidiaries 865 1,045
------------------------------
Total $8,995 $11,754
-------------------------------------------------------------
Notes and debentures have scheduled repayments for the years 1995 through 1999
and thereafter of $4.9 billion, $2.3 billion, $68 million, $153 million, and
$1.6 billion, respectively. In April 1995, the Corporation issued $350 million
of 7.875 percent unsecured subordinated notes due in 2005.
financial derivatives
---------------------------------------------------------------
The notional value of financial derivatives and the related fair values were
comprised of the following:
[CAPTION]
Positive Negative Total
In millions Notional Fair Notional Fair Notional
Value Value Value Value Value
-------------------------------------------------------------------------
June 30, 1995
Interest rate
swaps
Receive-fixed $ 589 $11 $ 9,479 $ (142) $10,068
Pay-fixed 10 5,608 (293) 5,618
Basis swap 465 8 465
-------------------------------------------------------
Total swaps 1,064 19 15,087 (435) 16,151
Interest rate
caps 5,500 27 5,500
-------------------------------------------------------
Total $6,564 $46 $15,087 $ (435) $21,651
-------------------------------------------------------
December 31,
1994
Interest rate
swaps
Receive-fixed $ 119 $ 4 $11,375 $ (772) $11,494
Pay-fixed 5,060 26 658 (19) 5,718
------------------------------------------------------
Total swaps 5,179 30 12,033 (791) 17,212
Interest rate
caps 5,500 132 5,500
------------------------------------------------------
Total $10,679 $162 $12,033 $ (791) $22,712
------------------------------------------------------------------------
Subsequent to June 30, 1995 the Corporation terminated $2.0 billion of
pay-fixed interest rate swaps. The terminations resulted in a loss of $99.3
million, which will be deferred and amortized as an adjustment to interest
income or expense of the designated instrument ratably over 2 years and 9
months.
31
32
l STATISTICAL INFORMATION l
average consolidated balance sheet and net interest analysis
Six months ended June 30
-------------------------------------------------------------------------------------
1995 1994
Taxable-equivalent basis ----------------------------------------------------------------------------------
Average balances in millions, interest in AVERAGE AVERAGE Average Average
thousands BALANCES INTEREST YIELDS/RATES Balances Interest Yields/Rates
----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Interest-earning assets
Short-term investments $ 695 $ 23,188 6.73% $ 860 $ 19,886 4.66%
Mortgages held for sale 456 18,225 7.99 824 28,922 7.02
Securities
U.S. Treasury 2,120 40,839 3.88 3,844 91,511 4.80
U.S. Government agencies and
corporations 13,721 386,160 5.63 15,363 454,198 5.91
State and municipal 344 17,680 10.27 374 19,349 10.34
Other debt 3,881 130,189 6.69 1,685 46,070 5.47
Corporate stocks and others 312 9,784 6.32 284 8,180 5.76
--------------------- ---------------------
Total securities 20,378 584,652 5.74 21,550 619,308 5.75
Loans, net of unearned income
Commercial 12,305 492,263 7.96 11,714 417,899 7.19
Real estate project 1,642 78,689 9.53 1,729 65,594 7.65
Real estate mortgage 11,134 417,777 7.50 9,018 308,794 6.85
Consumer 9,014 411,218 9.20 8,534 345,726 8.17
Other 1,660 55,565 6.72 1,283 38,785 6.07
--------------------- ---------------------
Total loans, net of unearned income 35,755 1,455,512 8.14 32,278 1,176,798 7.34
Other interest-earning assets 49 1,582 6.53 113 2,051 3.68
--------------------- ---------------------
Total interest-earning assets/interest
income 57,333 2,083,159 7.27 55,625 1,846,965 6.67
Noninterest-earning assets
Allowance for credit losses (988) (992)
Cash and due from banks 2,281 2,128
Other assets 3,180 2,536
------- -------
Total assets $61,806 $59,297
---------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities
Interest-bearing deposits
Demand and money market $ 9,065 141,136 3.14 $ 9,872 84,335 1.72
Savings 2,219 28,892 2.63 2,386 10,721 .91
Other time 13,896 381,190 5.52 13,110 311,456 4.79
Deposits in foreign offices 2,003 61,400 6.10 555 11,004 4.00
--------------------- ---------------------
Total interest-bearing deposits 27,183 612,618 4.53 25,923 417,516 3.25
Borrowed funds
Federal funds purchased 2,381 72,184 6.11 2,539 46,760 3.71
Repurchase agreements 6,778 208,048 6.11 5,468 100,069 3.69
Commercial paper 848 25,063 5.96 714 13,776 3.89
Other 3,295 113,572 6.90 2,532 46,706 3.72
--------------------- ---------------------
Total borrowed funds 13,302 418,867 6.29 11,253 207,311 3.72
Notes and debentures 9,475 288,935 6.11 10,589 214,971 4.07
--------------------- ---------------------
Total interest-bearing liabilities/interest
expense 49,960 1,320,420 5.30 47,765 839,798 3.54
Noninterest-bearing liabilities and
shareholders' equity
Demand and other noninterest-bearing
deposits 6,239 6,073
Accrued expenses and other liabilities 1,244 1,160
Shareholders' equity 4,363 4,299
------- -------
Total liabilities and shareholders'
equity $61,806 $59,297
-----------------------------------------------------------------------------------
Interest rate spread including interest
rate swaps and caps 1.97 3.13
Impact of noninterest-bearing
liabilities .68 .50
------------------------------------------------------------------------------------
Net interest income/margin on earning
assets $ 762,739 2.65% $1,007,167 3.63%
----------------------------------------------------------------------------------------------------------------------------------
Nonaccrual loans are included in loans, net of unearned income. The impact of
interest rate swaps and caps is included in the interest income/expense and
average yields/rates for commercial loans, U.S. Government agencies and
corporations securities, all interest-bearing deposits, other borrowed funds and
notes and debentures.
32
33
l STATISTICAL INFORMATION l
1995
------------------------------------------------------------------------- 1994
Second Quarter First Quarter Second Quarter
-------------------------------------------------------------------------------------------------------------------------
Average Average Average Average Average Average
Balances Interest Yields/Rates Balances Interest Yields/Rates Balances Interest Yields/Rates
-------------------------------------------------------------------------------------------------------------------------
$ 620 $ 10,777 6.97% $ 771 $ 12,411 6.53% $ 855 $ 10,666 5.00%
500 9,756 7.80 412 8,469 8.23 724 12,681 7.01
2,065 20,029 3.89 2,176 20,810 3.88 4,244 51,997 4.91
13,335 187,538 5.63 14,110 198,622 5.63 15,206 229,640 6.04
342 8,816 10.31 347 8,864 10.23 369 9,566 10.36
3,806 64,993 6.80 3,955 65,196 6.59 1,746 24,823 5.69
310 4,928 6.38 315 4,856 6.25 294 3,996 5.44
---------------------- -------------------- --------------------
19,858 286,304 5.76 20,903 298,348 5.72 21,859 320,022 5.86
12,479 250,410 7.94 12,129 241,853 7.98 12,075 213,853 7.10
1,665 39,799 9.46 1,619 38,305 9.46 1,736 33,767 7.80
11,383 214,293 7.53 10,882 204,069 7.50 8,981 156,806 6.98
9,005 210,863 9.39 9,023 200,355 9.01 8,617 175,131 8.15
1,659 27,839 6.72 1,662 27,726 6.72 1,122 19,448 6.94
---------------------- -------------------- --------------------
36,191 743,204 8.19 35,315 712,308 8.10 32,531 599,005 7.38
51 841 6.66 47 741 6.38 93 1,024 4.39
---------------------- -------------------- --------------------
57,220 1,050,882 7.33 57,448 1,032,277 7.21 56,062 943,398 6.74
(977) (1,000) (997)
2,413 2,147 2,029
3,262 3,098 2,531
------- ------- -------
$61,918 $61,693 $59,625
-----------------------------------------------------------------------------------------------------------------------
$ 8,799 70,241 3.20 $ 9,335 70,895 3.08 $ 9,875 45,765 1.86
2,154 14,352 2.67 2,284 14,540 2.58 2,381 6,851 1.15
14,171 199,782 5.65 13,616 181,407 5.39 12,988 155,764 4.76
2,301 35,909 6.17 1,702 25,492 5.99 884 9,132 4.14
---------------------- -------------------- --------------------
27,425 320,284 4.68 26,937 292,334 4.39 26,128 217,512 3.34
2,628 40,802 6.23 2,132 31,382 5.97 2,821 28,434 4.04
6,698 105,010 6.20 6,859 103,037 6.01 4,879 48,241 3.97
621 9,423 6.08 1,078 15,639 5.88 925 9,681 4.20
3,334 59,673 7.12 3,259 54,063 6.68 2,342 24,218 4.15
---------------------- -------------------- --------------------
13,281 214,908 6.43 13,328 204,121 6.16 10,967 110,574 4.04
9,213 145,119 6.28 9,736 143,654 5.94 11,030 113,949 4.14
---------------------- -------------------- --------------------
49,919 680,311 5.44 50,001 640,109 5.16 48,125 442,035 3.68
6,362 6,115 6,124
1,268 1,220 1,108
4,369 4,357 4,268
------- ------- -------
$61,918 $61,693 $59,625
-----------------------------------------------------------------------------------------------------------------------
1.89 2.05 3.06
.69 .67 .52
-----------------------------------------------------------------------------------------------------------------------
$ 370,571 2.58% $392,168 2.72% $501,363 3.58%
-----------------------------------------------------------------------------------------------------------------------
33
34
l CORPORATE INFORMATION l
CORPORATE HEADQUARTERS l
PNC Bank Corp.
One PNC Plaza
Fifth Avenue and Wood Street
Pittsburgh, Pennsylvania 15265
STOCK LISTING l
PNC Bank Corp. common stock is traded on the New York
Stock Exchange (NYSE) under the symbol PNC.
REGISTRAR AND TRANSFER AGENT l
Chemical Bank
J.A.F. Building
P. O. Box 3068
New York, New York 10116-3068
800-982-7652
INQUIRIES l
Individual shareholders should contact:
Shareholder Relations at 800-843-2206 or
the PNC Bank Hotline at 800-982-7652
Analysts and institutional investors should contact:
William H. Callihan, Vice President,
Investor Relations, at 412-762-8257
News media representatives and others seeking general
information should contact:
Jonathan Williams, Vice President,
Media Relations, at 412-762-4550
FORM 10-Q l
The Quarterly Report on Form 10-Q is filed with the Securities and Exchange
Commission. This report, excluding certain exhibits, may be obtained without
charge upon written or oral request to Glenn Davies, Vice President, Financial
Reporting, at corporate headquarters. Telephone requests may be directed to
(412) 762-1553.
COMMON STOCK PRICES/DIVIDENDS DECLARED l
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
-----------------------------------
Total $ .70
---------------------------------------------------------------
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
---------------------------------------------------------------
DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN l
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.
34