<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT 0F 1934
For the quarterly period ended September 30, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________ to _______________________
COMMISSION FILE NUMBER 1-9718
PNC BANK CORP.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
PENNSYLVANIA 25-1435979
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
ONE PNC PLAZA
FIFTH AVENUE AND WOOD STREET
PITTSBURGH, PENNSYLVANIA 15265
(Address of principal executive offices)
(Zip Code)
(412) 762-1553
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practical date.
Common Stock ($5 par value): 229,224,530 shares outstanding at October 31, 1995.
<PAGE> 2
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The following consolidated financial information of PNC Bank Corp.
and subsidiaries ("Corporation") is incorporated herein by reference
to the 1995 Third Quarter Corporate Financial Review ("Financial
Review") which is filed herewith as Exhibit 99.1. Page references
are to such Financial Review.
<TABLE>
<CAPTION>
FINANCIAL INFORMATION PAGE REFERENCE
--------------------- --------------
<S> <C>
Consolidated Balance Sheet as of September 30, 1995
and December 31, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Consolidated Statement of Income for the three months
and nine months ended September 30, 1995 and 1994 . . . . . . . . . . . . . . . 25
Consolidated Statement of Cash Flows for the
nine months ended September 30, 1995 and 1994 . . . . . . . . . . . . . . . . . 26
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . 27-33
</TABLE>
The statistical disclosure under the caption "Average Consolidated
Balance Sheet and Net Interest Analysis" in the Financial Review
at pages 34 and 35 is incorporated herein by reference. Certain
other statistical disclosure is included below in Part I, Item 2,
Management's Discussion and Analysis of Financial Condition and
Results of Operations, as permitted by Guide 3, Statistical
Disclosures by Bank Holding Companies.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The information contained under the caption "Corporate Financial
Review" in the Financial Review at pages 2 through 23 is
incorporated herein by reference.
2
<PAGE> 3
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Corporation's Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1995, included a description of a
purported class action lawsuit filed against Midlantic Corporation
("Midlantic"), Midlantic's chief executive officer and its directors
and the Corporation, relating to the proposed merger with Midlantic.
On October 5, 1995, the Corporation filed a motion to dismiss the
amended complaint.
ITEM 5. OTHER INFORMATION
As previously reported, on July 10, 1995, the Corporation
entered into a definitive merger agreement with Midlantic, a
regional bank holding company headquartered in Edison, New Jersey.
The agreement, provides, among other things, for (i) the merger (the
"Merger") of Midlantic with and into a wholly-owned subsidiary of
the Corporation and (ii) the exchange of each outstanding share of
Midlantic common stock for 2.05 shares of the Corporation's common
stock. The Corporation has received all required regulatory approvals
for the Merger, which is targeted to be completed by year-end 1995,
pending approval by shareholders of both companies.
Pro forma consolidated financial information, which gives effect
to the proposed Merger of Midlantic with and into a wholly-owned
subsidiary of the Corporation, is attached hereto as Exhibit 99.2 and
incorporated herein by reference.
3
<PAGE> 4
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibits listed below are filed herewith or incorporated
herein by reference:
2 Amendment Agreement dated as of August 16, 1995, by and
among Midlantic Corporation, PNC Bank Corp. and PNC
Bancorp, Inc.
3 By-laws of the Corporation, as amended, incorporated
herein by reference to Exhibit 4.2 to the Corporation's
Registration Statement on Form S-8 (Commission File
No. 33-62311).
11 Calculation of primary and fully diluted earnings per
common share for the three months and nine months ended
September 30, 1995 and 1994, filed herewith.
12.1 Computation of Earnings to Fixed Charges for the nine
months ended September 30, 1995 and for each of the five
years in the period ended December 31, 1994, for PNC
Bank Corp., Midlantic Corporation, and PNC Bank Corp.
Pro Forma Giving Effect to the Midlantic Merger,
filed herewith.
12.2 Computation of Earnings to Combined Fixed Charges and
Preferred Stock Dividends for the nine months ended
September 30, 1995 and for each of the five years in the
period ended December 31, 1994, for PNC Bank Corp.,
Midlantic Corporation, and PNC Bank Corp. Pro Forma
Giving Effect to the Midlantic Merger, filed herewith.
27 Financial Data Schedule, filed herewith.
99.1 1995 Third Quarter Corporate Financial Review as of and
for the three months and nine months ended September 30,
1995 and 1994, filed herewith.
99.2 Pro forma consolidated financial information (unaudited)
giving effect to the proposed merger of Midlantic with
and into a wholly-owned subsidiary of the Corporation,
filed herewith.
(b) The following Current Reports on Form 8-K were filed by the
Corporation:
A Current Report on Form 8-K dated as of July 10, 1995,
was filed pursuant to Item 5 to report the execution of an
Agreement and Plan of Reorganization dated as of July 10, 1995,
by and among Midlantic, the Corporation and PNC Bancorp, Inc.,
a wholly-owned subsidiary of the Corporation, and related
matters.
A Current Report on Form 8-K/A, Amendment No. 1 to the
Form 8-K dated as of July 10, 1995, was filed pursuant to Item
5 to report unaudited pro forma consolidated financial
information giving effect to the proposed Merger. Such report
also included audited consolidated financial statements of
Midlantic as of December 31, 1994 and 1993, and for each of
the three years in the period ended December 31, 1994, and the
unaudited consolidated financial statements of Midlantic as of
March 31, 1995 and 1994.
A Current Report on Form 8-K dated as of July 20, 1995,
was filed pursuant to Item 5 to report the Corporation's
consolidated financial results for the three months and six
months ended June 30, 1995.
A Current Report on Form 8-K dated as of September 26,
1995, was filed pursuant to Item 5 to report the Corporation's
consolidated financial results for the three months and nine
months ended September 30, 1995, the receipt of regulatory
approvals in connection with the Merger and other
Merger-related matters, and the appointment of an additional
director to the Corporation's Board of Directors.
4
<PAGE> 5
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PNC BANK CORP.
(Registrant)
Date: November 8, 1995 By /s/ Robert L. Haunschild
----------------------
Robert L. Haunschild
Senior Vice President and
Chief Financial Officer
5
<PAGE> 6
EXHIBIT INDEX
The following exhibits are filed herewith:
2 Amendment Agreement dated as of August 16, 1995 by and among Midlantic
Corporation, PNC Bank Corp. and PNC Bancorp, Inc.
11 Calculation of Primary and Fully Diluted Earnings per Common Share.
12.1 Computation of Ratio of Earnings to Fixed Charges.
12.2 Computation of Ratio of Earnings to Combined Fixed Charges and
Preferred Stock Dividends.
27 Financial Data Schedule.
99.1 1995 Third Quarter Corporate Financial Review.
99.2 Pro forma consolidated financial information (unaudited).
6
<PAGE> 1
EXHIBIT 2
AMENDMENT AGREEMENT
THIS AMENDMENT AGREEMENT ("Amendment") is entered into as of August 16,
1995, by and among MIDLANTIC CORPORATION ("MC"), a New Jersey corporation
having its principal executive office at Metro Park Plaza, P.O. Box 600,
Edison, New Jersey 08818, PNC BANK CORP. ("PNC"), a Pennsylvania corporation
having its principal executive office at One PNC Plaza, Pittsburgh,
Pennsylvania 15265, and PNC BANCORP, INC. ("Bancorp"), a Delaware corporation
and a wholly owned subsidiary of PNC, having its registered office at 222
Delaware Avenue, Wilmington, Delaware 19899.
WITNESSETH
WHEREAS, MC, PNC and Bancorp previously have entered into an Agreement
and Plan of Reorganization ("Reorganization Agreement") and an Agreement and
Plan of Merger ("Merger Agreement"), each dated as of July 10, 1995; and
WHEREAS, MC, PNC and Bancorp wish to amend the Reorganization Agreement
and the Merger Agreement in certain respects;
NOW, THEREFORE, MC, PNC and Bancorp agree as follows:
1. Section 3.1 of the Reorganization Agreement is amended by
substituting "2,178,965" for "178,965" and "22,752,023" for "21,602,949" in
clauses (i) and (ii) of the last sentence thereof, respectively.
2. Paragraph 6 of Article V of the Merger Agreement is hereby amended
to read in its entirety as follows:
6. On the Effective Date, MC's obligations under its Incentive
Stock and Stock Option Plan (1986) (the "1986 Plan"), the Midlantic
Banks, Inc. Incentive Plan and the Continental Bancorp, Inc. 1982 Stock
Option Plan (the "Option Plans") and each stock option granted under
the Option Plans and outstanding on the Effective Date (an "MC Option")
shall be treated as follows:
(i) Each MC Option granted to any person who is, on the
date MC's shareholders approve the Merger, subject to the
reporting
<PAGE> 2
- 2 -
requirements of Section 16(a) of the Securities
Exchange Act of 1934, as amended, with respect to equity
securities of MC (an "Insider") shall, as to the portion of
the MC option that is then exercisable under the Option Plans
(in the case of MC Options granted under the 1986 Plan,
determined by giving effect to the acceleration provisions of
Section 4(d)(ii) of the 1986 Plan but without regard to the
acceleration provisions of Section 4(d)(i) of the 1986 Plan)
(a "Vested MC Option") be assumed by PNC and each such option
shall become an option (a "PNC Option") that entitles such
Insider to receive, upon payment of the exercise price, 2.05
shares of PNC Common Stock for each share of MC Common Stock
covered by the Vested MC Option. Each such PNC Option shall be
subject to the same terms and conditions as were applicable to
the Vested MC Option, except that immediately following the
Effective Date, the PNC Option shall be cancelled in exchange
for the number of shares of PNC Common Stock having an
aggregate "fair market value" equal to the product of (1) the
number of shares of PNC Common Stock subject to such PNC
Option and (2) the excess, if any, of the fair market value of
a share of PNC Common Stock on the Effective Date over the
exercise price of the PNC Option.
(ii) The portion of each MC Option held by an Insider
that is not a Vested MC Option shall automatically become
exercisable in accordance with Section 4(d) of the 1986 Plan
and shall be cancelled on the Effective Date if not
theretofore exercised.
(iii) Each MC Option held by any person who is not an
Insider shall be cancelled at the Effective Date and PNC shall
deliver to the holder of each such option, in respect thereof,
the number of shares of PNC Common Stock having an aggregate
fair market value equal to the product of (1) the number of
shares of MC Common Stock subject to such option and (2) the
excess, if any, of the fair market value of a share of MC
Common Stock on the Effective Date over the exercise price of
such option.
<PAGE> 3
- 3 -
For purposes of this Paragraph 6, (1) "fair market
value" with respect to a share of MC Common Stock shall have
the meaning assigned to such term in the Option Plan under
which the related MC Option was granted and (2) "fair market
value" with respect to a share of PNC Common Stock shall have
the meaning ascribed to the term "market value" in Paragraph 7
of this Article.
3. From the date hereof, this Amendment shall be read and construed
along with the Reorganization Agreement and the Merger Agreement and such
agreements shall, along with all the terms, covenants and conditions thereof,
be and continue to be in full force and effect, save as hereby amended.
4. This Amendment shall be governed by and construed in accordance with
the laws of the Commonwealth of Pennsylvania applicable to agreements made and
entirely to be performed within such jurisdiction, except to the extent federal
law may be applicable.
5. This Amendment may be executed in any number of counterparts, each
of which shall constitute an original and all of which when taken together
shall constitute one instrument.
<PAGE> 4
- 4 -
IN WITNESS WHEREOF, the parties hereto, intending to be legally bound
hereby, have caused this Amendment to be executed in counterparts by their duly
authorized officers thereunto duly authorized, all as of the day and year first
above written.
PNC BANK CORP.
By /s/ WALTER E. GREGG, JR.
----------------------------
Walter E. Gregg, Jr.
Executive Vice President
PNC BANCORP, INC.
By /s/ WALTER E. GREGG, JR.
----------------------------
Walter E. Gregg, Jr.
Executive Vice President
MIDLANTIC CORPORATION
By /s/ HOWARD I. ATKINS
----------------------------
Howard I. Atkins
Executive Vice President and
Chief Financial Officer
<PAGE> 1
EXHIBIT 11
<TABLE>
PNC BANK CORP. AND SUBSIDIARIES
CALCULATION OF PRIMARY AND FULLY DILUTED EARNINGS PER COMMON SHARE
<CAPTION>
Three months ended Nine months ended
September 30 September 30
----------------------- ----------------------
In thousands, except per share data 1995 1994 1995 1994
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CALCULATION OF PRIMARY EARNINGS PER COMMON SHARE
Net income $149,046 $187,998 $411,685 $581,532
Less: Preferred dividends declared 373 405 1,147 1,233
----------------------------------------------------------
Net income applicable to primary earnings
per common share $148,673 $187,593 $410,538 $580,299
==========================================================
Weighted average shares of common stock outstanding 228,345 235,243 229,442 235,144
Weighted average common shares to be issued
using average market price and assuming exercise
of stock options 1,492 1,671 1,427 1,810
----------------------------------------------------------
Primary weighted average common shares outstanding 229,837 236,914 230,869 236,954
==========================================================
PRIMARY EARNINGS PER COMMON SHARE $.65 $.79 $1.78 $2.45
==========================================================
CALCULATION OF FULLY DILUTED EARNINGS PER COMMON SHARE
Net income $149,046 $187,998 $411,685 $581,532
Add: Interest expense on convertible
debentures (net of tax) 11 13 35 38
----------------------------------------------------------
Net income applicable to fully diluted
earnings per common share $149,057 $188,011 $411,720 $581,570
==========================================================
Weighted average shares of common stock outstanding 228,345 235,243 229,442 235,144
Weighted average commons shares to be issued
using average market price or period-end market
price, whichever is higher, and assuming:
Conversion of preferred stock Series A & B 196 221 201 228
Conversion of preferred stock Series C 606 672 623 687
Conversion of preferred stock Series D 808 855 822 864
Conversion of debentures 67 73 68 74
Exercise of stock options 1,853 1,671 1,931 1,810
----------------------------------------------------------
Fully diluted weighted average
common shares outstanding 231,875 238,735 233,087 238,807
==========================================================
FULLY DILUTED EARNINGS PER COMMON SHARE $.64 $.79 $1.77 $2.44
==========================================================
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE> 1
EXHIBIT 12.1
<TABLE>
PNC BANK CORP. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<CAPTION>
Year ended December 31
Nine months ended --------------------------------------------------------------------
Dollars in thousands September 30, 1995 1994 1993 1992 1991 1990
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
EARNINGS
Income before taxes and
cumulative effect of changes in
accounting principles................ $ 603,945 $ 902,389 $1,116,612 $ 778,122 $ 548,201 $ 29,425
Fixed charges excluding interest
on deposits.......................... 1,070,614 1,043,195 649,898 517,424 513,370 918,698
--------------------------------------------------------------------------------------
Subtotal............................ 1,674,559 1,945,584 1,766,510 1,295,546 1,061,571 948,123
Interest on deposits.................. 941,996 935,876 742,772 1,063,422 1,727,765 1,973,087
--------------------------------------------------------------------------------------
Total............................... $2,616,555 $2,881,460 $2,509,282 $2,358,968 $2,789,336 $2,921,210
======================================================================================
FIXED CHARGES
Interest on notes and debentures...... $ 425,990 $ 521,979 $ 279,646 $ 160,460 $ 95,103 $ 84,045
Interest on borrowed funds............ 626,580 493,005 348,702 336,827 398,883 816,448
Amortization of notes and debentures.. 535 1,346 967 970 584 538
Interest component of rentals ........ 17,509 26,865 20,583 19,167 18,800 17,667
--------------------------------------------------------------------------------------
Subtotal............................ 1,070,614 1,043,195 649,898 517,424 513,370 918,698
Interest on deposits.................. 941,996 935,876 742,772 1,063,422 1,727,765 1,973,087
--------------------------------------------------------------------------------------
Total............................... $2,012,610 $1,979,071 $1,392,670 $1,580,846 $2,241,135 $2,891,785
======================================================================================
RATIO OF EARNINGS TO FIXED CHARGES
Excluding interest on deposits........ 1.56x 1.87x 2.72x 2.50x 2.07x 1.03x
Including interest on deposits........ 1.30 1.46 1.80 1.49 1.24 1.01
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE> 2
MIDLANTIC CORPORATION AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Year ended December 31
Nine months ended --------------------------------------------------------------------
Dollars in thousands September 30, 1995 1994 1993 1992 1991 1990
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
EARNINGS
Income before taxes and
cumulative effect of changes in
accounting principles................ $271,719 $304,005 $ 20,353 $ 9,872 $ (586,779) $ (295,839)
Fixed charges excluding interest
on deposits.......................... 60,700 61,378 54,330 65,430 100,220 202,249
--------------------------------------------------------------------------------------
Subtotal........................... 332,419 365,383 74,683 75,302 (486,559) (93,590)
Interest on deposits................... 208,858 223,366 262,886 483,154 1,011,800 1,175,719
--------------------------------------------------------------------------------------
Total.............................. $541,277 $588,749 $337,569 $558,456 $ 525,241 $1,082,129
======================================================================================
FIXED CHARGES
Interest on notes and debentures....... $ 25,678 $ 34,453 $ 36,385 $ 41,517 $ 42,220 $ 42,178
Interest on borrowed funds............. 30,671 21,128 11,586 16,806 50,224 152,391
Amortization of notes and debentures... 188 415 451 535 535 534
Interest component of rentals.......... 4,163 5,382 5,908 6,572 7,241 7,146
--------------------------------------------------------------------------------------
Subtotal........................... 60,700 61,378 54,330 65,430 100,220 202,249
Interest on deposits................... 208,858 223,366 262,886 483,154 1,011,800 1,175,719
--------------------------------------------------------------------------------------
Total.............................. $269,558 $284,744 $317,216 $548,584 $1,112,020 $1,377,968
======================================================================================
RATIO OF EARNINGS TO COMBINED FIXED
CHARGES
Excluding interest on deposits......... 5.48x 5.95x 1.37x 1.15x (a) (a)
Including interest on deposits......... 2.01 2.07 1.06 1.02 (a) (a)
- ---------------------------------------------------------------------------------------------------------------------------------
<FN>
(a) Earnings are insufficient to cover fixed charges by $586.8 million and $295.8 million in 1991 and 1990, respectively.
</TABLE>
9
<PAGE> 3
PNC BANK CORP. AND SUBSIDIARIES
PRO FORMA COMPUTATION OF RATIO OF EARNINGS TO
FIXED CHARGES GIVING EFFECT TO MIDLANTIC MERGER
<TABLE>
<CAPTION>
Year ended December 31
Nine months ended --------------------------------------------------------------------
Dollars in thousands September 30, 1995 1994 1993 1992 1991 1990
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
EARNINGS
Income before taxes and
cumulative effect of changes in
accounting principles................ $ 875,664 $1,206,394 $1,136,965 $ 787,994 $ (38,578) $ (266,414)
Fixed charges excluding interest
on deposits.......................... 1,131,314 1,104,573 704,228 582,854 613,590 1,120,947
--------------------------------------------------------------------------------------
Subtotal........................... 2,006,978 2,310,967 1,841,193 1,370,848 575,012 854,533
Interest on deposits................... 1,150,854 1,159,242 1,005,658 1,546,576 2,739,565 3,148,806
--------------------------------------------------------------------------------------
Total.............................. $3,157,832 $3,470,209 $2,846,851 $2,917,424 $3,314,577 $4,003,339
======================================================================================
FIXED CHARGES
Interest on notes and debentures....... $ 451,668 $ 556,432 $ 316,031 $ 201,977 $ 137,323 $ 126,223
Interest on borrowed funds............. 657,251 514,133 360,288 353,633 449,107 968,839
Amortization of notes and debentures... 723 1,761 1,418 1,505 1,119 1,072
Interest component of rentals.......... 21,672 32,247 26,491 25,739 26,041 24,813
--------------------------------------------------------------------------------------
Subtotal........................... 1,131,314 1,104,573 704,228 582,854 613,590 1,120,947
Interest on deposits................... 1,150,854 1,159,242 1,005,658 1,546,576 2,739,565 3,148,806
--------------------------------------------------------------------------------------
Total.............................. $2,282,168 $2,263,815 $1,709,886 $2,129,430 $3,353,155 $4,269,753
======================================================================================
RATIO OF EARNINGS TO FIXED
CHARGES
Excluding interest on deposits......... 1.77x 2.09x 2.61x 2.35x (a) (a)
Including interest on deposits......... 1.38 1.53 1.66 1.37 (a) (a)
- ---------------------------------------------------------------------------------------------------------------------------------
<FN>
(a) Earnings are insufficient to cover fixed charges by $38.6 million and $266.4 million in 1991 and 1990, respectively.
</TABLE>
The pro forma computation of ratio of earnings to fixed charges gives
effect to the Merger to be accounted for as a pooling of interests. The
financial information in Exhibit 12.1 presents (i) the historical computation
of the ratio of earnings to fixed charges of both the Corporation and
Midlantic, for the nine months ended September 30, 1995 and for each of the
five years in the period ended December 31, 1994 and (ii) the computation of
the ratio of earnings to fixed charges giving effect to the Merger as if it had
occurred at the beginning of the earliest period presented.
The pro forma consolidated financial information is intended for informational
purposes and may not be indicative of the financial position or results that
actually would have occurred had the transaction been consummated on the dates
indicated, or which will be attained in the future. The pro forma consolidated
financial information should be read in conjunction with the 1994 Annual Reports
on Form 10-K and the Quarterly Reports on Form 10-Q for the quarterly period
ended September 30, 1995 of the Corporation and Midlantic.
10
<PAGE> 1
EXHIBIT 12.2
<TABLE>
PNC BANK CORP. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
<CAPTION>
Year ended December 31
Nine months ended -------------------------------------------------------------------
Dollars in thousands September 30, 1995 1994 1993 1992 1991 1990
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
EARNINGS
Income before taxes and cumulative
effect of changes in accounting principles.. $ 603,945 $ 902,389 $1,116,612 $ 778,122 $ 548,201 $ 29,425
Fixed charges and preferred stock dividends
excluding interest on deposits.............. 1,072,297 1,045,609 652,432 521,908 518,004 922,156
-----------------------------------------------------------------------------------
Subtotal................................... 1,676,242 1,947,998 1,769,044 1,300,030 1,066,205 951,581
Interest on deposits......................... 941,996 935,876 742,772 1,063,422 1,727,765 1,973,087
-----------------------------------------------------------------------------------
Total...................................... $2,618,238 $2,883,874 $2,511,816 $2,363,452 $2,793,970 $2,924,668
===================================================================================
FIXED CHARGES
Interest on notes and debentures............. $ 425,990 $ 521,979 $ 279,646 $ 160,460 $ 95,103 $ 84,045
Interest on borrowed funds................... 626,580 493,005 348,702 336,827 398,883 816,448
Amortization of notes and debentures......... 535 1,346 967 970 584 538
Interest component of rentals................ 17,509 26,865 20,583 19,167 18,800 17,667
Preferred stock dividend requirements........ 1,683 2,414 2,534 4,484 4,634 3,458
-----------------------------------------------------------------------------------
Subtotal................................... 1,072,297 1,045,609 652,432 521,908 518,004 922,156
Interest on deposits......................... 941,996 935,876 742,772 1,063,422 1,727,765 1,973,087
-----------------------------------------------------------------------------------
Total...................................... $2,014,293 $1,981,485 $1,395,204 $1,585,330 $2,245,769 $2,895,243
===================================================================================
RATIO OF EARNINGS TO COMBINED FIXED
CHARGES AND PREFERRED STOCK DIVIDENDS
Excluding interest on deposits.............. 1.56x 1.86x 2.71x 2.49x 2.06x 1.03x
Including interest on deposits.............. 1.30 1.46 1.80 1.49 1.24 1.01
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE> 2
MIDLANTIC CORPORATION AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED DIVIDENDS
<TABLE>
<CAPTION>
Year ended December 31
Nine months ended -------------------------------------------------------------------
Dollars in thousands September 30, 1995 1994 1993 1992 1991 1990
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
EARNINGS
Income before taxes and
cumulative effect of changes in
accounting principles................ $271,719 $304,005 $ 20,353 $ 9,872 $ (586,779) $ (295,839)
Fixed charges and preferred stock
dividends excluding interest
on deposits.......................... 63,489 66,955 59,907 70,994 105,996 208,025
--------------------------------------------------------------------------------------
Subtotal........................... 335,208 370,960 80,260 80,866 (480,783) (87,814)
Interest on deposits................... 208,858 223,366 262,886 483,154 1,011,800 1,175,719
--------------------------------------------------------------------------------------
Total.............................. $544,066 $594,326 $343,146 $564,020 $ 531,017 $1,087,905
======================================================================================
FIXED CHARGES
Interest on notes and debentures....... $ 25,678 $ 34,453 $ 36,385 $ 41,517 $ 42,220 $ 42,178
Interest on borrowed funds............. 30,671 21,128 11,586 16,806 50,224 152,391
Amortization of notes and debentures... 188 415 451 535 535 534
Interest component of rentals.......... 4,163 5,382 5,908 6,572 7,241 7,146
Preferred stock dividend requirements.. 2,789 5,577 5,577 5,564 5,776 5,776
--------------------------------------------------------------------------------------
Subtotal........................... 63,489 66,955 59,907 70,994 105,996 208,025
Interest on deposits................... 208,858 223,366 262,886 483,154 1,011,800 1,175,719
--------------------------------------------------------------------------------------
Total.............................. $272,347 $290,321 $322,793 $554,148 $1,117,796 $1,383,744
======================================================================================
RATIO OF EARNINGS TO COMBINED FIXED
CHARGES AND PREFERRED STOCK DIVIDENDS
Excluding interest on deposits......... 5.28x 5.54x 1.34x 1.14x (a) (a)
Including interest on deposits......... 2.00 2.05 1.06 1.02 (a) (a)
- ---------------------------------------------------------------------------------------------------------------------------------
<FN>
(a) Earnings are insufficient to cover fixed charges by $586.8 million and $295.8 million in 1991 and 1990, respectively.
</TABLE>
12
<PAGE> 3
PNC BANK CORP. AND SUBSIDIARIES
PRO FORMA COMPUTATION OF RATIO OF EARNINGS
TO COMBINED FIXED CHARGES AND PREFERRED DIVIDENDS
GIVING EFFECT TO MIDLANTIC MERGER
<TABLE>
<CAPTION>
Year ended December 31
Nine months ended -------------------------------------------------------------------
Dollars in thousands September 30, 1995 1994 1993 1992 1991 1990
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
EARNINGS
Income before taxes and
cumulative effect of changes in
accounting principles................ $ 875,664 $1,206,394 $1,136,965 $ 787,994 $ (38,578) $ (266,414)
Fixed charges and preferred stock
dividends excluding interest
on deposits.......................... 1,135,786 1,112,564 712,339 592,902 624,000 1,130,181
--------------------------------------------------------------------------------------
Subtotal........................... 2,011,450 2,318,958 1,849,304 1,380,896 585,422 863,767
Interest on deposits................... 1,150,854 1,159,242 1,005,658 1,546,576 2,739,565 3,148,806
--------------------------------------------------------------------------------------
Total.............................. $3,162,304 $3,478,200 $2,854,962 $2,927,472 $3,324,987 $4,012,573
======================================================================================
FIXED CHARGES
Interest on notes and debentures....... $ 451,668 $ 556,432 $ 316,031 $ 201,977 $ 137,323 $ 126,223
Interest on borrowed funds............. 657,251 514,133 360,288 353,633 449,107 968,839
Amortization of notes and debentures... 723 1,761 1,418 1,505 1,119 1,072
Interest component of rentals.......... 21,672 32,247 26,491 25,739 26,041 24,813
Preferred stock dividend requirements.. 4,472 7,991 8,111 10,048 10,410 9,234
--------------------------------------------------------------------------------------
Subtotal........................... 1,135,786 1,112,564 712,339 592,902 624,000 1,130,181
Interest on deposits................... 1,150,854 1,159,242 1,005,658 1,546,576 2,739,565 3,148,806
--------------------------------------------------------------------------------------
Total.............................. $2,286,640 $2,271,806 $1,717,997 $2,139,478 $3,363,565 $4,278,987
======================================================================================
RATIO OF EARNINGS TO COMBINED FIXED
CHARGES AND PREFERRED STOCK DIVIDENDS
Excluding interest on deposits......... 1.77x 2.08x 2.60x 2.33x (a) (a)
Including interest on deposits......... 1.38 1.53 1.66 1.37 (a) (a)
- ---------------------------------------------------------------------------------------------------------------------------------
<FN>
(a) Earnings are insufficient to cover fixed charges by $38.6 million and $266.4 million in 1991 and 1990, respectively.
</TABLE>
The pro forma computation of the ratio of earnings to combined fixed charges and
preferred stock dividends gives effect to the Merger to be accounted for as a
pooling of interests. The financial information in Exhibit 12.2 presents
(i) the historical computation of the ratio of the earnings to fixed charges and
preferred stock dividends of both the Corporation and Midlantic, for the nine
months ended September 30, 1995 and for each of the five years in the period
ended December 31, 1994 and (ii) the computation of the ratio of earnings to
fixed charges and preferred stock dividends, giving effect to the Merger as if
it had occurred at the beginning of the earliest period presented.
The pro forma consolidated financial information is intended for informational
purposes and may not be indicative of the financial position or results that
actually would have occurred had the transaction been consummated on the dates
indicated, or which will be attained in the future. The pro forma consolidated
financial information should be read in conjunction with the 1994 Annual Reports
on Form 10-K and the Quarterly Reports on Form 10-Q for the quarterly period
ended September 30, 1995 of the Corporation and Midlantic.
13
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from
the consolidated financial information incorporated by reference to the 1995
Third Quarter Corporate Financial Review which is filed herewith as Exhibit
99.1 and is qualified in its entirety by reference to such financial
information.
</LEGEND>
<CIK> 0000713676
<NAME> PNC BANK
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<CASH> 2,124
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 2,228
<INVESTMENTS-CARRYING> 16,035
<INVESTMENTS-MARKET> 15,787
<LOANS> 36,815
<ALLOWANCE> (943)
<TOTAL-ASSETS> 61,218
<DEPOSITS> 33,013
<SHORT-TERM> 12,683
<LIABILITIES-OTHER> 1,402
<LONG-TERM> 9,616
<COMMON> 1,184
0
1
<OTHER-SE> 3,319
<TOTAL-LIABILITIES-AND-EQUITY> 61,218
<INTEREST-LOAN> 2,194
<INTEREST-INVEST> 842
<INTEREST-OTHER> 70
<INTEREST-TOTAL> 3,106
<INTEREST-DEPOSIT> 942
<INTEREST-EXPENSE> 1,995
<INTEREST-INCOME-NET> 1,111
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 9
<EXPENSE-OTHER> 1,297
<INCOME-PRETAX> 604
<INCOME-PRE-EXTRAORDINARY> 604
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 412
<EPS-PRIMARY> 1.78
<EPS-DILUTED> 1.77
<YIELD-ACTUAL> 2.64
<LOANS-NON> 268
<LOANS-PAST> 146
<LOANS-TROUBLED> 5
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,002
<CHARGE-OFFS> (107)
<RECOVERIES> 47
<ALLOWANCE-CLOSE> 943
<ALLOWANCE-DOMESTIC> 943
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<PAGE> 1
<TABLE>
<CAPTION>
EXHIBIT 99.1
FINANCIAL HIGHLIGHTS
Three months ended Nine months ended
September 30 September 30
------------------------------------------------------------
1995 1994 1995 1994
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL PERFORMANCE (Dollars in thousands, except per
share data)
Net interest income (taxable-equivalent basis) $372,796 $503,240 $1,135,535 $1,510,407
Net income 149,046 187,998 411,685 581,532
Earnings per common share
Primary .65 .79 1.78 2.45
Fully diluted .64 .79 1.77 2.44
Return on average assets .96% 1.20% .89% 1.29%
Return on average common shareholders' equity 13.42 17.15 12.61 18.04
Net interest margin 2.61 3.45 2.64 3.57
After-tax profit margin 22.58 25.60 21.39 26.10
Overhead ratio 65.57 59.36 67.36 57.49
SELECTED AVERAGE BALANCES (In millions)
Assets $61,716 $61,988 $61,775 $60,204
Earning assets 57,099 58,275 57,255 56,518
Loans, net of unearned income 36,824 34,494 36,116 33,025
Securities 18,805 22,422 19,848 21,844
Deposits 34,252 33,982 33,702 32,665
Borrowings 13,294 11,346 13,299 11,284
Shareholders' equity 4,425 4,360 4,384 4,320
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
September 30 December 31 September 30
1995 1994 1994
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SELECTED RATIOS
Capital
Risk-based
Tier I 8.32% 8.62% 8.61%
Total 11.91 11.45 11.41
Leverage 6.45 6.59 6.82
Common shareholders' equity to assets 7.33 6.82 6.92
Average common shareholders' equity to average assets 7.07 7.09 7.14
Asset quality
Net charge-offs to average loans .22 .29 .27
Nonperforming loans to loans .74 .90 1.03
Nonperforming assets to loans and foreclosed assets 1.10 1.25 1.44
Nonperforming assets to assets .67 .69 .80
Allowance for credit losses to loans 2.56 2.83 2.89
Allowance for credit losses to nonperforming loans 346.28 314.17 281.35
Book value per common share
As reported $19.62 $18.76 $18.87
Excluding net unrealized securities losses 19.82 19.26 19.46
- -------------------------------------------------------------------------------------------------------------------------
TABLE OF CONTENTS
2 Corporate Financial Review 24 Consolidated Financial Statements
34 Statistical Information 36 Corporate Information
</TABLE>
<PAGE> 2
CORPORATE FINANCIAL REVIEW
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 nine months of 1995 was $411.7 million, or $1.77 per
fully diluted share, compared with $581.5 million, or $2.44 per share, for the
first nine months of 1994. Return on average assets and return on average common
shareholders' equity were .89 percent and 12.61 percent, respectively, in the
first nine months of 1995 compared with 1.29 percent and 18.04 percent a year
ago.
During the first nine months of 1995 the nation's economy grew at a more
moderate pace than the previous twelve months. As a result, there was less
inflationary pressure and the Federal Reserve responded with moderating actions
with respect to short-term interest rates. Management expects such economic
conditions and monetary policies to continue over the next twelve months and,
accordingly, expects more stability in short-term rates.
MERGERS AND ACQUISITIONS
- ---------------------------------------------------------------
On October 6, 1995, the Corporation completed the acquisition of Chemical New
Jersey Holdings, Inc., and its wholly-owned subsidiary Chemical Bank New Jersey,
N.A. ("Chemical") located in southern and central New Jersey with total assets
of $3.2 billion and retail core deposits of $2.7 billion. The transaction was
accounted for under the purchase method and the Corporation paid $492 million in
cash.
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 September 30, 1995, Midlantic had assets
and deposits of $13.9 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 September 30,
1995, the Corporation expects to issue 111.1 million shares of its common stock
to consummate the merger. The transaction will be accounted for as a pooling of
interests. The Corporation has received all required regulatory approvals for
the merger, which is targeted to be completed by year-end 1995, pending approval
by shareholders of both companies.
Upon completion of the Midlantic merger, the Corporation expects to have the
second and third largest deposit market share in Philadelphia and New Jersey,
respectively. The in-market nature of this transaction is expected to generate
substantial economies by reducing costs associated with overlapping and
duplicative operations. In addition, the transaction will provide opportunities
to enhance revenues through marketing the Corporation's products and services to
a new customer base. The Corporation's balance sheet is also expected to be
enhanced by the addition of Midlantic's large and stable base of retail core
deposits and superior capital position.
As previously disclosed, the Corporation will recognize one-time
merger-related charges in connection with the Midlantic transaction and is
considering the potential sale of securities that would result in additional
losses. The combination of these actions is expected to benefit the operating
results of future periods, but would result in material charges to earnings in
the fourth quarter of 1995. These potential actions are discussed herein under
the captions Income Statement Review-Noninterest Expense, Balance Sheet
Review-Securities and Risk Management-Financial Derivatives.
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.
2
<PAGE> 3
CORPORATE FINANCIAL REVIEW
INCOME STATEMENT REVIEW
- ---------------------------------------------------------------
During the first nine months of 1995 net interest income totaled $1.1 billion
and represented 59.0 percent of total revenue compared with $1.5 billion and
67.8 percent, respectively, in the same period a year ago. Noninterest income
totaled $789.4 million, or 41.0 percent of total revenue, in the first nine
months of 1995 compared with $717.9 million and 32.2 percent in the year-earlier
period.
INCOME STATEMENT HIGHLIGHTS
<TABLE>
<CAPTION>
Nine months ended September 30 Change
Dollars in ------------------
millions 1995 1994 Amount Percent
- ----------------------------------------------------------------
<S> <C> <C> <C> <C>
Net interest
income
(taxable-equivalent
basis) $1,136 $1,510 $(374) (24.8)%
Provision for
credit losses 60 (60) (100.0)
Noninterest income 789 718 71 10.0
Noninterest
expense 1,297 1,281 16 1.2
Net income 412 582 (170) (29.2)
- ----------------------------------------------------------------
</TABLE>
NET INTEREST INCOME AND NET INTEREST MARGIN On a fully taxable-equivalent
basis, net interest income for the first nine months of 1995 decreased $374.9
million compared with the first nine months of 1994. The benefit from a $736.6
million increase in average earning assets was more than offset by a narrower
net interest margin.
NET INTEREST INCOME
<TABLE>
<CAPTION>
Nine months ended September 30 Change
Taxable-equivalent basis ------------------
Dollars in millions 1995 1994 Amount Percent
- -----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net interest income
before swaps and
caps
Interest income $3,174 $2,740 $ 434 15.8%
Loan fees 55 54 1 1.9
Taxable-equivalent
adjustment 24 25 (1) (4.0)
-----------------------------
Total interest
income 3,253 2,819 434 15.4
Interest expense 1,977 1,429 548 38.3
-----------------------------
Net interest income
before swaps
and caps 1,276 1,390 (114) (8.2)
Effect of swaps and
caps on
Interest income (122) 43 (165) (383.7)
Interest expense 18 (77) 95 123.4
-----------------------------
Total swaps
and caps (140) 120 (260) (216.7)
-----------------------------
Net interest
income $1,136 $1,510 $(374) (24.8)%
- ------------------------------------------------------------------------
</TABLE>
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 investment activities and wholesale funding, and the cost of
other actions taken to reduce interest rate sensitivity. In addition, deposit
and borrowings costs increased more rapidly than loan yields in the year-to-year
comparison. These factors are expected to continue to adversely impact net
interest income and net interest margin in 1995 compared with the prior year.
Following several consecutive quarterly declines, net interest income and net
interest margin stabilized in the third quarter of 1995 and are expected to
increase in subsequent quarters. The Chemical acquisition and Midlantic merger
are expected to further benefit net interest income and margin.
NET INTEREST MARGIN
<TABLE>
<CAPTION>
Nine months ended September 30
Basis Point
Taxable-equivalent basis 1995 1994 Change
- --------------------------------------------------------------------
<S> <C> <C> <C>
Interest rate spread before
swaps and caps
Book-basis yield on
earning assets 7.37% 6.48% 89
Effect of loan fees .13 .13
Taxable-equivalent
adjustment .06 .06
------------------------------
Taxable-equivalent yield
on earning assets 7.56 6.67 89
Rate on interest-bearing
liabilities 5.29 3.93 136
------------------------------
Interest rate spread
before swaps and caps 2.27 2.74 (47)
Effect of
Noninterest-bearing
sources .69 .52 17
Interest rate swaps and
caps on
Interest income (.28) .10 (38)
Interest expense .04 (.21) 25
------------------------------
Total swaps and caps (.32) .31 (63)
------------------------------
Net interest margin 2.64% 3.57% (93)
- --------------------------------------------------------------------
</TABLE>
3
<PAGE> 4
CORPORATE FINANCIAL REVIEW
PROVISION FOR CREDIT LOSSES The Corporation did not record a provision for
credit losses in the first nine months of 1995 compared with $60.1 million in
the first nine months of 1994. 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 Noninterest income before securities transactions increased
6.6 percent to $780.4 million in the first nine months of 1995 compared with the
prior year period. Excluding securities transactions, noninterest income was
40.7 percent of total revenue in the first nine months of 1995 compared with
32.6 percent a year earlier.
Net securities gains totaled $9.1 million in the first nine months of 1995
compared with net securities losses of $13.9 million in the year-earlier period.
During 1995 and 1994, the Corporation sold securities in connection with its
strategic initiatives to reduce the securities portfolio and interest rate
sensitivity.
NONINTEREST INCOME
<TABLE>
<CAPTION>
Change
Nine months ended September 30 ------------------------
Dollars in thousands 1995 1994 Amount Percent
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment management and trust
Trust $173,425 $146,658 $26,767 18.3%
Mutual funds 99,881 72,157 27,724 38.4
------------------------------------------
Total investment management and trust 273,306 218,815 54,491 24.9
Service charges, fees and commissions
Deposit account and corporate services 119,146 124,156 (5,010) (4.0)
Credit card and merchant services 32,728 40,520 (7,792) (19.2)
Corporate finance 33,795 33,302 493 1.5
Brokerage 31,236 26,529 4,707 17.7
Other services 55,220 50,628 4,592 9.1
------------------------------------------
Total service charges, fees and commissions 272,125 275,135 (3,010) (1.1)
Mortgage banking
Servicing 91,084 93,140 (2,056) (2.2)
Sale of servicing 32,675 51,338 (18,663) (36.4)
Marketing 22,894 14,796 8,098 54.7
------------------------------------------
Total mortgage banking 146,653 159,274 (12,621) (7.9)
Other 88,270 78,561 9,709 12.4
------------------------------------------
Total noninterest income before securities transactions 780,354 731,785 48,569 6.6
Net securities gains (losses) 9,080 (13,895) 22,975 (165.3)
------------------------------------------
Total $789,434 $717,890 $71,544 10.0%
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE> 5
CORPORATE FINANCIAL REVIEW
INVESTMENT MANAGEMENT AND TRUST
<TABLE>
<CAPTION>
Assets at September 30 Revenue for the
------------------------------------------------------------------------------------ Nine Months
Discretionary Nondiscretionary Total Ended September 30
--------------------------------------------------------------------------------------------------------
In millions 1995 1994 1995 1994 1995 1994 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Personal and charitable $25,497 $23,350 $ 12,515 $ 10,050 $ 38,012 $ 33,400 $113 $108
Institutional 21,335 2,782 36,427 78,281 57,762 81,063 60 39
--------------------------------------------------------------------------------------------------------
Total trust 46,832 26,132 48,942 88,331 95,774 114,463 173 147
Mutual funds 39,053 23,955 122,882 57,179 161,935 81,134 100 72
--------------------------------------------------------------------------------------------------------
Total $85,885 $50,087 $171,824 $145,510 $257,709 $195,597 $273 $219
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Investment management and trust revenue increased $54.5 million, or 24.9
percent, to $273.3 million in the first nine months of 1995 compared with the
prior-year period. The increase was due to the BlackRock acquisition, new
business, and an increase in the value of managed assets.
Compared with a year ago, total trust and mutual funds assets increased $62.1
billion to $257.7 billion at September 30, 1995. BlackRock added approximately
$25 billion in discretionary assets, of which $15 billion were institutional
funds and $10 billion were mutual funds. At September 30, 1995, the composition
of total discretionary assets was 46 percent fixed-income, 29 percent money
market, 23 percent equity and two percent other assets. The PNC Family of Funds
is included in the discretionary mutual funds category. Assets in these funds
totaled $7.1 billion at September 30, 1995 compared with $4.9 billion a year
ago.
Service charges, fees and commissions decreased $3.0 million in the first nine
months of 1995 compared with the same period a year ago. 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 agreements
for Card Issuer Program Management Corporation and First Data Resources Inc. to
provide certain administrative, marketing, data processing, and customer support
services for the Corporation's credit card business. Excluding the effect of
these agreements, service charges, fees and commissions increased $8.0 million,
or 3.2 percent in the year-to-year comparison.
Brokerage fee income increased in the comparison due to higher transaction
volumes as revenue per broker doubled. The increase in other services income
resulted from higher consumer-related fees, primarily related to automated
teller machines ("ATM").
During the first nine months of 1995, mortgage banking income decreased $12.6
million to $146.7 million primarily due to lower gains from sales of servicing.
Marketing gains increased due to recognizing the value of originated mortgage
servicing rights ("MSR") totaling $25.6 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 MSR.
MORTGAGE SERVICING PORTFOLIO
<TABLE>
<CAPTION>
In millions 1995 1994
- ----------------------------------------------------------
<S> <C> <C>
Balance at January 1 $40,966 $35,527
Originations 4,136 5,285
Acquisitions 64 10,625
Repayments (3,545) (5,051)
Sales (4,067) (4,806)
------------------------
Balance at September 30 $37,554 $41,580
- ----------------------------------------------------------
</TABLE>
During the first nine months of 1995, the Corporation funded $4.1 billion of
residential mortgages, of which approximately 83 percent represented new
financing. The Corporation directly originated 67 percent of total volume in
1995. At September 30, 1995, the Corporation's mortgage servicing portfolio
totaled $37.6 billion, had a weighted-average coupon rate of 7.96 percent
and an estimated fair value of $453 million. The servicing portfolio included
$25.3 billion serviced for others with a MSR carrying value and of $281
million. If interest rates decline and the rate of prepayments increases,
the underlying servicing fee income stream and related fair value of the MSR
would be reduced. The Corporation uses certain financial derivatives to manage
this risk.
During the first nine months of 1995, other income totaled $88.3 million, an
increase of $9.7 million compared with the year-earlier period. The increase was
primarily due to gains on
5
<PAGE> 6
CORPORATE FINANCIAL REVIEW
the sale of certain branches, which were partially offset by lower venture
capital income. During the third quarter of 1995, the Corporation realized a
$28.2 million gain on the sale of 12 branches in Dayton, Ohio, which were sold
in connection with the ongoing rationalization of the retail branch network.
NONINTEREST EXPENSE Noninterest expense increased 1.2 percent, or $15.5
million, in the first nine months of 1995, primarily due to acquisitions.
Excluding acquisitions, noninterest expense decreased $53.4 million, or 4.2
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, and the benefit of lower Federal deposit
insurance premiums.
NONINTEREST EXPENSE
<TABLE>
<CAPTION>
Nine months ended Change
September 30 --------------------
Dollars in thousands 1995 1994 Amount Percent
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Compensation $ 500,065 $ 497,835 $ 2,230 .4%
Employee benefits 111,224 121,164 (9,940) (8.2)
-----------------------------------------
Total staff expense 611,289 618,999 (7,710) (1.2)
Net occupancy 104,725 101,107 3,618 3.6
Equipment 101,348 98,915 2,433 2.5
Amortization of intangible
assets and MSR 66,416 59,478 6,938 11.7
Federal deposit
insurance 38,534 54,745 (16,211) (29.6)
Taxes other
than income 36,451 33,411 3,040 9.1
Other 337,821 314,399 23,422 7.4
-----------------------------------------
Total $1,296,584 $1,281,054 $15,530 1.2%
- ------------------------------------------------------------------------------
</TABLE>
The overhead ratio was 67.4 percent in the first nine months of 1995 compared
with 57.5 percent in the year-earlier period. The higher overhead ratio
primarily reflects the impact of lower net interest income.
Staff expense decreased 1.2 percent in the year-to-year comparison primarily
due to lower staff levels. Average full-time equivalent employees decreased to
approximately 20,000 for the first nine months of 1995 compared with
approximately 21,100 a year ago. Approximately 1,300 employees added from
acquisitions and from the establishment of the National Financial Services
Center, the Corporation's telebanking center, were more than offset by
reductions, primarily in the Consumer Banking line of business. Pension and
postretirement benefit expense declined $5.1 million due to lower staff levels
and a higher discount rate used to estimate pension obligations.
Amortization of intangibles and MSR increased $6.9 million primarily
reflecting additional intangibles from acquisitions.
The decline in Federal deposit insurance reflects a premium refund of $16.5
million resulting from a reduction in the Bank Insurance Fund premium.
Approximately $5.5 billion of the Corporation's deposits insured by the Savings
Association Insurance Fund ("SAIF") continue to be assessed a higher rate. There
are several proposals for legislative action to address recapitalization of the
SAIF including a significant one-time assessment. Management currently cannot
predict the outcome of these proposals or the effect, if any, on the
Corporation.
The increase in the remaining noninterest expense categories was primarily due
to acquisitions.
In connection with the closing of its pending merger with Midlantic, the
Corporation currently estimates it will record merger-related and nonrecurring
charges of between $150 million and $180 million, compared with an original
estimate of $130 million. The increase in the estimate is primarily due to more
aggressive plans with respect to operations and facilities consolidations.
Management continues to review integration plans and final determination of the
amount of the charges will be made prior to year end.
6
<PAGE> 7
CORPORATE FINANCIAL REVIEW
LINE OF BUSINESS RESULTS
- ---------------------------------------------------------------
The management accounting process uses various methods of balance sheet and
income statement allocations, transfers and assignments to evaluate the
performance of various business units. Unlike financial accounting, there is no
comprehensive, authoritative body of guidance for management accounting
equivalent to generally accepted accounting principles. The following
information is based on management accounting practices which conform to and
support the management structure of the Corporation and is not necessarily
comparable with similar information for any other financial services
institution. Designations, assignments, and allocations may change from time to
time as the management accounting system is enhanced and business or product
lines change. In 1995, the Corporation realigned its line of business management
structure along customer segments. The principal change was segregating the
trust business, previously managed separately, into the corporate and consumer
banking organizations. In addition, consistent with the Corporation's strategic
focus and balance sheet realignment, asset/liability management has been
redefined as a support function for the core lines of business. Results for the
first nine months of 1994 are presented on a basis consistent with this new
management 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 used for interest risk
management, and securities transactions are excluded from line of business
results and are reported separately in asset/liability management activities.
Capital is assigned to each business unit based on management's assessment of
inherent risks and equity levels at independent companies that provide similar
products and services. Capital assignments are not equivalent to regulatory
capital guidelines and the total amount assigned may vary from consolidated
shareholders' equity.
LINE OF BUSINESS HIGHLIGHTS
<TABLE>
<CAPTION>
Return on
Average Assigned
Balance Sheet Revenue Earnings Capital
Nine months ended September 30 -----------------------------------------------------------------------------------------
Dollars in millions 1995 1994 1995 1994 1995 1994 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Corporate Banking
Large Corporate $ 3,924 $ 4,085 $ 108 $ 132 $ 39 $ 52 12% 15%
Middle Market 11,281 10,395 391 408 118 175 11 17
Equity Management 186 181 20 35 12 21 27 52
---------------------------------------------------------------------
Total Corporate Banking 15,391 14,661 519 575 169 248 12 18
---------------------------------------------------------------------
Consumer Banking
Private Banking 1,041 863 177 158 32 28 30 29
Mass Market 25,705 24,806 922 888 180 169 17 17
Mortgage Banking 11,537 10,042 285 332 39 71 10 21
---------------------------------------------------------------------
Total Consumer Banking 38,283 35,711 1,384 1,378 251 268 16 19
---------------------------------------------------------------------
Asset Management 321 247 131 96 27 21 44 50
---------------------------------------------------------------------
Total lines of business 53,995 50,619 2,034 2,049 447 537 15 19
Asset/liability management activities 7,530 9,316 (109) 173 (81) 104
Unallocated provision 29 (49)
Other unallocated items 250 269 6 17 (10)
---------------------------------------------------------------------
Total $61,775 $60,204 $1,925 $2,228 $412 $582 13 18
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE> 8
CORPORATE FINANCIAL REVIEW
Total earnings contributed by the lines of business were $447 million in the
first nine months of 1995 compared with $537 million in the first nine 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 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 38 percent of line of business earnings in the
first nine months of 1995 compared with 46 percent in the first nine months of
1994. Large Corporate earnings declined in the comparison due to a decrease in
average loans and the impact of a $15 million pretax benefit recorded in 1994
from resolution of a problem asset. Average loans declined primarily due to the
reduction of certain low-spread loans. Middle Market earnings declined as the
benefit of an increase in average loans was more than offset by an increase in
the allocated provision for credit losses and narrower spreads in the loan
portfolio. A modest provision was allocated in 1995 compared with a negative
provision in 1994 resulting from a significant reduction of problem assets.
CONSUMER BANKING Consumer Banking provides lending, deposit, personal trust,
brokerage, 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 the
National Financial Services Center and ATMs, 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--loan origination,
acquisition and servicing activities, and residential mortgage loans held in
portfolio.
The earnings contribution from Consumer Banking increased to 56 percent in the
first nine months of 1995 from 50 percent a year ago. Earnings from Private
Banking increased in the first nine months of 1995 as the benefit from loan
growth, new trust business and higher brokerage fees more than offset expense
growth from marketing activities in this sector. Mass Market earnings benefitted
from a pretax $28.2 million gain on the sale of certain branches. Mortgage
Banking continued to operate in a competitive environment characterized by
significantly reduced loan origination volumes. Earnings declined in 1995 as the
benefit of an increase in portfolio loans was more than offset by narrower loan
spreads and lower gains from sales of servicing.
ASSET MANAGEMENT Asset Management provides trust and mutual fund investment
management, strategy, research, and asset servicing for institutional and family
wealth customers. It serves customers through one unified money management
organization.
Asset Management contributed 6 percent of line of business earnings in the
first nine months of 1995 compared with 4 percent a year ago. Asset Management
earnings increased due to the impact of BlackRock, new business and an increase
in the value of managed assets.
8
<PAGE> 9
CORPORATE FINANCIAL REVIEW
BALANCE SHEET REVIEW
- ----------------------------------------------------------------
AVERAGE ASSETS
<TABLE>
<CAPTION>
Nine months ended September 30
In millions 1995 1994
- ------------------------------------------------------------
<S> <C> <C>
Assets $61,775 $60,204
Earning assets 57,255 56,518
Loans, net of unearned income 36,116 33,025
Securities 19,848 21,844
- ------------------------------------------------------------
</TABLE>
LOANS Average loans for the first nine months of 1995 increased 9.4 percent
over the comparable period in 1994, to $36.1 billion. Acquisitions increased the
loan portfolio primarily in the Consumer Banking line of business. Excluding the
impact of acquisitions, average loans increased 7.2 percent, of which the
majority was in residential mortgages.
The proportion of average loans to average earning assets increased to 63.1
percent in the first nine months of 1995 compared with 58.4 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 composition of loan outstandings did not change significantly since
year-end 1994. Credit risk associated with lending activities is managed through
underwriting policies and procedures, portfolio diversification, and loan
monitoring practices.
LOAN PORTFOLIO COMPOSITION
<TABLE>
<CAPTION>
September 30 December 31
Percent of gross loans 1995 1994
- --------------------------------------------------------------
<S> <C> <C>
Commercial 34.0% 34.9%
Real estate project 4.6 4.6
Real estate mortgage
Residential 29.1 26.0
Commercial 3.1 3.5
----------------------------
Total real estate mortgage 32.2 29.5
Consumer 24.5 25.8
Other 4.7 5.2
----------------------------
Total 100.0% 100.0%
- --------------------------------------------------------------
</TABLE>
At September 30, 1995, loan outstandings and net unfunded commitments
increased $3.9 billion, or 6.3 percent, since year-end 1994. Unfunded
commitments are net of participations and syndications. In addition, the
Corporation had letters of credit outstanding totaling $4.2 billion and $4.3
billion at September 30, 1995 and December 31, 1994, respectively, primarily
consisting of standby letters of credit.
Excluding the impact of the initiative to reduce certain low-spread loans,
total commercial loan outstandings increased $1.1 billion from year-end 1994.
Growth in commercial unfunded commitments was broad based and totaled $2.3
billion, or 12.2 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 68 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 13.3 percent primarily due to
acquisitions and portfolio management strategies. As part of its mortgage
banking business, 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 September 30, 1995 compared
with $9.2 billion at year-end 1994. The decline was primarily due to a planned
reduction in indirect automobile loans.
9
<PAGE> 10
CORPORATE FINANCIAL REVIEW
LOANS
<TABLE>
<CAPTION>
September 30, 1995 December 31, 1994
-----------------------------------------------------------------
Net Unfunded Net Unfunded
In millions Outstandings Commitments Outstandings Commitments
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial
Manufacturing $ 2,394 $ 6,750 $ 2,434 $ 6,011
Retail/Wholesale 2,116 2,358 2,148 2,123
Service providers 1,637 1,583 1,534 1,384
Communications
Cable 675 155 691 215
Telephone/cellular 307 1,127 285 923
Other 214 231 125 93
-----------------------------------------------------------------
Total communications 1,196 1,513 1,101 1,231
Financial services 653 2,890 691 2,502
Real estate related 685 282 610 180
Health care 790 937 606 958
Public utilities 196 1,080 254 1,079
Other 2,926 3,733 3,067 3,447
-----------------------------------------------------------------
Total commercial 12,593 21,126 12,445 18,915
Real estate project
Construction and development 470 241 394 254
Medium-term financings 1,222 81 1,234 56
-----------------------------------------------------------------
Total real estate project 1,692 322 1,628 310
Real estate mortgage
Residential 10,795 832 9,283 769
Commercial 1,152 11 1,261 19
-----------------------------------------------------------------
Total real estate mortgage 11,947 843 10,544 788
Consumer
Home equity 2,639 1,710 2,625 1,761
Automobile 2,227 2,534
Student 1,370 76 1,258 30
Credit card 917 3,684 817 3,423
Other 1,911 286 1,953 330
-----------------------------------------------------------------
Total consumer 9,064 5,756 9,187 5,544
Other 1,744 947 1,843 917
Unearned income (225) (240)
-----------------------------------------------------------------
Total, net of unearned income $36,815 $28,994 $35,407 $26,474
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 11
CORPORATE FINANCIAL REVIEW
SECURITIES The securities portfolio declined $2.7 billion from year-end 1994
to $18.3 billion at September 30, 1995. As a percent of earning assets,
securities declined to 32.3 percent at September 30, 1995 compared with 36.3
percent at December 31, 1994 and 38.3 percent at the end of the third quarter of
1994.
At September 30, 1995, the securities portfolio included $10.7 billion and
$1.7 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
<TABLE>
<CAPTION>
September 30, 1995 December 31, 1994
-------------------------------------------------------------------------------------------
Unrealized Unrealized
Amortized ------------------ Amortized -------------------
In millions Cost Gains Losses Fair Value Cost Gains Losses Fair Value
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment securities
Debt securities
U.S. Treasury $ 1,806 $14 $ 1,820 $ 1,794 $ 93 $ 1,701
U.S. Government agencies and
corporations
Mortgage-related 9,892 9 $298 9,603 10,920 1,025 9,895
Other 1,000 4 1,004 1,000 28 972
State and municipal 325 21 346 348 $12 2 358
Asset-backed private
placements 1,597 10 1,607 1,597 33 1,564
Other debt
Mortgage-related 636 1 9 628 726 43 683
Other 468 1 467 769 20 749
Other 311 1 312 310 1 311
--------------------------------------------------------------------------------------------
Total $16,035 $60 $308 $15,787 $17,464 $13 $1,244 $16,233
--------------------------------------------------------------------------------------------
Securities available for sale
Debt securities
U.S. Treasury $ 106 $ 1 $ 107 $ 401 $ 8 $ 393
U.S. Government agencies and
corporations
Mortgage-related 1,284 8 $ 9 1,283 2,161 69 2,092
Other 25 1 24 25 4 21
Other debt
Mortgage-related 590 1 2 589 749 17 732
Other 118 2 1 119 117 $2 119
Corporate stocks and other 106 2 2 106 105 1 6 100
-------------------------------------------------------------------------------------------
Total $2,229 $14 $15 $2,228 $3,558 $3 $104 $3,457
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE> 12
CORPORATE FINANCIAL REVIEW
EXPECTED MATURITY DISTRIBUTION OF SECURITIES
<TABLE>
<CAPTION>
1997 and Weighted
Dollars in millions 1995 1996 beyond Total Average Life
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investment securities
Debt securities
U.S. Treasury $ 5 $ 1,801 $ 1,806 3 yrs, 4 mos
U.S. Government agencies and corporations
Mortgage-related 543 $ 2,010 7,339 9,892 3 yrs, 2 mos
Other 1,000 1,000 10 mos
State and municipal 3 28 294 325 9 yrs, 2 mos
Asset-backed private placements 1,347 250 1,597 1 yr
Other debt
Mortgage-related 20 93 523 636 2 yrs, 7 mos
Other 67 216 185 468 1 yr, 4 mos
Other 311 311 NM
-----------------------------------------------------
Total investment securities 638 4,694 10,703 16,035 2 yrs, 11 mos
Securities available for sale
Debt securities
U.S. Treasury 63 3 40 106 1 yr, 10 mos
U.S. Government agencies and corporations
Mortgage-related 116 232 936 1,284 7 yrs
Other 5 20 25 2 yrs, 4 mos
Other debt
Mortgage-related 35 133 422 590 4 yrs, 11 mos
Other 1 6 111 118 8 yrs, 2 mos
Corporate stocks and other 106 106 NM
-----------------------------------------------------
Total securities available for sale 215 379 1,635 2,229 6 yrs, 2 mos
-----------------------------------------------------
Total $ 853 $ 5,073 $12,338 $18,264 3 yrs, 3 mos
-----------------------------------------------------
Percent of total 4.67% 27.78% 67.55% 100.0%
-----------------------------------------------------
Securities with interest rates that are
Fixed $ 706 $ 2,371 $10,894 $13,971
Variable 147 2,702 1,444 4,293
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
NM--not meaningful
The expected weighted average life of the securities portfolio was 3 years and
3 months at September 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.
Management is reviewing the asset/liability positions of Midlantic and the
Corporation and is considering various actions consistent with the Corporation's
strategic initiatives related to balance sheet repositioning and interest rate
risk management. In connection therewith, the Corporation is considering
reclassifying investment securities to the available-for-sale portfolio. Any
reclassifications of investment securities will be accounted for at fair value
and would include the fair value of associated financial derivatives. Unrealized
gains and losses would be recorded as a component of shareholders' equity, net
of tax.
The Corporation may sell securities classified as available for sale as part
of the overall asset/liability management process. Realized gains and losses
would be reflected in the results of operations and would include the fair value
of financial derivatives associated with such securities.
On a pro forma basis, the combined investment securities of the Corporation
and Midlantic had a net unrealized pretax loss of $226 million at September 30,
1995. The associated financial derivatives had an estimated net unrealized
pretax loss of $283 million, including deferred losses on terminated swap
contracts. As discussed herein under the caption Risk Management-Financial
Derivatives, the Corporation anticipates terminating its interest rate caps in
connection with the Midlantic
12
<PAGE> 13
CORPORATE FINANCIAL REVIEW
merger. Management anticipates the results of operations for future periods
would be positively impacted by such actions.
AVERAGE FUNDING SOURCES HIGHLIGHTS
<TABLE>
<CAPTION>
Nine months ended September 30
In millions 1995 1994
- -------------------------------------------------------------
<S> <C> <C>
Deposits $33,702 $32,665
Borrowed funds 13,299 11,284
Notes and debentures 9,132 10,848
Shareholders' equity 4,384 4,320
- -------------------------------------------------------------
</TABLE>
FUNDING SOURCES l Average deposits increased $1.0 billion, or 3.2 percent,
compared with the first nine months of 1994, primarily due to acquisitions.
Average noninterest-bearing sources represented 19.3 percent of total funding
sources during the first nine months of 1995 and 1994.
FUNDING SOURCES
<TABLE>
<CAPTION>
September 30 December 31
In millions 1995 1994
- -------------------------------------------------------------
<S> <C> <C>
Deposits
Demand, savings and money
market $17,076 $19,313
Time 14,383 13,100
Foreign 1,554 2,598
--------------------------
Total deposits 33,013 35,011
Borrowed funds
Repurchase agreements 5,427 3,785
Treasury, tax and loan 1,156 1,989
Federal funds purchased 3,407 2,181
Commercial paper 490 1,226
Other 2,203 2,427
--------------------------
Total borrowed funds 12,683 11,608
Notes and debentures
Bank notes 5,777 8,825
Federal Home Loan Bank 2,447 1,384
Other 1,392 1,545
--------------------------
Total notes and debentures 9,616 11,754
--------------------------
Total $55,312 $58,373
- -------------------------------------------------------------
</TABLE>
Total deposits at September 30, 1995 decreased $2.0 billion, or 5.7 percent
from year-end 1994. A decline in demand, savings and money market deposits of
$2.2 billion was partially offset by a $1.3 billion increase in time deposits.
The change in composition of such deposit products was primarily due to
customers shifting to higher rate deposit products. Customer product migration
stabilized in the third quarter but is expected to continue during the remainder
of 1995.
Brokered deposits totaled $2.3 billion at September 30, 1995 compared with
$2.8 billion at December 31, 1994. Retail brokered deposits, which are issued or
participated-out by brokers in denominations of $100,000 or less, represented
78.3 percent of total brokered deposits at September 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 the most attractive
sources of funds.
CAPITAL Acquisition capability, funding alternatives, new business activities,
deposit insurance costs, and the level and nature of expanded regulatory
oversight depend in large part on a 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 September 30, 1995, the capital position of each of the
Corporation's bank affiliates was classified as well capitalized.
The Corporation manages its capital position primarily through the issuance of
debt and equity instruments, treasury stock activities, its dividend policies
and retained earnings.
RISK-BASED CAPITAL AND CAPITAL RATIOS
<TABLE>
<CAPTION>
September 30 December 31
Dollars in millions 1995 1994
- ------------------------------------------------------------
<S> <C> <C>
RISK-BASED CAPITAL
Shareholders' equity $4,504 $4,394
Intangibles (607) (373)
Net unrealized securities
losses 45 119
-------------------------------
Tier I risk-based
capital 3,942 4,140
Subordinated debt 1,102 752
Eligible allowance for
credit losses 597 605
-------------------------------
Total risk-based
capital $5,641 $5,497
-------------------------------
ASSETS
Risk-weighted assets and
off-balance-sheet
instruments $47,361 $48,007
Average tangible assets 61,161 62,842
CAPITAL RATIOS
Tier I risk-based capital 8.32% 8.62%
Total risk-based capital 11.91 11.45
Leverage 6.45 6.59
- ------------------------------------------------------------
</TABLE>
13
<PAGE> 14
CORPORATE FINANCIAL REVIEW
The decline in Tier I risk-based capital reflects the impact of intangibles
from acquisitions and the stock repurchase program. Intangibles increased in the
comparison due to the acquisition of BlackRock in February 1995.
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. 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's ability to repurchase additional shares may be
limited due to constraints associated with the pooling of interests accounting
method for the pending Midlantic merger.
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 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. 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 on net interest income of most likely
("base case" which management believes is reasonably likely to occur), higher
and lower ("alternative") interest rate scenarios.
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 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 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.
14
<PAGE> 15
CORPORATE FINANCIAL REVIEW
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 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 approximately 2.5
percent. Conversely, if interest rates decline by 100 basis points, net interest
income would remain substantially unchanged from the base scenario. If the
actual change in interest rates is greater than 100 basis points in either
direction, the impact on net interest income could further differ from the
simulated results.
The simulated results of management's base case scenario include the
impact of the Chemical acquisition. However, the model does not reflect the
impact of the pending Midlantic merger, which is expected to further reduce
interest sensitivity.
The following table sets forth average interest rates for the periods
indicated including management's base case forecast and the industry consensus
for the twelve months ended September 30, 1996 as reported in the Blue Chip
Financial Forecasts.
AVERAGE INTEREST RATES
<TABLE>
<CAPTION>
Industry
Consensus
Base case scenario Average for
-------------------- the Twelve
September December September Months Ending
1995 1995 1996 September 1996
- -----------------------------------------------------------------
<S> <C> <C> <C> <C>
Federal funds 5.75% 5.50% 5.75% 5.50%
3-month LIBOR 5.86 5.65 5.95 5.60
5-year U.S.
Treasury
Note 6.00 5.90 6.35 6.00
Spread
between
5-year U.S.
Treasury
and Fed
funds 25bp 40bp 60bp 50bp
- -----------------------------------------------------------------
</TABLE>
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 .8 percent asset sensitive at September
30, 1995, compared with a liability-sensitive position of 1.5 percent and 17.4
percent at year end 1994 and September 30, 1994, respectively.
15
<PAGE> 16
CORPORATE FINANCIAL REVIEW
FINANCIAL DERIVATIVES
<TABLE>
<CAPTION>
Weighted Average Rate
September 30, 1995 Notional --------------------- Estimated
Dollars In millions Value Paid Received Fair Value
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Instruments used to manage interest rate risk
Asset rate conversion
Interest rate swaps
Pay-fixed designated to
Investment securities $ 3,000 7.89% 5.90% $(126)
Commercial loans and mortgage 290 7.97 5.91 (18)
Receive-fixed index amortizing designated to commercial loans 4,931 5.89 5.25 (87)
Interest rate caps designated to investment securities 5,500 NM NM 18
------- -----
Total asset rate conversion 13,721 6.70 5.51 (213)
Liability rate conversion
Interest rate conversion
Interest rate swaps
Pay-fixed designated to overnight and other borrowings 790 6.15 5.79 (4)
Receive-fixed index amortizing designated to deposits 3,107 5.79 5.57 (42)
Receive-fixed designated to bank notes and other borrowings 994 5.19 6.06 12
Basis swaps designated to bank notes 465 5.87 5.53 2
------- -----
Total liability rate conversion 5,356 5.74 5.69 (32)
Mortgage origination activities
Commitments to purchase forward contracts 417 NM NM
Commitments to sell forward contracts 851 NM NM 1
------- -----
Total interest rate risk management 20,345 (244)
Instruments used to manage MSR risk
Interest rate floors 500 NM NM 5
Receive-fixed interest rate swaps 125 5.91 6.73 1
------- -----
Total MSR risk management 625 6
------- -----
Total $20,970 $(238)
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The floating rate portion of interest rate contracts are based on money-market
indices. As a percent of notional value, 73 percent were based on 3-month LIBOR,
18 percent on Federal funds rate and the remainder on other short-term indices.
NM -- not meaningful
FINANCIAL DERIVATIVES The Corporation uses a variety of off-balance-sheet
financial derivatives as part of its overall interest rate risk management
process and to manage risk associated with the value of certain MSR.
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. Basis
swaps are agreements under which both the receive and pay portion of the
contract are based on a variable index.
Interest rate caps and floors are agreements where, for a fee, the
counterparty agrees to pay the Corporation the amount, if any, by which a
specified market interest rate differs from a defined rate applied to a notional
amount. These contracts can also include a contractually specified limit of such
rate differentials under which payment is required.
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.
Forward contracts provide for the delivery of financial instruments at a
specified future date and at a specified price or yield.
Financial derivatives involve, to varying degrees, interest rate and credit
risk in excess of the amount recognized in the balance sheet but less than the
notional amount of the contract. For interest rate swaps, caps and floors, only
periodic cash payments and, with respect to caps and floors, premiums, are
exchanged; therefore, cash requirements and exposure to credit risk are
significantly less than the notional principal amount.
16
<PAGE> 17
CORPORATE FINANCIAL REVIEW
The Corporation manages these risks as part of its asset/liability management
process and through the Corporation's credit policies and procedures. The
Corporation seeks to minimize the credit risk associated with financial
derivatives by entering into transactions with only a select number of
high-quality institutions, establishing credit limits, requiring bilateral-
netting agreements, and, in certain instances, segregated collateral.
INTEREST RATE RISK MANAGEMENT For interest rate risk management purposes the
Corporation uses interest rate swaps to convert fixed-rate assets or liabilities
to floating-rate instruments, convert floating-rate assets or liabilities to
fixed-rate instruments, or convert floating-rate instruments from one index to
another. The Corporation's swaps do not contain leverage or any similar
features.
FINANCIAL DERIVATIVES ACTIVITY
<TABLE>
<CAPTION>
January 1 Maturities/ September 30
Notional value in millions 1995 Additions Amortization Terminations 1995
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest rate risk management
Interest rate swaps
Index amortizing receive-fixed $11,400 $ (3,362) $ 8,038
Receive-fixed 94 $ 989 (89) 994
Pay-fixed 5,718 2,700 (2,270) $(2,068) 4,080
Basis swaps 465 465
Interest rate caps 5,500 5,500
Eurodollar futures 2,500 (2,500)
Mortgage origination activities
Commitments to purchase forward
contracts 16 1,495 (1,094) 417
Commitments to sell forward
contracts 350 3,516 (3,015) 851
-----------------------------------------------------------------------------
Total interest rate risk management 23,078 11,665 (12,330) (2,068) 20,345
MSR risk management
Interest rate floors 500 500
Receive-fixed interest rate swaps 125 125
--------- ------------
Total MSR risk management 625 625
-----------------------------------------------------------------------------
Total $23,078 $12,290 $(12,330) $(2,068) $20,970
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
During 1995, the Corporation entered into pay-fixed interest rate and basis
swap contracts to alter the repricing characteristics of certain borrowed funds.
Substantially all of these contracts have maturities of three to twelve months.
As part of its overall asset/liability management process the Corporation
terminated $2.0 billion of pay-fixed interest rate swaps during the third
quarter of 1995. The terminations resulted in a loss which is being deferred and
amortized as an adjustment to interest income on investment securities, the
instruments to which the swaps were designated. At September 30, 1995, the
unamortized loss was $92.8 million and is being amortized ratably over a
remaining period of 2 years and 7 months.
17
<PAGE> 18
CORPORATE FINANCIAL REVIEW
In November 1994, the Corporation purchased, for $129.6 million, interest rate
caps with a notional value of $5.5 billion to reduce exposure to higher interest
rates. These caps 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, if any, of
3-month LIBOR over a specified cap rate, currently 6.00 percent, computed
quarterly based on the notional value of the contracts. At September 30, 1995,
3-month LIBOR was 5.94 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.
During the first nine months of 1995, interest rate swaps and caps negatively
affected net interest income by $140.2 million compared with a benefit of $119.9
million in the same period of 1994.
In connection with the pending Midlantic merger, the Corporation continues to
evaluate various alternatives regarding financial derivatives used for interest
rate risk management 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.
The Corporation anticipates terminating its interest rate cap position in
connection with the Midlantic merger. Upon termination, a pretax loss of
approximately $65 million, measured by the difference between the unamortized
premium and the estimated fair value is expected to be recorded. 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 both an interest rate swap and the instrument to which the swap
is designated are terminated or the designated instrument matures, the net loss
would be recognized immediately in the results of operations.
The following table sets forth the expected maturity distribution of the
notional value of financial derivatives and the associated weighted average
interest rates with respect to instruments maturing in each year, assuming
expected interest rates developed in 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.
18
<PAGE> 19
CORPORATE FINANCIAL REVIEW
EXPECTED MATURITY DISTRIBUTION OF FINANCIAL DERIVATIVES
<TABLE>
<CAPTION>
1999 and
Notional value in millions 1995 1996 1997 1998 beyond Total
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest rate risk management
Interest rate swaps
Receive-fixed index amortizing
Notional value $1,488 $5,490 $694 $366 $8,038
Weighted averaged fixed interest rate received 5.54% 5.29% 5.36% 4.97% 5.33%
Weighted average variable interest rate paid 5.74 5.71 5.90 5.95 5.74
Receive-fixed
Notional value $4 $955 $35 $994
Weighted average fixed interest rate received 8.87% 5.98% 6.48% 6.01%
Weighted average variable interest rate paid 5.75 4.15 5.85 4.22
Pay-fixed
Notional value $50 $865 $1,040 $2,050 $75 $4,080
Weighted average variable interest rate
received 5.75% 5.57% 5.95% 5.95% 5.95% 5.87%
Weighted average fixed interest rate paid 8.11 6.09 7.90 7.93 9.43 7.56
Basis swaps
Notional value $465 $465
Weighted average interest rate received 5.72% 5.72%
Weighted average interest rate paid 5.63 5.63
Interest rate caps $5,500 $5,500
Forward contracts $1,268 1,268
MSR risk management
Interest rate floors $500 500
Receive-fixed interest rate swaps 125 125
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
The notional values of receive-fixed index amortizing swaps amortize on
predetermined dates and in predetermined amounts based on market movements of
the designated index. The weighted average expected maturity of index amortizing
swaps shortened to 10 months at September 30, 1995, compared with 2 years and 10
months at year-end 1994, reflecting actual and 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.
19
<PAGE> 20
CORPORATE FINANCIAL REVIEW
MORTGAGE SERVICING RISK MANAGEMENT The Corporation also uses financial
derivatives to manage risk associated with the value of certain MSR. The
inherent risk affecting the value of MSR is the potential for the related
mortgages to prepay thereby eliminating the underlying service fee income
stream. Prepayment is primarily related to declining interest rates. During the
third quarter of 1995, the Corporation entered into a combination of interest
rate floors and receive-fixed interest rate swaps designed to reduce this risk.
If interest rates decrease, the value of the interest rate swaps and floors
should increase and the value of the related MSR would decline.
CREDIT RISK 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.
NONPERFORMING ASSETS
<TABLE>
<CAPTION>
September 30 December 31
Dollars in millions 1995 1994
- -------------------------------------------------------------
<S> <C> <C>
Nonaccrual loans
Commercial $ 93 $143
Real estate project 82 70
Real estate mortgage
Residential 53 53
Commercial 40 44
-------------------------------
Total nonaccrual
loans 268 310
Restructured loans 5 9
-------------------------------
Total nonperforming
loans 273 319
Foreclosed assets
Real estate project 87 77
Real estate mortgage
Residential 24 21
Commercial 3 5
Other 21 24
-------------------------------
Total foreclosed
assets 135 127
-------------------------------
Total $408 $446
-------------------------------
Nonperforming loans to
loans .74% .90%
Nonperforming assets to
loans and foreclosed
assets 1.10 1.25
Nonperforming assets to
assets .67 .69
- -------------------------------------------------------------
</TABLE>
20
<PAGE> 21
CORPORATE FINANCIAL REVIEW
The following table sets forth changes in nonperforming assets during the
first nine months of 1995.
CHANGE IN NONPERFORMING ASSETS
<TABLE>
<CAPTION>
In millions 1995
- ----------------------------------------------------------
<S> <C>
Balance at January 1 $446
Transferred from accrual 191
Acquisitions 1
Returned to performing (20)
Principal reductions (112)
Sales (49)
Charge-offs and valuation adjustments (49)
--------
Balance at September 30 $408
- ----------------------------------------------------------
</TABLE>
At September 30, 1995, $65 million of nonperforming assets were current as to
principal and interest compared with $62 million at December 31, 1994.
Accruing loans contractually past due 90 days or more as to the payment of
principal or interest totaled $146.0 million at September 30, 1995 compared with
$148.3 million at December 31, 1994. Residential mortgages and student loans
totaling $54.6 million and $37.4 million, respectively, were included in the
total at September 30, 1995 compared with $49.6 million and $36.4 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 $943 million at September 30, 1995
compared with $1.0 billion at December 31, 1994. The allowance as a percentage
of period-end loans and nonperforming loans was 2.56 percent and 346.3 percent,
respectively, at September 30, 1995. The comparable year-end 1994 amounts were
2.83 percent and 314.2 percent, respectively.
CHARGE-OFFS AND RECOVERIES
<TABLE>
<CAPTION>
Percent of
Dollars in Net Average
millions Charge-offs Recoveries Charge-offs Loans
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Nine months ended
September 30, 1995
Commercial $ 31 $19 $12 .13%
Real estate project
9 2 7 .56
Real estate
mortgage
Residential 7 1 6 .08
Commercial 4 1 3 .33
Consumer 56 24 32 .47
------------------------------------
Total $107 $47 $60 .22%
-----------------------------------------------
Nine months ended
September 30, 1994
Commercial $ 38 $26 $12 .13%
Real estate project
19 2 17 1.34
Real estate
mortgage
Residential 11 1 10 .16
Commercial 3 1 2 .24
Consumer 49 23 26 .40
------------------------------------
Total $120 $53 $67 .27%
----------------------------------------------------------------
</TABLE>
21
<PAGE> 22
CORPORATE FINANCIAL REVIEW
LIQUIDITY RISK 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 likelihood the Corporation
would be unable to generate cash or otherwise obtain funds at reasonable rates
to satisfy commitments to borrowers, as well as the obligations to depositors
and debtholders. Liquidity is managed through the coordination of the relative
maturities of assets, liabilities and off-balance-sheet positions and is
enhanced by the ability to raise funds in capital markets.
During the first nine months of 1995, cash and due from banks decreased $468
million to $2.1 billion compared with an increase of $121 million during the
year-earlier period. Net cash provided by operating activities decreased by $1.2
billion in the comparison, primarily due to an increase in loans held for sale
associated with the Corporation's mortgage banking activities. Cash provided by
investing activities increased to $2.9 billion compared with $2.0 billion used
in the year-earlier period reflecting the Corporation's reduction of the
securities portfolio. Net cash used by financing activities totaled $3.5 billion
in the first nine months of 1995 compared with $749 million provided a year
earlier as the Corporation repaid wholesale liabilities using proceeds from the
reduction in securities.
Liquid assets consist of cash and due from banks, short-term investments,
loans held for sale and securities available for sale. At September 30, 1995,
such assets totaled $5.9 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 September 30, 1995,
approximately $5.3 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 $5.2 billion at September 30, 1995. The planned reduction in
the securities portfolio and related wholesale funding sources is not expected
to materially affect overall liquidity.
Liquidity for the parent company and its affiliates is also generated through
the issuance of securities in public or private markets, lines of credit and
dividends from subsidiaries. Under effective shelf registration statements at
September 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.
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 September
30, 1995, the model assumed short-term rates and the cost of replacement funding
would be relatively stable.
22
<PAGE> 23
CORPORATE FINANCIAL REVIEW
THIRD QUARTER 1995 VERSUS
THIRD QUARTER 1994
- ---------------------------------------------------------------
Net income for the third quarter of 1995 totaled $149.0 million, or $.64 per
fully diluted share, compared with $188.0 million, or $.79 per fully diluted
share, a year ago. Return on average assets and return on average common
shareholders' equity were .96 percent and 13.42 percent, respectively, in the
third quarter of 1995, and the after-tax profit margin was 22.58 percent.
Taxable-equivalent net interest income totaled $372.8 million in the third
quarter of 1995 compared with $503.2 million a year ago. The net interest margin
was 2.61 percent compared with 3.45 percent in the third quarter of 1994. 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
other actions taken to reduce interest rate sensitivity. In addition, deposit
and borrowing costs increased more rapidly than loan yields in the
quarter-to-quarter comparison.
Average assets for the third quarter of 1995 totaled $61.7 billion compared
with $62.0 billion in the third quarter last year. For the third quarter of
1995, average loans totaled $36.8 billion. Excluding acquisitions, average loans
increased 6.4 percent compared with the third quarter of 1994. Average loans
represented 64.5 percent of average earning assets compared with 59.2 percent a
year ago, as average securities declined $3.6 billion reflecting the strategic
initiative to downsize this portfolio.
Noninterest income increased $56.2 million, or 24.3 percent, to $287.3 million
in the third quarter of 1995 compared with the year-earlier period. Investment
management and trust income increased $24.3 million, or 33.6 percent, to $96.7
million, primarily due to the BlackRock acquisition, new business, and an
increase in the value of managed assets. Discretionary assets totaled $85.9
billion at September 30, 1995, compared with $50.1 billion a year ago. Service
charges, fees and commissions decreased $3.4 million to $91.7 million in the
third quarter of 1995 compared with the same quarter a year ago, primarily
reflecting the impact of the Corporation's credit card alliance. Excluding the
effect of this alliance, service charges, fees and commissions increased 4.0
percent, or $3.5 million.
Mortgage banking income decreased $27.6 million to $51.3 million during the
third quarter of 1995 compared with the year-earlier period primarily due to
lower gains on sales of servicing.
Other noninterest income increased $18.6 million in the comparison. A $28.2
million gain on the sale of 12 branches located in Dayton, Ohio was partially
offset by lower venture capital income. The branch sale was initiated in
connection with the ongoing rationalization of the Corporation's retail branch
network.
Noninterest expense decreased $3.1 million to $432.8 million for the third
quarter of 1995 compared with the year-earlier period. Lower staff and Federal
deposit insurance expenses were substantially offset in the comparison by the
impact of acquisitions.
23
<PAGE> 24
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
September 30 December 31
Dollars in millions, except par values 1995 1994
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 2,124 $ 2,592
Short-term investments 637 809
Loans held for sale 901 487
Securities available for sale 2,228 3,457
Investment securities, fair value of $15,787 and $16,233 16,035 17,464
Loans, net of unearned income of $225 and $240 36,815 35,407
Allowance for credit losses (943) (1,002)
----------------------------------
Net loans 35,872 34,405
Other 3,421 4,931
----------------------------------
Total assets $61,218 $64,145
----------------------------------
LIABILITIES
Deposits
Noninterest-bearing $ 6,496 $ 6,992
Interest-bearing 26,517 28,019
----------------------------------
Total deposits 33,013 35,011
Borrowed funds
Federal funds purchased 3,407 2,181
Repurchase agreements 5,427 3,785
Commercial paper 490 1,226
Other 3,359 4,416
----------------------------------
Total borrowed funds 12,683 11,608
Notes and debentures 9,616 11,754
Other 1,402 1,378
----------------------------------
Total liabilities 56,714 59,751
SHAREHOLDERS' EQUITY
Preferred stock - $1 par value
Authorized: 17,545,591 and 17,601,524 shares
Issued and outstanding: 865,033 and 920,966 shares
Aggregate liquidation value: $18 and $19 1 1
Common stock - $5 par value
Authorized: 450,000,000 shares
Issued: 236,776,811 and 236,063,418 shares 1,184 1,180
Capital surplus 465 462
Retained earnings 3,189 3,018
Deferred ESOP benefit expense (92) (83)
Net unrealized securities losses (45) (119)
Common stock held in treasury at cost: 8,178,221 and 2,814,910 shares (198) (65)
----------------------------------
Total shareholders' equity 4,504 4,394
----------------------------------
Total liabilities and shareholders' equity $61,218 $64,145
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
24
<PAGE> 25
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
--------------------------------------------------------------
In thousands, except per share data 1995 1994 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans and fees on loans $ 749,019 $ 652,127 $2,194,025 $1,818,974
Securities 262,974 335,117 841,761 947,572
Other 27,481 20,325 70,410 71,121
--------------------------------------------------------------
Total interest income 1,039,474 1,007,569 3,106,196 2,837,667
INTEREST EXPENSE
Deposits 329,378 249,532 941,996 664,777
Borrowed funds 209,705 129,712 626,580 333,322
Notes and debentures 135,598 133,370 426,525 354,313
--------------------------------------------------------------
Total interest expense 674,681 512,614 1,995,101 1,352,412
--------------------------------------------------------------
Net interest income 364,793 494,955 1,111,095 1,485,255
Provision for credit losses 10,078 60,123
--------------------------------------------------------------
Net interest income less provision for credit losses 364,793 484,877 1,111,095 1,425,132
NONINTEREST INCOME
Investment management and trust 96,657 72,354 273,306 218,815
Service charges, fees and commissions 91,717 95,094 272,125 275,135
Mortgage banking 51,333 78,911 146,653 159,274
Net securities gains (losses) 44 (44,202) 9,080 (13,895)
Other 47,536 28,942 88,270 78,561
--------------------------------------------------------------
Total noninterest income 287,287 231,099 789,434 717,890
NONINTEREST EXPENSE
Staff expense 204,841 208,128 611,289 618,999
Net occupancy and equipment 69,314 67,880 206,073 200,022
Other 158,647 159,905 479,222 462,033
--------------------------------------------------------------
Total noninterest expense 432,802 435,913 1,296,584 1,281,054
--------------------------------------------------------------
Income before income taxes 219,278 280,063 603,945 861,968
Applicable income taxes 70,232 92,065 192,260 280,436
--------------------------------------------------------------
Net income $ 149,046 $ 187,998 $ 411,685 $ 581,532
--------------------------------------------------------------
EARNINGS PER COMMON SHARE
Primary $.65 $.79 $1.78 $2.45
Fully diluted .64 .79 1.77 2.44
CASH DIVIDENDS DECLARED PER COMMON SHARE .35 .32 1.05 .96
AVERAGE COMMON SHARES OUTSTANDING
Primary 229,837 236,914 230,869 236,954
Fully diluted 231,875 238,735 233,087 238,807
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
25
<PAGE> 26
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Nine months ended September 30
In millions 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 412 $ 582
Adjustments to reconcile net income to net cash provided by operating activities
Provision for credit losses 60
Depreciation, amortization and accretion 185 185
Deferred income taxes 79 38
Net securities (gains) losses (9) 14
Net gain on sales of assets (66) (55)
Valuation adjustments on assets, net of gains on sales (1) (19)
Changes in
Loans held for sale (414) 927
Other (61) (402)
-----------------------------
Net cash provided by operating activities 125 1,330
INVESTING ACTIVITIES
Net change in loans (1,241) (1,512)
Maturities
Securities available for sale 360 1,920
Investment securities 1,465 2,539
Sales
Securities available for sale 1,713 10,699
Loans 153 561
Foreclosed assets 52 84
Purchases
Securities available for sale (696) (8,430)
Investment securities (32) (7,560)
Loans (520) (22)
Net cash paid for acquisitions (119) (462)
Other 1,799 225
-----------------------------
Net cash provided (used) by investing activities 2,934 (1,958)
FINANCING ACTIVITIES
Net change in
Noninterest-bearing deposits (503) (813)
Interest-bearing deposits (1,405) (1,088)
Federal funds purchased 1,223 822
Sale/issuance
Repurchase agreements 60,328 106,042
Commercial paper 3,234 4,086
Other borrowed funds 80,973 80,433
Notes and debentures 8,506 7,577
Common stock 34 33
Redemption/maturity
Repurchase agreements (58,686) (106,684)
Commercial paper (3,969) (2,739)
Other borrowed funds (82,030) (81,251)
Notes and debentures (10,825) (5,412)
Net acquisition of treasury stock (164) (30)
Cash dividends paid to shareholders (243) (227)
-----------------------------
Net cash provided (used) by financing activities (3,527) 749
-----------------------------
INCREASE IN CASH AND DUE FROM BANKS (468) 121
Cash and due from banks at beginning of year 2,592 1,817
-----------------------------
Cash and due from banks at end of period $ 2,124 $ 1,938
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
26
<PAGE> 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ACCOUNTING POLICIES
- ---------------------------------------------------------------
BUSINESS PNC Bank Corp. provides a broad range of banking and related
financial services through its subsidiaries to consumers, small businesses and
corporate customers and is subject to intense competition from other financial
services companies with respect to these services and customers. PNC Bank Corp.
is also subject to the regulations of certain federal and state agencies and
undergoes periodic examinations by such regulatory authorities.
BASIS OF FINANCIAL STATEMENT PRESENTATION The unaudited consolidated interim
financial statements have been prepared in accordance with generally accepted
accounting principles and include the accounts of PNC Bank Corp. and its
subsidiaries ("Corporation"), substantially all of which are wholly owned. In
the opinion of management, the financial statements reflect all adjustments,
which are of a normal recurring nature, necessary for a fair statement of the
results for the interim periods presented.
In preparing the unaudited consolidated interim financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the balance sheet
and revenues and expenses for the period. Actual results could differ from such
estimates.
The notes included herein should be read in conjunction with the audited
consolidated financial statements included in the Corporation's 1994 Annual
Report.
ALLOWANCE FOR CREDIT LOSSES Effective January 1, 1995, the Corporation adopted
Statement of Financial Accounting Standards ("SFAS") No. 114, "Accounting by
Creditors for Impairment of a Loan," as amended 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 commercial, real
estate project, commercial real estate and restructured 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.
27
<PAGE> 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NONPERFORMING ASSETS 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 Primary earnings per common share is calculated by
dividing net income adjusted for preferred stock dividends declared by the sum
of the weighted average number of shares of common stock outstanding and the
number of shares of common stock which would be issued assuming the exercise of
stock options during each period.
Fully diluted earnings per common share is based on net income adjusted for
interest expense, net of tax, on outstanding convertible debentures and
dividends declared on nonconvertible preferred stock. The weighted average
number of shares of common stock outstanding is increased by the assumed
conversion of outstanding convertible preferred stock and convertible debentures
from the beginning of the year or date of issuance, if later, and the number of
shares of common stock which would be issued assuming the exercise of stock
options. Such adjustments to net income and the weighted average number of
shares of common stock outstanding are made only when such adjustments dilute
earnings per common share.
FINANCIAL DERIVATIVES The Corporation uses off-balance-sheet financial
derivatives as part of its overall asset/liability management process and as
part of its mortgage banking activities. Substantially all of such instruments
are used to manage interest rate risk and to manage risk associated with the
value of certain mortgage servicing rights ("MSR"). Financial derivatives used
for such purposes primarily consist of interest rate swaps, caps, and floors 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 that is probable of
occurring and whose significant terms have been identified. Such instruments
must expose the Corporation to interest rate risk and the futures contract must
reduce such risk. Under hedge accounting, gains and losses on futures contracts
are deferred and included in the carrying value of related assets and
liabilities. The deferred gains and losses are amortized as a yield adjustment
over the expected life of the hedged instrument. If the hedged instruments are
disposed of, the unamortized deferred gains or losses are included in the
determination of the gain/loss on the disposition of such instruments.
Interest rate caps and floors are agreements where, for a fee, the
counterparty agrees to pay the Corporation the amount, if any, by which a
specified market interest rate differs from a defined rate applied to a notional
amount. Premiums on interest rate caps are deferred and amortized over the life
of the agreement as an adjustment to interest income or interest expense of the
designated instruments. Unamortized premiums are included in other assets.
Payments received on interest rate caps are recognized under the accrual method
as an adjustment to interest income or expense of the designated instruments.
Upon termination, any losses, measured by the difference between the unamortized
premium and the fair value payment would be recognized immediately in the
results of operations. Any gains resulting from such terminations would be
deferred and amortized as an adjustment to interest income or expense of the
designated instruments over the shorter of the remaining life of the interest
rate contract or the designated instrument.
28
<PAGE> 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Corporation has used a combination of interest rate swaps and floors to
manage risk associated with the value of MSR. To qualify as a hedge, the
instruments must be designated as a hedge of specified MSR and reduce risk of
changes in the value of MSR. Premiums on interest rate floors are deferred and
amortized over the life of the agreement as an adjustment to non-interest
expense. Unamortized premiums are included in other assets. Unrealized gains or
losses on the hedges are considered in the valuation of MSR. Realized gains and
losses are deferred as an adjustment to the carrying amount of the MSR and
amortized over the estimated life of the designated MSR. Instruments not
qualifying as a hedge would be marked to market.
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 value of OMSR was not
recognized as assets when the related loan was sold. MSR are amortized in
proportion to, and over the period of, estimated net servicing income.
At September 30, 1995, the Corporation's capitalized MSR had a carrying value
of $280.8 million and an estimated fair value of $356.3 million. To determine
the fair value of MSR the Corporation estimates the present value of future cash
flows incorporating numerous assumptions including servicing income, cost of
servicing, discount rate, prepayment speeds and default rates.
SFAS No. 122 also requires that a valuation allowance be established for the
excess of the carrying amount of capitalized MSR over their estimated fair
value. For purposes of measuring impairment, MSR are disaggregated and
stratified on predominant risk characteristics, primarily loan type, interest
rates and investor type. At September 30, 1995 no allowance for impairment was
required.
SFAS No. 122 requires prospective adoption with respect to OMSR recognition.
The after-tax amount of OMSR recognized in the nine months ended September 30,
1995, was $16.6 million, or $.07 per fully diluted share.
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 September 30, 1995, Midlantic had assets
and deposits of $13.9 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 September 30,
1995, the Corporation expects to issue 111.1 million shares of its common stock
to consummate the merger. The transaction will be accounted for as a pooling of
interests. The Corporation has received all required regulatory approvals for
the merger, which is targeted to be completed by year-end 1995, pending approval
by shareholders of both companies.
On October 6, 1995, the Corporation completed the acquisition of Chemical New
Jersey Holdings, Inc., and its wholly-owned subsidiary Chemical Bank New Jersey,
N.A. ("Chemical") consisting of 81 branches in southern and central New Jersey
with total assets of $3.2 billion and retail core deposits of $2.7 billion. The
transaction was accounted for under the purchase method and the Corporation paid
approximately $492 million in cash.
29
<PAGE> 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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 nine months of
1995 and 1994, interest paid on deposits and other contractual debt obligations
was $2.0 billion and $1.3 billion, respectively. Income taxes paid were $36.4
and $305.1 million, respectively. Noncash activities consisted of loans
transferred to foreclosed assets totaling $59.6 million during the first nine
months of 1995 and $46.4 million in the first nine months of 1994 and transfers
of securities available for sale to investment securities totaling $2.7 billion
during the first nine months of 1994.
The table below sets forth information pertaining to acquisitions and
divestitures which affect cash flows for the nine months ended September 30,
1995 and 1994.
<TABLE>
<CAPTION>
Nine months ended September 30
In millions 1995 1994
- ----------------------------------------------------------
<S> <C> <C>
Assets acquired $299 $3,197
Liabilities assumed 144 2,619
Cash paid 155 578
Cash and due from banks received 36 116
- ----------------------------------------------------------
</TABLE>
In addition, the Corporation issued $169 million of unsecured notes in
connection with the BlackRock acquisition.
30
<PAGE> 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SECURITIES
- ------------------------------------------
The following table sets forth the amortized cost, unrealized gains and losses,
and the estimated fair value of the securities portfolio.
[CAPTION]
<TABLE>
September 30, 1995 December 31, 1994
------------------------------------------ --------------------------------------------
Amortized Unrealized Amortized Unrealized
------------------ ------------------
In millions Cost Gains Losses Fair Value Cost Gains Losses Fair Value
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment securities
Debt securities
U.S. Treasury $ 1,806 $14 $ 1,820 $ 1,794 $ 93 $ 1,701
U.S. Government agencies and
corporations
Mortgage-related 9,892 9 $298 9,603 10,920 1,025 9,895
Other 1,000 4 1,004 1,000 28 972
State and municipal 325 21 346 348 $12 2 358
Asset-backed private placements 1,597 10 1,607 1,597 33 1,564
Other debt
Mortgage-related 636 1 9 628 726 43 683
Other 468 1 467 769 20 749
Other 311 1 312 310 1 311
------------------------------------------------------------------------------------------
Total $16,035 $60 $308 $15,787 $17,464 $13 $1,244 $16,233
------------------------------------------------------------------------------------------
Securities available for sale
Debt securities
U.S. Treasury $ 106 $ 1 $ 107 $ 401 $ 8 $ 393
U.S. Government agencies and
corporations
Mortgage-related 1,284 8 $ 9 1,283 2,161 69 2,092
Other 25 1 24 25 4 21
Other debt
Mortgage-related 590 1 2 589 749 17 732
Other 118 2 1 119 117 $ 2 119
Corporate stocks and other 106 2 2 106 105 1 6 100
------------------------------------------------------------------------------------------
Total $2,229 $14 $ 15 $ 2,228 $ 3,558 $ 3 $ 104 $ 3,457
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Management is reviewing the asset/liability positions of Midlantic and the
Corporation and is considering various actions consistent with the Corporation's
strategic initiatives related to balance sheet repositioning and interest rate
risk management. In connection therewith, the Corporation is considering
reclassifying investment securities to the available-for-sale portfolio. Any
reclassifications of investment securities will be accounted for at fair value
and would include the fair value of associated financial derivatives. Unrealized
gains and losses would be recorded as a component of shareholders' equity, net
of tax.
The Corporation may sell securities classified as available for sale as part
of the overall asset/liability management process. Realized gains and losses
would be reflected in the results of operations and would include the fair value
of financial derivatives associated with such securities.
On a pro forma basis, the combined investment securities of the Corporation
and Midlantic had a net unrealized pretax loss of $226 million at September 30,
1995. The associated financial derivatives had an estimated net unrealized
pretax loss of $283 million, including deferred losses on terminated swap
contracts.
31
<PAGE> 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NONPERFORMING ASSETS
- ---------------------------------------------------------------
Nonperforming assets are comprised of nonaccrual and restructured loans, and
foreclosed assets. These assets were as follows:
<TABLE>
<CAPTION>
September 30 December 31
In millions 1995 1994
- --------------------------------------------------------
<S> <C> <C>
Nonaccrual loans $268 $310
Restructured loans 5 9
----------------------------
Total nonperforming
loans 273 319
Foreclosed assets 135 127
----------------------------
Total nonperforming
assets $408 $446
- --------------------------------------------------------
</TABLE>
Information with respect to impaired loans and the related allowance
determined in accordance with SFAS No. 114 is set forth below.
<TABLE>
<CAPTION>
September 30
In millions 1995
- ------------------------------------------------------
<S> <C>
Impaired loans
With a related allowance for credit
losses $123
Without a related allowance for
credit losses 92
----
Total impaired loans $215
----
Allowance for credit losses $ 18
Average impaired loans 240
- ------------------------------------------------------
</TABLE>
During the first nine months of 1995, interest income recognized on impaired
loans was $1.3 million.
ALLOWANCE FOR CREDIT LOSSES
- ---------------------------------------------------------------
The following table presents changes in the allowance for credit losses:
<TABLE>
<CAPTION>
In millions 1995 1994
- ------------------------------------------------------------
<S> <C> <C>
Balance at January 1 $1,002 $ 972
Charge-offs (107) (120)
Recoveries 47 53
----------------------
Net charge-offs (60) (67)
Provision for credit losses 60
Acquisitions 1 65
----------------------
Balance at September 30 $ 943 $1,030
- ------------------------------------------------------------
</TABLE>
NOTES AND DEBENTURES
- ---------------------------------------------------------------
Notes and debentures consisted of the following:
<TABLE>
<CAPTION>
September 30 December 31
In millions 1995 1994
- -------------------------------------------------------------
<S> <C> <C>
BANKING SUBSIDIARIES
Bank notes $5,777 $ 8,825
Federal Home Loan Bank 2,447 1,384
Subordinated notes 345
Student Loan Marketing
Association 500
Other 182
------------------------------
Total banking subsidiaries 8,751 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 $9,616 $11,754
- -------------------------------------------------------------
</TABLE>
Notes and debentures have scheduled repayments for the years 1995 through 1999
and thereafter of $2.3 billion, $5.3 billion, $168 million, $152 million, and
$1.6 billion, respectively. In April 1995, the Corporation issued $350 million
of 7.875 percent unsecured subordinated notes due in 2005.
32
<PAGE> 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FINANCIAL DERIVATIVES
- ----------------------------------------
The following table sets forth the notional value and the related fair values of
financial derivatives used for interest rate risk management and to manage the
risk associated with the value of MSR:
[CAPTION]
<TABLE>
Positive Negative Total
Notional Fair Notional Fair Notional
In millions Value Value Value Value Value
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
September 30, 1995
Interest rate risk management
Interest rate swaps
Receive-fixed $1,015 $13 $ 8,017 $(129) $ 9,032
Pay-fixed 500 3,580 (149) 4,080
Basis swap 465 2 465
-------------------------------------------------------------------------
Total interest rate swaps 1,980 15 11,597 (278) 13,577
Interest rate caps 5,500 18 5,500
-------------------------------------------------------------------------
Total interest rate risk 7,480 33 11,597 (278) 19,077
-------------------------------------------------------------------------
Mortgage servicing risk management
Receive-fixed interest rate swaps 125 1 125
Interest rate floors 500 5 500
-------------------------------------------------------------------------
Total mortgage servicing risk management 625 6 625
-------------------------------------------------------------------------
Total $8,105 $39 $11,597 $(278) $19,702
-------------------------------------------------------------------------
December 31, 1994
Interest rate risk management
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 interest rate risk management $10,679 $162 $12,033 $(791) $22,712
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
During the third quarter of 1995, the Corporation terminated $2.0 billion of
pay-fixed interest rate swaps. The resulting loss was deferred and is being
amortized as an adjustment to interest income or expense of the designated
instruments. At September 30, 1995, the unamortized loss was $92.8 million and
will be amortized ratably over a remaining period of 2 years and 7 months.
33
<PAGE> 34
STATISTICAL INFORMATION
average consolidated balance sheet and net interest analysis
<TABLE>
<CAPTION>
Nine months ended September 30
-------------------------------------------------------------------------------------
1995 1994
Taxable-equivalent basis -------------------------------------------------------------------------------------
Average balance in millions, interest in Average Average Average Average
thousands Balances Interest Yields/Rates Balances Interest Yields/Rates
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets
Short-term investments $ 635 $ 32,829 6.91% $ 821 $ 29,378 4.78%
Mortgages held for sale 602 35,069 7.77 730 38,948 7.11
Securities
U.S. Treasury 2,061 58,289 3.78 3,562 129,262 4.85
U.S. Government agencies and
corporations 13,341 558,242 5.58 15,406 691,417 5.98
State and municipal 342 26,160 10.22 369 28,596 10.33
Other debt 3,791 192,920 6.75 2,212 95,301 5.75
Corporate stocks and others 313 14,821 6.33 295 12,998 5.88
--------------------- ---------------------
Total securities 19,848 850,432 5.71 21,844 957,574 5.85
Loans, net of unearned income
Commercial 12,425 741,652 7.87 11,963 648,452 7.25
Real estate project 1,666 116,521 9.22 1,693 100,181 7.91
Real estate mortgage 11,345 649,048 7.63 9,293 483,967 6.94
Consumer 9,039 619,454 9.16 8,689 538,069 8.28
Other 1,641 82,994 6.75 1,387 63,372 6.10
--------------------- ---------------------
Total loans, net of unearned income 36,116 2,209,669 8.13 33,025 1,834,041 7.42
Other interest-earning assets 54 2,637 6.55 98 2,878 3.94
--------------------- ---------------------
Total interest-earning assets/interest
income 57,255 3,130,636 7.28 56,518 2,862,819 6.77
Noninterest-earning assets
Allowance for credit losses (979) (1,009)
Cash and due from banks 2,252 2,121
Other assets 3,247 2,574
------- -------
Total assets $61,775 $60,204
-------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities
Interest-bearing deposits
Demand and money market $ 9,004 210,358 3.12 $10,007 142,115 1.90
Savings 2,160 41,995 2.60 2,440 22,224 1.22
Other time 14,080 589,738 5.60 13,115 469,887 4.79
Deposits in foreign offices 2,147 99,905 6.14 945 30,551 4.32
--------------------- ---------------------
Total interest-bearing deposits 27,391 941,996 4.59 26,507 664,777 3.35
Borrowed funds
Federal funds purchased 2,782 125,414 6.03 2,880 87,373 4.06
Repurchase agreements 6,447 298,439 6.10 5,180 149,971 3.87
Commercial paper 728 32,459 5.96 947 30,119 4.25
Other 3,342 170,268 6.76 2,277 65,859 3.87
--------------------- ---------------------
Total borrowed funds 13,299 626,580 6.24 11,284 333,322 3.95
Notes and debentures 9,132 426,525 6.20 10,848 354,313 4.36
--------------------- ---------------------
Total interest-bearing liabilities/interest
expense 49,822 1,995,101 5.33 48,639 1,352,412 3.72
Noninterest-bearing liabilities and
shareholders' equity
Demand and other noninterest-bearing
deposits 6,311 6,158
Accrued expenses and other liabilities 1,258 1,087
Shareholders' equity 4,384 4,320
------- -------
Total liabilities and shareholders'
equity $61,775 $60,204
-------------------------------------------------------------------------------------
Interest rate spread including interest
rate swaps and caps 1.95 3.05
Impact of noninterest-bearing
liabilities .69 .52
-------------------------------------------------------------------------------------
Net interest income/margin on earning
assets $1,135,535 2.64% $1,510,407 3.57%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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.
34
<PAGE> 35
STATISTICAL INFORMATION
<TABLE>
<CAPTION>
1995
- ---------------------------------------------------------------------------- 1994
Third Quarter Second Quarter Third Quarter
- -------------------------------------------------------------------------------------------------------------------------------
Average Average Average Average Average Average
Balances Interest Yields/Rates Balances Interest Yields/Rates Balances Interest Yields/Rates
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 518 $ 9,641 7.39% $ 620 $ 10,777 6.97% $ 744 $ 9,493 5.06%
888 16,844 7.59 500 9,756 7.80 546 10,026 7.35
1,946 17,449 3.56 2,065 20,029 3.89 3,008 37,751 4.99
12,595 172,082 5.47 13,335 187,538 5.63 15,494 237,219 6.12
336 8,479 10.10 342 8,816 10.31 359 9,246 10.30
3,613 62,732 6.87 3,806 64,993 6.80 3,245 49,231 6.07
315 5,038 6.35 310 4,928 6.38 316 4,818 6.10
- ---------------------- --------------------- ---------------------
18,805 265,780 5.64 19,858 286,304 5.76 22,422 338,265 6.03
12,660 249,389 7.71 12,479 250,410 7.94 12,454 230,552 7.34
1,713 39,549 9.04 1,665 39,799 9.46 1,621 34,587 8.46
11,761 229,554 7.81 11,383 214,293 7.53 9,836 175,174 7.12
9,088 208,235 9.09 9,005 210,863 9.39 8,993 192,343 8.49
1,602 27,430 6.82 1,659 27,839 6.72 1,590 24,587 6.16
- ---------------------- --------------------- ---------------------
36,824 754,157 8.10 36,191 743,204 8.19 34,494 657,243 7.58
64 1,055 6.58 51 841 6.66 69 827 4.76
- ---------------------- --------------------- ---------------------
57,099 1,047,477 7.28 57,220 1,050,882 7.33 58,275 1,015,854 6.94
(961) (977) (1,043)
2,195 2,413 2,107
3,383 3,262 2,649
- ------- ------- -------
$61,716 $61,918 $61,988
- -------------------------------------------------------------------------------------------------------------------------------
$ 8,882 69,221 3.09 $ 8,799 70,241 3.20 $10,273 57,780 2.23
2,045 13,103 2.54 2,154 14,352 2.67 2,547 11,504 1.79
14,444 208,550 5.74 14,171 199,782 5.65 13,125 160,701 4.86
2,429 38,504 6.20 2,301 35,909 6.17 1,712 19,547 4.53
- ---------------------- --------------------- ---------------------
27,800 329,378 4.70 27,425 320,284 4.68 27,657 249,532 3.58
3,570 53,230 5.92 2,628 40,802 6.23 3,550 40,613 4.54
5,795 90,391 6.10 6,698 105,010 6.20 4,615 49,901 4.29
492 7,396 5.96 621 9,423 6.08 1,405 16,343 4.61
3,437 58,688 6.72 3,334 58,588 6.99 1,776 22,855 5.11
- ---------------------- --------------------- ---------------------
13,294 209,705 6.21 13,281 213,823 6.40 11,346 129,712 4.54
8,459 135,598 6.32 9,213 146,204 6.32 11,358 133,370 4.68
- ---------------------- --------------------- ---------------------
49,553 674,681 5.38 49,919 680,311 5.44 50,361 512,614 4.04
6,452 6,362 6,325
1,286 1,268 942
4,425 4,369 4,360
- ------- ------- -------
$61,716 $61,918 $61,988
- -------------------------------------------------------------------------------------------------------------------------------
1.90 1.89 2.90
.71 .69 .55
- -------------------------------------------------------------------------------------------------------------------------------
$ 372,796 2.61% $ 370,571 2.58% $ 503,240 3.45%
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
35
<PAGE> 36
CORPORATE INFORMATION
CORPORATE HEADQUARTERS
PNC Bank Corp.
One PNC Plaza
Fifth Avenue and Wood Street
Pittsburgh, Pennsylvania 15265
STOCK LISTING
PNC Bank Corp. common stock is traded on the New York
Stock Exchange (NYSE) under the symbol PNC.
REGISTRAR AND TRANSFER AGENT
Chemical Bank
J.A.F. Building
P. O. Box 3068
New York, New York 10116-3068
800-982-7652
INQUIRIES
Individual shareholders should contact:
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
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 request to Glenn Davies, Vice President, Financial
Reporting, at corporate headquarters. Requests may also be directed to (412)
762-1553 or to [email protected] on the Internet.
COMMON STOCK PRICES/DIVIDENDS DECLARED
The table below sets forth by quarter the range of high and low sale prices for
PNC Bank Corp. common stock and the cash dividends declared per common share.
<TABLE>
<CAPTION>
Cash Dividends
1995 Quarter High Low Declared
- ---------------------------------------------------------------
<S> <C> <C> <C>
First $25.750 $21.125 $ .35
Second 28.125 24.250 .35
Third 28.625 23.625 .35
-----------------------------------
Total $1.05
- ---------------------------------------------------------------
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
- ---------------------------------------------------------------
</TABLE>
DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN
The PNC Bank Corp. dividend reinvestment and stock purchase plan enables holders
of common and preferred stock to purchase additional shares of common stock
conveniently and without paying brokerage commissions or service charges. A
prospectus and enrollment card may be obtained by writing to Shareholder
Relations at corporate headquarters.
36
<PAGE> 1
EXHIBIT 99.2
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
(UNAUDITED)
The unaudited pro forma consolidated financial information gives effect
to the Merger to be accounted for as a pooling of interests. The consolidated
financial information on the following pages presents (i) the historical
consolidated balance sheets of both the Corporation and Midlantic at September
30, 1995, and the pro forma consolidated balance sheet as of September 30,
1995, giving effect to the Merger as if it had occurred on that date; and (ii)
the historical consolidated statements of income of both the Corporation and
Midlantic for the nine months ended September 30, 1995 and 1994, and the pro
forma consolidated statements of income for the nine months ended September
30, 1995 and 1994, giving effect to the Merger as if it had been effected for
all periods presented. Certain reclassifications have been made to the
historical financial information to conform presentation. Intercompany
transactions between the Corporation and Midlantic are immaterial and,
accordingly, have not been eliminated.
The pro forma consolidated balance sheet gives effect to anticipated expenses
and nonrecurring charges related to the Merger and assumes each of the
outstanding shares of Midlantic common stock is converted into 2.05 shares of
the Corporation's common stock. In addition, the pro forma consolidated
balance sheet assumes that all Midlantic stock options are exchanged for the
Corporation's common stock, in accordance with the terms of the agreement.
However, pro forma consolidated financial information excludes the estimated
effect of revenue enhancements and expense savings associated with the
consolidation of the operations of the Corporation and Midlantic.
During 1995 and 1994, the Corporation and Midlantic completed, or had
pending, various other acquisitions (including the Chemical Bank-New Jersey
transaction) which individually and in the aggregate were and are not
acquisitions of "significant subsidiaries" in relation to the Corporation.
Accordingly, pro forma financial information with respect to those
acquisitions is not included herein.
The pro forma consolidated financial statements are intended for
information purposes and may not be indicative of the combined financial
position or results of operations that actually would have occurred had the
transaction been consummated during the periods or as of the dates indicated,
or which will be attained in the future. The pro forma consolidated financial
information should be read in conjunction with the 1994 Annual Reports on Form
10-K and the Quarterly Reports on Form 10-Q for the quarterly period ended
September 30, 1995 of the Corporation and Midlantic.
1
<PAGE> 2
PNC BANK CORP.
Pro Forma Consolidated Balance Sheet (Unaudited)
September 30, 1995
<TABLE>
<CAPTION>
PNC MIDLANTIC PRO FORMA
In millions BANK CORP. CORPORATION ADJUSTMENTS PRO FORMA
______________________________________________________________________________________________________________
<S> <C> <C> <C> <C>
ASSETS
Cash and due from banks $ 2,124 $ 832 $ 9 (A) $ 2,985
20 (B)
Short-term investments 637 617 1,254
Loans held for sale 901 901
Securities available for sale 2,228 807 3,035
Investment securities 16,035 2,444 18,479
Loans, net of unearned income 36,815 8,785 45,600
Allowance for credit losses (943) (341) (1,284)
------------------------------------------------------------
Net loans 35,872 8,444 44,316
Other 3,421 717 33 (A) 4,162
23 (B)
(85)(B)
53 (C)
------------------------------------------------------------
Total assets $61,218 $13,861 $ 53 $75,132
============================================================
LIABILITIES
Deposits
Noninterest-bearing $ 6,496 $ 2,729 $ 9,225
Interest-bearing 26,517 8,128 34,645
------------------------------------------------------------
Total deposits 33,013 10,857 43,870
------------------------------------------------------------
Borrowed funds
Federal funds purchased 3,407 53 3,460
Repurchase agreements 5,427 923 6,350
Commercial paper 490 490
Other 3,359 30 3,389
------------------------------------------------------------
Total borrowed funds 12,683 1,006 13,689
Notes and debentures 9,616 369 9,985
Accrued expenses and other liabilities 1,402 180 $150 (C) 1,732
------------------------------------------------------------
Total liabilities 56,714 12,412 150 69,276
SHAREHOLDERS' EQUITY
Preferred stock 1 1
Common stock 1,184 158 (158)(A) 1,739
555 (A)
Capital surplus 465 619 (619)(A) 714
249 (A)
Retained earnings 3,189 683 (42)(B) 3,733
(97)(C)
Deferred ESOP benefit expense (92) (92)
Net unrealized securities gains (losses) (45) 4 (41)
Common stock held in treasury at cost (198) (15) 15 (A) (198)
------------------------------------------------------------
Total shareholders' equity 4,504 1,449 (97) 5,856
------------------------------------------------------------
Total liabilities and shareholders' equity $61,218 $13,861 $ 53 $75,132
==============================================================================================================
</TABLE>
See accompanying Notes to Pro Forma Consolidated Financial Information.
2
<PAGE> 3
PNC BANK CORP.
Pro Forma Consolidated Statement of Income (Unaudited)
Nine months ended September 30, 1995
<TABLE>
<CAPTION>
PNC MIDLANTIC
In thousands, except per share data BANK CORP. CORPORATION PRO FORMA (D)
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Loans and fees on loans $2,194,025 $555,281 $2,749,306
Securities 841,761 157,728 999,489
Other 70,410 30,224 100,634
--------------------------------------------
Total interest income 3,106,196 743,233 3,849,429
--------------------------------------------
INTEREST EXPENSE
Deposits 941,996 208,858 1,150,854
Borrowed funds 626,580 30,671 657,251
Notes and debentures 426,525 25,678 452,203
--------------------------------------------
Total interest expense 1,995,101 265,207 2,260,308
--------------------------------------------
Net interest income 1,111,095 478,026 1,589,121
Provision for credit losses 4,500 4,500
--------------------------------------------
Net interest income less provision for
credit losses 1,111,095 473,526 1,584,621
--------------------------------------------
NONINTEREST INCOME
Investment management and trust 273,306 35,330 308,636
Service charges, fees and commissions 272,125 58,289 330,414
Mortgage banking 146,653 146,653
Net securities gains 9,080 184 9,264
Other 88,270 53,896 142,166
--------------------------------------------
Total noninterest income 789,434 147,699 937,133
--------------------------------------------
NONINTEREST EXPENSE
Staff expense 611,289 189,447 800,736
Net occupancy and equipment 206,073 51,928 258,001
Amortization of intangibles 66,416 6,868 73,284
Federal deposit insurance 38,534 11,473 50,007
Other 374,272 89,790 464,062
--------------------------------------------
Total noninterest expense 1,296,584 349,506 1,646,090
--------------------------------------------
Income before income taxes 603,945 271,719 875,664
Applicable income taxes 192,260 100,884 293,144
--------------------------------------------
Net income $ 411,685 $170,835 $ 582,520
===========================================================================================
EARNINGS PER COMMON SHARE
Primary $1.78 $3.20 $1.71
Fully diluted 1.77 3.14 1.69
AVERAGE COMMON SHARES OUTSTANDING
Primary 230,869 52,854 339,221
Fully diluted 233,087 54,672 345,165
===========================================================================================
</TABLE>
See accompanying Notes to Pro Forma Consolidated Financial Information.
3
<PAGE> 4
PNC BANK CORP.
Pro Forma Consolidated Statement of Income (Unaudited)
Nine months ended September 30, 1994
<TABLE>
<CAPTION>
PNC MIDLANTIC
In thousands, except per share data BANK CORP. CORPORATION PRO FORMA
(D)
-----------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Loans and fees on loans $1,818,974 $505,305 $2,324,279
Securities 947,572 80,668 1,028,240
Other 71,121 52,085 123,206
------------------------------------------
Total interest income 2,837,667 638,058 3,475,725
------------------------------------------
INTEREST EXPENSE
Deposits 664,777 162,673 827,450
Borrowed funds 333,322 15,906 349,228
Notes and debentures 354,313 25,865 380,178
------------------------------------------
Total interest expense 1,352,412 204,444 1,556,856
------------------------------------------
Net interest income 1,485,255 433,614 1,918,869
Provision for credit losses 60,123 23,768 83,891
------------------------------------------
Net interest income less provision for
credit losses 1,425,132 409,846 1,834,978
------------------------------------------
NONINTEREST INCOME
Investment management and trust 218,815 31,927 250,742
Service charges, fees and commissions 275,135 57,995 333,130
Mortgage banking 159,274 159,274
Net securities gains (losses) (13,895) (3,374) (17,269)
Other 78,561 80,380 158,941
------------------------------------------
Total noninterest income 717,890 166,928 884,818
------------------------------------------
NONINTEREST EXPENSE
Staff expense 618,999 172,338 791,337
Net occupancy and equipment 200,022 52,361 252,383
Amortization of intangibles 59,478 4,843 64,321
Federal deposit insurance 54,745 21,386 76,131
Other 347,810 104,073 451,883
------------------------------------------
Total noninterest expense 1,281,054 355,001 1,636,055
------------------------------------------
Income before income taxes 861,968 221,773 1,083,741
Applicable income taxes 280,436 19,894 300,330
------------------------------------------
Income before cumulative effect of
change in accounting principle $ 581,532 $201,879 $ 783,411
=========================================================================================
EARNINGS PER COMMON SHARE BEFORE CUMMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE
Primary $2.45 $3.76 $2.26
Fully diluted 2.44 3.71 2.24
AVERAGE COMMON SHARES OUTSTANDING
Primary 236,954 52,944 345,490
Fully diluted 238,807 54,501 350,533
_________________________________________________________________________________________
</TABLE>
See accompanying Notes to Pro Forma Consolidated Financial Information.
4
<PAGE> 5
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
(UNAUDITED)
(A) The pro forma consolidated balance sheet gives effect to the proposed
Merger of the Corporation and Midlantic by combining the respective
balance sheets of the two companies at September 30, 1995 on a
pooling-of-interests basis. Cash and other assets have been adjusted
to reflect the exercise of Midlantic stock options for $9 million in
cash and a related current tax benefit of $33 million related to the
exchange of the Corporation's common stock for outstanding Midlantic
options. The capital accounts have been adjusted to reflect the issuance
of 111.1 million shares of the Corporation's common stock in exchange
for all the outstanding shares of Midlantic (common stock held in
treasury was assumed to be canceled) and the assumed exchange of the
Corporation's common stock for outstanding Midlantic stock options.
Midlantic's debentures, which approximated $69 million, are convertible
into Midlantic common stock at a conversion price of $48 per share.
For purposes of this pro forma consolidated balance sheet, conversion
of these debentures has not been assumed.
(B) Based upon a 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. Interest rate caps are accounted for on the accrual basis under
the Corporation's accounting policies because they are designated to
certain interest bearing assets which modify their interest rate
characteristics. Upon termination, any losses, measured by the difference
between the unamortized premium and the fair value payment to the
Corporation, would be recognized immediately in the results of operations.
This is because the predominant characteristic of the interest rate cap
is that of a purchased option for which losses are expensed upon
termination under the Corporation's accounting policies. An adjustment
of $65 million (unamortized premium of $85 million net of estimated fair
value payment of $20 million to the Corporation) has been recorded in the
pro forma consolidated balance sheet to reflect the anticipated loss.
This adjustment resulted in a $42 million after-tax charge to retained
earnings in the pro forma balance sheet.
Management is continuing its review of the asset/liability positions
of Midlantic and the Corporation and is considering various actions
consistent with the Corporation's strategic initiatives related to
balance sheet repositioning and interest rate risk management. In
connection therewith, the Corporation is considering reclassifying
investment securities to the available-for-sale portfolio. Any
reclassifications of investment securities will be accounted for at
fair value and would include the fair value of associated financial
derivatives. Unrealized gains and losses would be recorded as a
component of shareholders' equity, net of tax.
The Corporation may sell securities classified as available for sale
as part of the overall asset/liability management process. Realized gains
and losses would be reflected in the results of operations and would
include the fair value of financial derivatives associated with such
securities.
On a pro forma basis, the combined investment securities of the
Corporation and Midlantic had a net unrealized pretax loss of
$226 million at September 30, 1995. The associated financial derivatives
had an estimated net unrealized pretax loss of $283 million, including
deferred losses on terminated swap contracts.
No adjustments have been made in the accompanying pro forma consolidated
balance sheet to reflect the potential reclassification or sale of
investment securities, including the effect, if any, of the related
interest rate swaps, as the Corporation's management has not made a
final determination with respect to such matters.
5
<PAGE> 6
(C) In connection with the closing in the fourth quarter of 1995 of the
Midlantic merger, the Corporation currently estimates it will record
merger-related and nonrecurring charges of between $150 million and
$180 million, compared with an original estimate of $130 million. The
increase in the estimate is primarily due to more aggressive plans with
respect to operations and facilities consolidations. Management continues
to review integration plans and final determination of the amount of
the charges will be made prior to year end. There can be no assurance that
such expenses and charges will not exceed the amounts described above.
A liability of $150 million has been recorded in the pro forma
consolidated balance sheet to reflect an estimate of anticipated expenses
and nonrecurring charges related to the Merger. This liability resulted in
a $97 million after-tax adjustment to retained earnings in the pro forma
consolidated balance sheet. Should the anticipated expenses and
nonrecurring charges exceed the amount reflected in the pro forma
consolidated balance sheet, shareholders' equity would be reduced by the
after-tax effect of such excess. It is anticipated that substantially all
of these charges will be recognized upon consummation of the Merger and
paid in 1995 and/or 1996. The following table provides details of the
estimated charges by type:
<TABLE>
<CAPTION> Estimated
Pre-Tax Amount
Type of Cost (In Millions)
------------ --------------
<S> <C>
Operations and Facilities $ 70
Personnel Related 44
Other 36
----
$150
====
</TABLE>
Operations and facilities charges consist of lease termination costs
and other related costs resulting from the consolidation of overlapping
branches and elimination of redundant operational facilities as well as
write-offs of computer hardware and software, signage and
telecommunication equipment due to incompatibility or duplication.
Personnel related costs consist primarily of charges related to employee
severance, termination of certain employee benefit plans and employee
outplacement assistance. Other charges include investment banking
fees, legal and accounting fees, proxy registration/filing fees and
mailing costs and adjustment of state deferred tax assets relating to
the Merger.
(D) The pro forma consolidated statements of income give effect to the
proposed Merger by combining the respective statements of income of
the two companies for the nine months ended September 30, 1995 and 1994.
The pro forma statements of income do not give effect to anticipated
expenses and nonrecurring charges related to the Merger and the estimated
effect of revenue enhancements and expense savings associated with the
consolidation of the operations of the Corporation and Midlantic.
Earnings per common share amounts for the Corporation and Midlantic are
based on the historical fully diluted weighted average number of common
shares outstanding for each company during the period. With respect to
the pro forma earnings per share computation, shares of Midlantic have been
adjusted to the equivalent shares of the Corporation for each period.
6
