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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
(Mark One)
[X] Annual report pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 1996
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from ___________ to ___________
PNC BANK CORP.
(Exact name of registrant as specified in its charter)
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PENNSYLVANIA 25-1435979
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(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
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ONE PNC PLAZA
249 FIFTH AVENUE
PITTSBURGH, PENNSYLVANIA 15222-2707
(Address of principal executive offices)
Registrant's telephone number, including area code - (412) 762-1553
Securities registered pursuant to Section 12(b) of the Act:
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Name of Each Exchange
Title of Each Class on Which Registered
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COMMON STOCK, PAR VALUE $5.00 New York Stock Exchange
$1.60 CUMULATIVE CONVERTIBLE PREFERRED STOCK-SERIES C, PAR VALUE $1.00 New York Stock Exchange
$1.80 CUMULATIVE CONVERTIBLE PREFERRED STOCK-SERIES D, PAR VALUE $1.00 New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act:
$1.80 CUMULATIVE CONVERTIBLE PREFERRED STOCK - SERIES A, PAR VALUE $1.00
$1.80 CUMULATIVE CONVERTIBLE PREFERRED STOCK - SERIES B, PAR VALUE $1.00
8.25% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2008
8 1/4% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2010
9.875% SUBORDINATED CAPITAL NOTES DUE 1999
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 by check mark if the disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant amounted to approximately $12.9 billion at February 28, 1997.
Number of shares of Registrant's common stock outstanding at February 28, 1997:
321,728,962
DOCUMENTS INCORPORATED BY REFERENCE
Portions of PNC Bank Corp.'s Annual Report to Shareholders for the year ended
December 31, 1996 ("Annual Report to Shareholders") are incorporated by
reference into Parts I and II and portions of the definitive Proxy Statement of
PNC Bank Corp. for the annual meeting of shareholders to be held on April 22,
1997 ("Proxy Statement") are incorporated by reference into Part III of this
Form 10-K. The incorporation by reference herein of portions of the Proxy
Statement shall not be deemed to specifically incorporate by reference the
information referred to in Item 402(a)(8) of Regulation S-K.
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TABLE OF CONTENTS
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PART I Page
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Item 1 Business 2
Item 2 Properties 5
Item 3 Legal Proceedings 5
Item 4 Submission of Matters to a Vote of Security
Holders *
PART II
Item 5 Market for Registrant's Common Equity and
Related Stockholder Matters 6
Item 6 Selected Financial Data 6
Item 7 Management's Discussion and Analysis of
Financial Condition and Results of 6
Operations
Item 8 Financial Statements and Supplementary Data 6
Item 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure *
PART III
Item 10 Directors and Executive Officers of the 6
Registrant
Item 11 Executive Compensation 7
Item 12 Security Ownership of Certain Beneficial
Owners and Management 7
Item 13 Certain Relationships and Related 7
Transactions
PART IV
Item 14 Exhibits, Financial Statement Schedules and
Reports on Form 8-K 7
SIGNATURES 8
EXHIBIT INDEX E-1
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* Not applicable
PART I
ITEM 1 - BUSINESS
BUSINESS OVERVIEW PNC Bank Corp. ("PNC Bank" or "Corporation") is a bank
holding company registered under the Bank Holding Company Act of 1956, as
amended ("BHC Act"). PNC Bank was incorporated under the laws of the
Commonwealth of Pennsylvania in 1983 with the consolidation of Pittsburgh
National Corporation and Provident National Corporation. Since 1983, PNC Bank
has diversified its geographical presence and product capabilities through
strategic bank and nonbank acquisitions and the formation of various nonbanking
subsidiaries.
The Corporation is one of the largest diversified financial services companies
in the United States and operates five lines of business: Consumer Banking,
Corporate Banking, Real Estate Banking, Mortgage Banking and Asset Management.
Each line of business focuses on specific customer segments and offers
financial products and services in PNC Bank's primary geographic locations in
Pennsylvania, New Jersey, Delaware, Ohio and Kentucky and nationally through
retail distribution networks and alternative delivery channels. At December 31,
1996, the Corporation's consolidated total assets, deposits and shareholders'
equity were $73.3 billion, $45.7 billion and $5.9 billion, respectively.
LINES OF BUSINESS Information relating to Consumer Banking, Corporate Banking,
Real Estate Banking, Mortgage Banking and Asset Management is set forth under
the captions "Business Strategies" and "Line of Business Results" in the
"Corporate Financial Review" included on pages 27 through 28 and 29 through 34,
respectively, of the Annual Report to Shareholders, which is incorporated
herein by reference.
SUBSIDIARY BANKS While the Corporation manages five lines of business, the
corporate legal structure currently consists of 10 subsidiary banks and over
140 active nonbank subsidiaries. PNC Bank, National Association, headquartered
in Pittsburgh, Pennsylvania is the Corporation's only bank subsidiary which is
a significant subsidiary within the meaning of Rule 1-02(v) of Regulation S-X.
At December 31, 1996, PNC Bank, N. A. had total assets of $58 billion,
representing 79% of the Corporation's consolidated assets. For additional
information on subsidiaries, see Exhibit 21 to this Form 10-K which is
incorporated herein by reference.
STATISTICAL DISCLOSURES BY BANK HOLDING COMPANIES The following statistical
information is included on the indicated pages of the Annual Report to
Shareholders and is incorporated herein by reference:
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Page of
Annual
Report
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Analysis of Year-to-Year Changes in Net Interest
Income 71
Average Consolidated Balance Sheet and Net Interest
Analysis 72
Book Values of Securities 45 and 55
Maturities and Weighted-Average Yield of Securities 55
Loan Types 56
Loan Maturities and Interest Sensitivity 74
Nonaccrual, Past Due and Restructured Loans 57
Potential Problem Loans 40
Summary of Loan Loss Experience 74
Allocation of Allowance for Credit Losses 75
Average Amount and Average Rate Paid on Deposits 72
Time Deposits of $100,000 or More 75
Selected Consolidated Financial Data 69
Borrowed Funds 75
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RISK MANAGEMENT The Corporation's ordinary course of business involves varying
degrees of risk taking, the most significant of which are credit, liquidity and
interest rate risk. Although it cannot eliminate these risks, PNC Bank has risk
management processes designed to provide for risk identification, measurement,
monitoring and control. Information relating to credit, liquidity and interest
rate risk and the Corporation's risk management processes is set forth under
the section "Risk Management" in the "Corporate Financial Review" included on
pages 39 through 42 of the Annual Report to Shareholders, which is incorporated
herein by reference.
EFFECT OF GOVERNMENTAL MONETARY POLICIES The earnings and operations of bank
holding companies and their subsidiaries are affected by the monetary and
fiscal policies of the United States government and its agencies, including the
Board of Governors of the Federal Reserve System (the "Federal Reserve Board").
An important function of the Federal Reserve Board is to regulate the national
supply of bank credit. The Federal Reserve Board employs open market operations
in U.S. Government securities, changes in the discount rate on bank borrowings
and changes in reserve requirements on bank deposits to implement its monetary
policy objectives. These instruments of monetary policy are used in varying
combinations to influence the overall level of bank loans, investments and
deposits, the interest rates charged on loans and paid for deposits, the price
of the dollar in foreign exchange markets and the level of inflation. The
monetary policies of the Federal Reserve Board have had a significant effect on
the operating results of banking institutions in the past and are expected to
continue to do so in the future. It is not possible to predict the nature or
timing of future changes in monetary and fiscal policies or the effect that
they may have on the Corporation's business and earnings.
SUPERVISION AND REGULATION The Corporation and its subsidiaries are subject to
numerous governmental regulations, some of which are highlighted below and in
"Note 19 - Regulatory Matters" of the "Notes to Consolidated Financial
Statements" included on page 64 of the Annual Report to Shareholders ("Note 19
- - Regulatory Matters"), which is incorporated herein by reference. The coverage
of the regulations range from activity, investment and dividend limitations on
the bank holding company and its subsidiaries to consumer-related protections
for loan, deposit, brokerage and mutual fund customers.
As a bank holding company registered under the BHC Act, the Corporation is
subject to the supervision and regular inspection by the Federal Reserve Board.
Under the BHC Act, the Federal Reserve Board's prior approval is required in
any case the Corporation proposes to acquire all or substantially all of the
assets of any bank, acquire direct or indirect ownership or control of more
than 5% of the voting shares of any bank, or merge or consolidate with any
other bank holding company. The BHC Act also prohibits, with certain
exceptions, the Corporation from acquiring direct or indirect ownership or
control of more than 5% of any class of voting shares of any nonbanking
corporation. Under the BHC Act, the Corporation may not engage in any business
other than managing and controlling banks or furnishing certain specified
services to subsidiaries, and may not acquire voting control of nonbanking
corporations, unless the Federal Reserve Board determines such businesses and
services to be closely related to banking. When reviewing bank acquisition
applications for approval, the Federal Reserve Board considers, among other
things, each subsidiary bank's record in meeting credit needs of the
communities it serves in accordance with the Community Reinvestment Act of
1977, as amended ("CRA"). At December 31, 1996, the Corporation's subsidiary
banks were rated "Outstanding" or "Satisfactory" with respect to CRA.
The Corporation's subsidiary banks are subject to supervision and examination
by applicable federal and state banking agencies, including such federal
agencies as the Office of the Comptroller of the Currency ("OCC") with respect
to its national banks, the Federal Reserve Board with respect to PNC Bank,
Kentucky, Inc., the Federal Deposit Insurance Corporation ("FDIC") with respect
to PNC Bank, Delaware and PNC Bank, New England, and the Office of Thrift
Supervision with respect to PNC Bank, FSB. The Corporation's subsidiary banks
are subject to various federal and state restrictions on their ability to pay
dividends to the Corporation, which constitutes the principal source of income
to the parent company as discussed under the caption "Liquidity" in the
"Corporate Financial Review" on page 41 of the Annual Report to Shareholders,
which is incorporated herein by reference. The Corporation's subsidiary banks
are also subject to federal laws limiting extension of credit to their parent
holding company and nonbank affiliates as discussed in "Note 19 - Regulatory
Matters."
The federal banking agencies possess broad powers to take corrective action as
deemed appropriate for an insured depository institution and its holding
company. The extent of these powers depends upon whether the institution in
question is considered "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." Generally, as an institution is deemed to be less well
capitalized, the scope and severity of the agencies' powers increase,
ultimately permitting the agency to appoint a receiver for the institution.
Business activities may also be influenced by an institution's capital
classification. For instance, only a "well capitalized" depository institution
may accept brokered deposits without prior regulatory approval and only an
"adequately capitalized" depository institution may accept brokered deposits
with prior regulatory approval. At December 31, 1996, all of the Corporation's
subsidiary banks exceeded the required ratios for classification as "well
capitalized."
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Additional discussion of capital adequacy requirements is set forth under the
caption "Capital" in the "Corporate Financial Review" on page 39 of the Annual
Report to Shareholders, which is incorporated herein by reference.
All of the subsidiary banks are insured by the FDIC and subject to premium
assessments. The amount of FDIC assessments is based on the institution's
relative risk as measured by regulatory capital ratios and certain other
factors. Under current regulations, the Corporation's subsidiary banks are not
assessed a premium on deposits insured by either the Bank Insurance Fund or the
Savings Association Insurance Fund. However, insured depository institutions
will continue to pay premiums based on deposit levels to service debt on
Financing Corporation bonds.
The Corporation's subsidiary banks are subject to "cross-guarantee" provisions
under federal law that provide if one FDIC-insured depository institution of a
multi-bank holding company fails or requires FDIC assistance, the FDIC may
assess a "commonly controlled" depository institution for the estimated losses
suffered by the FDIC. Such liability could have a material adverse effect on
the financial condition of any assessed bank and the Corporation. While the
FDIC's claim is junior to the claims of depositors, holders of secured
liabilities, general creditors and subordinated creditors, it is superior to
the claims of shareholders and affiliates.
Under Federal Reserve Board policy, a bank holding company is expected to act as
a source of financial strength to each of its subsidiary banks and to commit
resources to support each such bank. Consistent with the "source of strength"
policy for subsidiary banks, the Federal Reserve Board has stated that, as a
matter of prudent banking, a bank holding company generally should not maintain
a rate of cash dividends unless its net income available to common shareholders
has been sufficient to fund fully the dividends, and the prospective rate of
earnings retention appears to be consistent with the corporation's capital
needs, asset quality and overall financial condition.
The Corporation's nonbank subsidiaries are subject to regulatory
restrictions imposed by the Federal Reserve Board and other federal and state
agencies as well. The Corporation's four registered broker-dealer subsidiaries
are regulated by the Securities and Exchange Commission ("SEC") and monitored
by the OCC in three instances and the Federal Reserve Board in the other
instance. They are also subject to rules and regulations promulgated by the
National Association of Securities Dealers, Inc., among others. Several nonbank
subsidiaries which are registered investment advisers are subject to the
regulations of the SEC and other agencies. Investment advisers which are
national bank subsidiaries are also subject to OCC supervision.
Over the past few years, the regulatory framework applicable to the Corporation
and its subsidiaries has been subject to extensive Congressional and agency
review, which has resulted in some liberalization and may result in further
reforms. Current proposals range from easing restrictions on a bank's insurance
and investment banking activities to easing bank ownership requirements.
Management currently cannot predict the outcome of these proposals or the
effect, if any, on the Corporation.
Since 1995, the BHC Act has permitted bank holding companies from any state to
acquire banks and bank holding companies located in any other state, subject to
certain conditions. Effective June 1, 1997, the Corporation's subsidiary banks
will have the ability, subject to certain restrictions, including state opt-out
provisions, to consolidate with one another or to acquire by acquisition or
merger branches outside their home state. Some states, including Delaware,
Kentucky, New Jersey, Ohio and Pennsylvania, have affirmatively opted to permit
such transactions earlier. Pursuant to these provisions, the Corporation merged
certain subsidiary banks during 1996 and may do so in the future. Competition
may increase further as banks branch across state lines and enter new markets.
COMPETITION The Corporation and subsidiaries are subject to vigorous and
intense competition from various financial institutions and increasingly from
"nonbank" entities that engage in similar activities without being subject to
bank regulatory supervision and restrictions. In making loans, the subsidiary
banks compete with traditional banking institutions as well as consumer finance
companies, leasing companies and other nonbank lenders. Loan pricing and credit
standards are under competitive pressure as lenders seek to deploy capital and
a broader range of borrowers have access to capital markets. Traditional
deposit activities are subject to pricing pressures and customer migration as
the competition for consumer investment dollars intensifies among banks and
other financial services companies. The Corporation's subsidiary banks compete
for deposits not only with other commercial banks, savings banks, savings and
loan associations and credit unions, but also insurance companies, issuers of
commercial paper and other securities, including mutual funds. Various non-bank
subsidiaries engaged in investment banking and venture capital activities
compete with commercial banks, investment banking firms, insurance companies
and venture capital firms. In providing asset management services, the
Corporation's subsidiaries compete with many large banks, trust companies,
brokerage houses, mutual fund managers, other registered investment advisers
and insurance companies.
The Corporation and its subsidiaries compete not only with financial
institutions headquartered in states in which the subsidiary banks are located,
but also a number of large out-of-state and foreign banks, bank holding
companies and other financial and nonbank institutions. Some of the financial
and other institutions operating in the same markets are engaged in national
and international operations and have more assets and personnel than the
Corporation.
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EXECUTIVE OFFICERS OF THE REGISTRANT Information concerning each executive
officer of the Corporation as of March 1, 1997 is set forth below. Each
executive officer held the position indicated or another senior executive
position with the same entity or one of its affiliates or a predecessor
corporation for the past five years.
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Position with Year
Name Age Corporation Employed(1)
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Thomas H. O'Brien (2) 60 Chairman and Chief 1962
Executive Officer
James E. Rohr (2) 48 President and Director 1972
Walter E. Gregg, Jr. 55 Senior Executive Vice 1974
(2) President
Susan B. Bohn 52 Executive Vice President, 1986
Corporate Development
and Communications
Richard C. Caldwell 52 Executive Vice President, 1990
Asset Management
Frederick J. 54 Executive Vice President, 1976
Gronbacher Consumer Banking
Robert L. Haunschild 47 Senior Vice President and 1990
Chief Financial Officer
William J. Johns 49 Senior Vice President and 1974
Chief Accounting Officer
Ralph S. Michael III 42 Executive Vice President, 1979
Corporate Banking
Thomas E. Paisley III 49 Senior Vice President and 1972
Chairman, Corporate
Credit Policy Committee
Helen P. Pudlin 47 Senior Vice President and 1989
General Counsel
Bruce E. Robbins 52 Executive Vice President, 1973
Real Estate Banking
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(1) Where applicable, refers to year first employed by predecessor company or
acquired company.
(2) Office of the Chairman member.
ITEM 2 - PROPERTIES
The executive and administrative offices of the Corporation and PNC Bank,
National Association ("PNC Bank, N.A."), are located at One PNC Plaza,
Pittsburgh, Pennsylvania. The thirty-story structure is owned by PNC Bank, N.A.
The Corporation and PNC Bank, N.A. occupy substantially all of the building. In
addition, PNC Bank, N.A. owns a thirty-four story structure adjacent to One PNC
Plaza, known as Two PNC Plaza, 620 Liberty Avenue, Pittsburgh, Pennsylvania,
that houses additional office space. PNC Bank, N.A. also owns a data processing
and telecommunications center located in a suburb of Pittsburgh, Pennsylvania.
The Corporation's subsidiaries also own or lease numerous other premises for
use in conducting business activities. The facilities owned or occupied under
lease by the Corporation's subsidiaries are considered by management to be
adequate.
Additional information pertaining to the Corporation's properties is set forth
in "Note 8 - Premises, Equipment and Leasehold Improvements" of the "Notes to
Consolidated Financial Statements" included on pages 57 and 58 of the Annual
Report to Shareholders, which is incorporated herein by reference.
ITEM 3 - LEGAL PROCEEDINGS
A consolidated class action complaint was filed in March 1995 in the United
States District Court for the Western District of Pennsylvania against the
Corporation, its Chairman and Chief Executive Officer and its Senior Vice
President and Chief Financial Officer. The lawsuit was consolidated from four
lawsuits filed in November and December 1994. The consolidated complaint
alleges violations of federal securities laws and common law relating to
disclosures regarding the Corporation's net interest income, interest rate
risk, future prospects, and related matters, and seeks, among other things,
unquantified damages. On August 7, 1996, the district court denied defendants'
motion to dismiss as to all claims except the negligent misrepresentation
claim, which was dismissed. On the same date, the district court certified the
case as a class action consisting of all persons who purchased the
Corporation's common stock from April 18, 1994 through November 15, 1994.
Management believes there are meritorious defenses to this consolidated lawsuit
and intends to defend it vigorously. Management believes that the final
disposition will not be material to the Corporation's financial position.
The Corporation, in the normal course of business, is subject to various other
pending and threatened lawsuits in which claims for monetary damages are
asserted. Management, after consultation with legal counsel, does not
anticipate that the ultimate aggregate liability, if any, arising out of such
other lawsuits will have a material effect on the Corporation's financial
position.
At the present time, management is not in a position to determine whether any
pending or threatened litigation will have a material adverse effect on the
Corporation's results of operations in any future reporting period.
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PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Corporation's common stock is listed on the New York Stock Exchange and is
traded under the symbol "PNC". At the close of business on February 28, 1997,
there were 65,642 common shareholders of record.
Holders of common stock are entitled to receive dividends when declared by the
Board of Directors out of funds legally available therefor. The Board of
Directors may not pay or set apart dividends on the common stock until
dividends for all past dividend periods on any series of outstanding preferred
stock have been paid or declared and set apart for payment. The Board presently
intends to continue the policy of paying quarterly cash dividends. However, the
amount of any future dividends will depend on earnings, the financial condition
of the Corporation and other factors including applicable government
regulations and policies (such as those relating to the ability of the
subsidiary banks and nonbank subsidiaries to upstream dividends to the parent
company). The Federal Reserve Board has the power to prohibit the Corporation
from paying dividends without prior regulatory approval. Further discussion
concerning dividend restrictions is set forth under the caption "Supervision
and Regulation" in Part I, Item 1 of this Form 10-K and in "Note 19 -
Regulatory Matters," which sections are incorporated herein by reference.
Additional information relating to the common stock is set forth under the
caption "Common Stock Prices/Dividends Declared" on page 76 of the Annual
Report to Shareholders, which is incorporated herein by reference.
ITEM 6 - SELECTED FINANCIAL DATA
"Selected Consolidated Financial Data" on page 69 of the Annual Report to
Shareholders is incorporated herein by reference.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The discussion of the Corporation's financial position and results of
operations set forth under the section "Corporate Financial Review" on pages 26
through 46 of the Annual Report to Shareholders is incorporated herein by
reference.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The "Report of Ernst & Young LLP, Independent Auditors," "Consolidated
Financial Statements" and "Selected Quarterly Financial Data" on pages 47, 48
through 51, and 70, respectively, of the Annual Report to Shareholders are
incorporated herein by reference.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to the principal occupations of directors of the
Corporation, their ages, directorships in other companies, and respective terms
of office, except for Donald L. Moritz and Arthur J. Kania who are not standing
for reelection, is set forth under the heading "Election of Directors -
Information Concerning Nominees" in the Proxy Statement and is incorporated
herein by reference. Mr. Moritz, age 69, has been a director of the Corporation
since 1985. He is a director and chairman of the Executive Committee of
Equitable Resources, Inc., an energy, gas and utility company. Mr. Kania, age
65, is a principal with Trikan Associates, a real estate management investment
firm, and became a director of the Corporation in connection with the Midlantic
Corporation merger effective December 31, 1995. Mr. Kania is also a partner
with Kania, Lindner, Lasak & Feeney, a law firm.
Information regarding compliance with Section 16(a) of the Securities Exchange
Act of 1934 set forth under the heading Section 16(a) Beneficial Ownership
Reporting Compliance in the Proxy Statement is incorporated herein by
reference.
Information regarding executive officers of the Corporation is included in Part
I of this Form 10-K under the caption "Executive Officers of the Registrant".
Information regarding the involvement of the Corporation's Chairman and Chief
Executive Officer and Senior Vice President and Chief Financial Officer in a
certain legal proceeding set forth under the heading "Legal Proceedings" in the
Proxy Statement is incorporated herein by reference.
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ITEM 11 - EXECUTIVE COMPENSATION
Information regarding compensation of directors and executive officers under
the captions "Election of Directors - Compensation of Directors," "Election of
Directors Common Stock Purchase Guideline" and "Compensation of Executive
Officers," excluding the "Personnel and Compensation Committee Report on
Executive Compensation," in the Proxy Statement is incorporated herein by
reference.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding the beneficial ownership of the equity securities of the
Corporation by all directors, each of the five highest compensated executive
officers, all directors and executive officers of the Corporation as a group
and certain other beneficial owners under the heading "Security Ownership of
Directors and Executive Officers and Certain Beneficial Owners" in the Proxy
Statement is incorporated herein by reference.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding transactions and relationships with certain directors and
executive officers of the Corporation and their associates under the heading
"Compensation of Executive Officers-Compensation Committee Interlocks and
Insider Participation" in the Proxy Statement is incorporated herein by
reference.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
FINANCIAL STATEMENTS The following report of independent auditors and
consolidated financial statements of the Corporation included in the Annual
Report to Shareholders are incorporated herein by reference.
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Page of
Annual
Financial Statements Report
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Report of Ernst & Young LLP, Independent Auditors 47
Consolidated Statement of Income for the three
years ended December 31, 1996 48
Consolidated Balance Sheet as of December 31, 1996
and 1995 49
Consolidated Statement of Changes in
Shareholders' Equity for the three years 50
ended December 31, 1996
Consolidated Statement of Cash Flows for the
three years ended December 31, 1996 51
Notes to Consolidated Financial Statements 52-68
Quarterly Selected Financial Data 70
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No financial statement schedules are being filed.
REPORTS ON FORM 8-K The following reports on Form 8-K were filed during the
quarter ended December 31, 1996, or thereafter:
Form 8-K dated as of October 7, 1996, reporting a public offering of 6,000,000
shares by the Corporation of a newly authorized series of Preferred Stock,
filed pursuant to Item 5.
Form 8-K dated as of October 10, 1996, reporting the Corporation's consolidated
financial results for the three and nine months ended September 30, 1996, filed
pursuant to Item 5.
Form 8-K dated as of January 15, 1997, reporting the Corporation's consolidated
financial results for the three months and year ended December 31, 1996, filed
pursuant to Item 5.
EXHIBITS The exhibits listed on the Exhibit Index on pages E-1 and E-2 of this
Form 10-K are filed herewith or are incorporated herein by reference.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant, PNC Bank Corp., has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
PNC BANK CORP.
(Registrant)
By: /s/ ROBERT L. HAUNSCHILD
---------------------------------------------
Robert L. Haunschild, Senior Vice President
and Chief Financial Officer
March 21, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of PNC Bank
Corp. and in the capacity indicated on March 21, 1997.
/s/ THOMAS H. O'BRIEN
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Thomas H. O'Brien, Chairman, Chief Executive
Officer and Director
/s/ ROBERT L. HAUNSCHILD
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Robert L. Haunschild, Senior Vice President and
Chief Financial Officer
/s/ WILLIAM J. JOHNS
- ------------------------------------------------
William J. Johns, Senior Vice President and
Chief Accounting Officer
*
- ------------------------------------------------
Paul W. Chellgren, Director
*
- ------------------------------------------------
Robert N. Clay, Director
*
- ------------------------------------------------
George A. Davidson, Director
*
- ------------------------------------------------
David F. Girard-diCarlo, Director
*
- ------------------------------------------------
Dianna L. Green, Director
*
- ------------------------------------------------
C. G. Grefenstette, Director
*
- ------------------------------------------------
Arthur J. Kania, Director
*
- ------------------------------------------------
Bruce C. Lindsay, Director
*
- ------------------------------------------------
Thomas Marshall, Director
*
- ------------------------------------------------
W. Craig McClelland, Director
*
- ------------------------------------------------
Donald I. Moritz, Director
*
- ------------------------------------------------
Jackson H. Randolph, Director
*
- ------------------------------------------------
James E. Rohr, President and Director
*
- ------------------------------------------------
Roderic H. Ross, Director
*
- ------------------------------------------------
Vincent A. Sarni, Director
*
- ------------------------------------------------
Garry J. Scheuring, Director
*
- ------------------------------------------------
Richard P. Simmons, Director
*
- ------------------------------------------------
Thomas J. Usher, Director
*
- ------------------------------------------------
Milton A. Washington, Director
*
- ------------------------------------------------
Helge H. Wehmeier, Director
*By: /s/ MELANIE S. CIBIK
--------------------------------------------
Melanie S. Cibik, Attorney-in-fact,
pursuant to Powers of Attorney
filed herewith
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EXHIBIT INDEX
3.1 Articles of Incorporation of the Corporation, as amended, incorporated
herein by reference to Exhibit 99.1 and 99.2 of the Current Report on
Form 8-K dated October 7, 1996.
3.2 By-Laws of the Corporation, as amended, incorporated herein by
reference to Exhibit 4.2 of the Corporation's Registration Statement
on Form S-8 at File No. 33-62311.
4.1 Instruments defining the rights of holders of long-term debt of the
Corporation and its subsidiaries are not filed as Exhibits because the
amount of debt under each instrument is less than 10 percent of the
consolidated assets of the Corporation. The Corporation undertakes to
file these instruments with the Commission on request.
4.2 Designation of Series: $1.80 Cumulative Convertible Preferred Stock --
Series A, incorporated herein as part of Exhibit 3.1.
4.3 Designation of Series: $1.80 Cumulative Convertible Preferred Stock --
Series B, incorporated herein as part of Exhibit 3.1.
4.4 Designation of Series: $1.60 Cumulative Convertible Preferred Stock --
Series C, incorporated herein as part of Exhibit 3.1.
4.5 Designation of Series: $1.80 Cumulative Convertible Preferred Stock --
Series D, incorporated herein as part of Exhibit 3.1.
4.6 Designation of Series: Fixed/Adjustable Rate Noncumulative Preferred
Stock - Series F, incorporated herein as part of Exhibit 3.1.
10.1 Supplemental Executive Retirement Income and Disability Plan of the
Corporation, incorporated herein by reference to Exhibit 10.2 of the
Annual Report on Form 10-K for the year ended December 31, 1990 ("1990
Form 10-K").*
10.2 Amendments to Supplemental Executive Retirement Income and Disability
Plan, filed herewith.*
10.3 Supplemental Executive Life Insurance and Spouse's Benefit Plan of the
Corporation, incorporated herein by reference to Exhibit 10.3 of the
1990 Form 10-K.*
10.4 November 21, 1996 Amendment to Supplemental Executive Life Insurance
and Spouse's Benefit Plan, filed herewith.*
10.5 1992 Long-Term Incentive Award Plan of the Corporation ("1992 Award
Plan"), incorporated herein by reference to Exhibit 4.3 of the
Corporation's Registration Statement on Form S-8 at File No. 33-54960.*
10.6 Form of Nonstatutory Stock Option Agreement under 1992 Award Plan,
filed herewith.*
10.7 Form of Incentive Share Agreement under 1992 Award Plan (June 1995),
as amended November 21, 1996, filed herewith.*
10.8 PNC Bank Corp. 1994 Annual Incentive Award Plan, incorporated by
reference to Exhibit 10.6 of the Annual Report on Form 10-K for the
year ended December 31, 1994 ("1994 Form 10-K").*
10.9 PNC Bank Corp. 1996 Executive Incentive Award Plan, incorporated by
reference to Exhibit 10.2 of the Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996 ("3Q 1996 Form 10-Q").*
10.10 PNC Bank Corp. and Affiliates Deferred Compensation Plan, incorporated
by reference to Exhibit 4.2 to the Corporation's Registration
Statement on Form S-8 at File No. 333-18069.*
10.11 PNC Bank Corp. Supplemental Incentive Savings Plan, as amended,
incorporated by reference to Exhibit 4.1 to the Corporation's
Registration Statement on Form S-8 at File No. 333-18069.*
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<PAGE> 10
10.12 PNC Bank Corp. Supplemental Pension Plan, as amended, filed herewith.*
10.13 1992 Director Share Incentive Plan, incorporated herein by reference
to Exhibit 10.6 of the Annual Report on Form 10-K for the year ended
December 31, 1992.*
10.14 PNC Bank Corp. Directors Retirement Plan, incorporated by reference to
Exhibit 10.7 of the 1994 Form 10-K.*
10.15 PNC Bank Corp. Directors Deferred Compensation Plan, incorporated by
reference to Exhibit 10.1 of the 3Q 1996 Form 10-Q.*
10.16 Employment Agreement dated as of December 29, 1995, between the
Corporation and Garry J. Scheuring, incorporated by reference to
Exhibit 10.7 of the 1995 Form 10-K.*
10.17 Form of Change in Control Severance Agreement, filed herewith.*
10.18 Amended and Restated Trust Agreement between the Corporation, as
Settlor, and NationsBank, N.A., as Trustee, filed herewith.*
11 Calculation of Primary and Fully Diluted Earnings Per Share, filed
herewith.
12.1 Computation of Ratio of Earnings to Fixed Charges, filed herewith.
12.2 Computation of Ratio of Earnings to Combined Fixed Charges and
Preferred Dividends, filed herewith.
13 Excerpts from the Annual Report to Shareholders for the year ended
December 31, 1996, filed herewith. Such Annual Report, except for
those portions thereof that are expressly incorporated by reference
herein, is furnished for information of the SEC only and is not deemed
to be "filed" as part of this Form 10-K.
21 Schedule of Certain Subsidiaries of the Corporation, filed herewith.
23 Consent of Ernst & Young LLP, independent auditors for the
Corporation, filed herewith.
24.1 Power of Attorney of certain directors and officers of the
Corporation, filed herewith.
24.2 Power of Attorney of Robert N. Clay, filed herewith.
24.3 Power of Attorney of Jackson H. Randolph, filed herewith.
24.4 Power of Attorney of Vincent A. Sarni, filed herewith.
27 Financial Data Schedule, filed herewith.
- --------------------------------------------------------------------
* Denotes management contract or compensatory plan.
E-2
<PAGE> 1
EXHIBIT 10.2
AMENDMENT NO. 1 TO THE
PNC BANK CORP. SUPPLEMENTAL
EXECUTIVE RETIREMENT INCOME AND DISABILITY PLAN
WHEREAS, PNC Bank Corp. adopted the PNC Bank Corp. Supplemental
Executive Retirement Income and Disability Plan effective September 1, 1985
(the "Plan"); and
WHEREAS, the Corporation desires to amend the Plan to add a
provision concerning payment of benefits to participants who cease to be
employees as a result of assignment to an entity partially owned (directly or
indirectly) by the Corporation; and
WHEREAS, Section 6 of the Plan authorizes the Corporation, acting
through its Board of Directors, to amend the Plan; and
WHEREAS, the Board of Directors of the Corporation has authorized
certain officers of the Corporation to amend the Plan.
NOW, THEREFORE, the Plan is hereby amended as follows:
1. Existing Sections 4 through 8 shall be renumbered as Sections 5
through 9, respectively.
2. Effective July 1, 1993, a new Section 4 shall be added to read as
follows:
4. Certain Transfers of Employment. If a Participant is transferred
from the employment of the Corporation or a Subsidiary to an entity the equity
of which (directly or indirectly) is owned 10% or more (but 50% or less) by the
Corporation (a "Minority-Owned Entity"), the benefits earned while a Participant
will be frozen and will be paid in the event that the Participant subsequently
becomes disabled while employed by the Minority-Owned Entity or retires from the
employment of the Minority-Owned Entity.
IN WITNESS WHEREOF, PNC Bank Corp. has caused this Amendment No. 1
to be executed by its duly authorized officers and attested this 10th day of
March, 1994.
ATTEST: PNC BANK CORP.
/s/ MARY LYNN FITZPATRICK By: /s/ WILLIAM F. STROME
- ------------------------- -------------------------
Mary Lynn Fitzpatrick William F. Strome
Corporate Seal Secretary
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<PAGE> 2
AMENDMENT NO. 2 TO THE
PNC BANK CORP. SUPPLEMENTAL
EXECUTIVE RETIREMENT INCOME AND DISABILITY PLAN
WHEREAS, PNC Bank Corp. (the "Corporation") adopted the PNC Bank
Corp. Supplemental Executive Retirement Income and Disability Plan effective
September 1, 1985 (the "Plan") and has since amended the Plan on one occasion;
and
WHEREAS, the Corporation desires to amend the Plan to provide that
persons who are eligible to actively participate in the PNC Retirement Savings
Plan shall not be eligible to participate in the Plan and to the extent such
individuals have previously participated in the Plan, any Plan benefit shall be
frozen and may be available to such individual in the future if any other
conditions for receipt of such benefit are met; and
WHEREAS, Section 6 of the Plan authorizes the Corporation, acting
through its Board of Directors to amend the Plan; and
WHEREAS, the Board of Directors of the Corporation has authorized
certain officers of the Corporation to amend the Plan.
NOW, THEREFORE, effective June 30, 1996, the Plan is hereby amended
as follows:
1. Section 2.1 of the Plan is hereby deleted and a new Section 2.1
is inserted to read as follows:
2.1 Participant - On the Effective Date, all persons who have
been granted a stock option under the Corporation's Executive Bonus
Plan shall be Participants in this Plan. All other persons employed
by the Corporation and its Subsidiaries who have received on stock
option grant under the Corporation's Executive Bonus Plan are
eligible to participate at the discretion of the Board of Directors.
All persons who have been granted a stock option under the
Corporation's Executive Stock Bonus Plan and who are eligible to
actively Participate in the PNC Retirement Savings Plan are not
eligible to participate in this Plan. Any person who was a
Participant in this Plan shall cease participation on the date such
person is eligible to be an active participant in the PNC Retirement
Savings Plan.
2. Section 3 of the Plan is hereby amended by inserting Section 3.4
to read as follows:
3.4 Frozen Benefit - Any Participant who is eligible to
actively participate in the PNC Retirement Savings Plan shall have
the value of his or her benefit frozen as of the first day of the
month following the date he or she is eligible to actively
participate in the PNC Retirement Savings Plan. Such frozen benefit
otherwise payable under the Plan, provided that any future benefit
eligibility requirements are met.
IN WITNESS WHEREOF, PNC Bank Corp. has caused this Amendment No. 1
to be executed by its duly authorized officers and attested this 29th day of
May, 1996, effective as of June 30, 1996.
ATTEST: PNC BANK CORP.
By: /s/ WILLIAM F. STROME /s/ JOANNE BLEHI
- ------------------------- ---------------------
William F. Strome Joanne Blehi
Secretary Vice President
2
<PAGE> 3
NOVEMBER 21, 1996
AMENDMENT TO THE PNC FINANCIAL CORP
SUPPLEMENTAL EXECUTIVE RETIREMENT
INCOME AND DISABILITY PLAN
WHEREAS, PNC Bank Corp. ("PNC") maintains the PNC Financial Corp
Supplemental Executive Retirement Income and Disability Plan (the "Plan"); and
WHEREAS, Section 7 of the Plan authorizes PNC to amend the Plan at
any time; and
WHEREAS, it has been determined that it is in the best interest of
PNC to amend the Plan to (a) reflect the change in name of PNC Financial Corp
to PNC Bank Corp., (b) protect the rights of Plan participants to retirement
and disability benefits hereunder after a Change in Control, and (c) make
certain other changes;
NOW, THEREFORE, the Plan is hereby amended as follows:
1. The Plan is hereby renamed the "PNC Bank Corp. Supplemental
Executive Retirement Income and Disability Plan" and all references in the Plan
to "PNC Financial Corp" are hereby changed to "PNC Bank Corp."
2. Section 2.5 of the Plan is hereby amended to add the following
sentence at the end thereof:
Notwithstanding the foregoing, after a Change in Control, in no event
shall a Participant's Annual Base Salary for purposes of determining
disability benefits and retirement benefits hereunder be less than his
annual pay rate as of the last payday of the January preceding the
date of the Change in Control.
3. Section 2.6 of the Plan is hereby amended to read as follows:
Compensation - The Annual Base Salary established by the Corporation
for services rendered by a Participant for a particular year, plus the
amount of cash, if any, whether deferred or not, awarded to a
Participant under any Executive Bonus Plan paid during that same year.
4. The Plan is hereby amended to replace the term "Annual
Compensation" with the word "Compensation" in each place such term appears.
5. Section 2.8 is hereby amended to read as follows:
Executive Bonus Plan - The PNC Bank Corp. 1994 Annual Incentive Award
Plan, the PNC Bank Corp. 1996 Executive Incentive Award Plan, or any
successor or predecessor plans thereto (hereinafter be referred to as
"Existing Plans") or any other annual bonus plan (an "Other Bonus
Plan"); provided, however, that with respect to any Other Bonus Plan,
the annual bonus amount used in the calculation of Compensation
hereunder shall be the lower of the amount awarded under such Other
Bonus Plan or the amount that such Participant would have been awarded
under an Existing Plan had his annual bonus been awarded pursuant to
the same grade or level that is used for calculating his recommended
stock option grant under the 1992 Long-Term Incentive Award Plan
(except for Gary J. Zentner who shall have the amount of his annual
bonus amount used in the calculation of Compensation hereunder
calculated in accordance with the applicable Other Bonus Plan subject
to an annual limit of 200% of Annual Base Salary).
6. Section 2.9 is hereby deleted in its entirety and Sections 2.10
and 2.11 are hereby redesignated as Sections 2.9 and 2.10.
7. Section 2.10 is hereby amended to add the following at the end
thereof: "or any successor plan thereto."
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<PAGE> 4
8. Section 2 of the Plan is hereby amended to add new Sections 2.11
through 2.18 to read as follows:
2.12 Board - the Board of Directors of PNC.
2.13 Cause - (a) the willful and continued failure of a
Participant to substantially perform the Participant's duties with the
Corporation (other than any such failure resulting from incapacity due to
physical or mental illness), after a written demand for substantial performance
is delivered to the Participant by the Board, the Chief Executive Officer of
PNC, or the Participant's superior, which specifically identifies the manner in
which the Board, Chief Executive Officer, or superior believes that the
Participant has not substantially performed the Participant's duties; or
(b) the willful engaging by the Participant in illegal
conduct or gross misconduct that is materially and demonstrably injurious to
the Corporation.
For purposes of the preceding clauses (a) and (b), no act or failure to act, on
the part of a Participant, shall be considered "willful" unless it is done, or
omitted to be done, by the Participant in bad faith and without reasonable
belief that the Participant's action or omission was in the best interests of
the Corporation. Any act, or failure to act, based upon the instructions or
prior approval of the Board, Chief Executive Officer of PNC or the
Participant's superior, or based upon the advice of counsel for the
Corporation, shall be conclusively presumed to be done, or omitted to be done,
by the Participant in good faith and in the best interests of the Corporation.
The cessation of employment of the Participant shall not be deemed to be for
Cause unless and until there shall have been delivered to the Participant a
copy of a resolution duly adopted by the affirmative vote of not less than a
majority of the entire membership of the Board or the Committee at a Board or
Committee meeting called and held for the purpose of considering such
termination finding that, in the good faith opinion of the Board or Committee,
the Participant is guilty of the conduct described in clause (a) or (b) above,
and specifying the particulars thereof in detail. Such resolution shall be
adopted only after reasonable notice of such meeting is provided to the
Participant and the Participant is given an opportunity, together with counsel,
to be heard before the Board or the Committee.
2.14 Change in Control - a change of control of PNC of a
nature that would be required to be reported in response to Item 6(e) of
Schedule 14A of Regulation 14A (or in response to any similar item on any
similar schedule or form) promulgated under the Securities Exchange Act,
whether or not PNC is then subject to such reporting requirement; provided,
however, that without limitation, a Change in Control shall be deemed to have
occurred if:
(a) any person, excluding employee benefit plans of PNC, is
or becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under
the Exchange Act), directly or indirectly, of securities of PNC representing
twenty percent (20%) or more of the combined voting power of PNC's then
outstanding securities, provided, however, that such an acquisition of
beneficial ownership representing between twenty percent (20%) and forty
percent (40%), inclusive, of such voting power shall not be considered a Change
in Control if the Board approves such acquisition either prior to or
immediately after its occurrence;
(b) PNC consummates a merger, consolidation, share exchange,
division or other reorganization or transaction of PNC (a "Fundamental
Transaction") with any other corporation, other than a Fundamental Transaction
that results in the voting securities of PNC outstanding immediately prior
thereto continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity) at least sixty
percent (60%) of the combined voting power immediately after such Fundamental
Transaction of (i) PNC's outstanding securities, (ii) the surviving entity's
outstanding securities, or (iii) in the case of a division, the outstanding
securities of each entity resulting from the division;
(c) the shareholders of PNC approve a plan of complete
liquidation or winding-up of PNC or an agreement for the sale or disposition
(in one transaction or a series of transactions) of all or substantially all of
PNC's assets;
(d) as a result of a proxy contest, individuals who prior to
the conclusion thereof constituted the Board (including for this purpose any
new director whose election or nomination for election by PNC's shareholders in
connection with such proxy contest was approved by a vote of at least
two-thirds (2/3) of the directors then still in
4
<PAGE> 5
office who were directors prior to such proxy contest) cease to constitute at
least a majority of the Board (excluding any Board seat that is vacant or
otherwise unoccupied);
(e) during any period of twenty-four consecutive months,
individuals who at the beginning of such period constituted the Board
(including for this purpose any new director whose election or nomination for
election by PNC's shareholders was approved by a vote of at least two-thirds
(2/3) of the directors then still in office who were directors at the beginning
of such period) cease for any reason to constitute at least a majority of the
Board (excluding any Board seat that is vacant or otherwise unoccupied); or
(f) the Board determines that a Change in Control has
occurred.
"Person" has the meaning given in Section 3(a)(9) of the Exchange Act and also
includes any syndicate or group deemed to be a "person" under Section 13(d)(3)
of the Exchange Act.
Notwithstanding anything to the contrary herein, a divestiture or spin-off of a
Subsidiary or division of PNC shall not by itself constitute a "Change in
Control."
2.15 Credited Service - means "Credited Service" as defined in the
Pension Plan as of the date hereof or as defined from time to time after the
date hereof if such definition results in a longer period of Credited Service
for the applicable Participant.
2.16 Good Reason - means: (a) the assignment to a Participant of any
duties inconsistent in any respect with the Participant's position (including
status, offices, titles and reporting requirements), authority, duties or
responsibilities immediately prior to the Change in Control, or any other
action by the Corporation which results in a diminution in any respect in such
position, authority, duties or responsibilities, excluding for this purpose an
isolated, insubstantial and inadvertent action not taken in bad faith that is
remedied by the Corporation promptly after receipt of notice thereof given by
the Participant;
(b) a reduction by the Corporation in the Participant's
annual base salary as in effect on the date hereof; as the same may be
increased from time to time;
(c) the Corporation's requiring the Participant to be based
at any office or location that is more than fifty (50) miles from the
Participant's office or location immediately prior to the Change in Control;
(d) the failure by the Corporation (i) to continue in effect
any bonus, stock option or other cash or equity-based incentive plan in which
the Participant participates immediately prior to the Change in Control that is
material to the Participant's total compensation, unless a substantially
equivalent arrangement (embodied in an ongoing substitute or alternative plan)
has been made with respect to such plan, or (ii) to continue the Participant's
participation in such plan (or in such substitute or alternative plan) on a
basis at least as favorable, both in terms of the amount of benefits provided
and the level of the Participant's participation relative to other
participants, as existed immediately prior to the Change in Control; or
(e) the failure by the Corporation to continue to provide the
Participant with benefits substantially similar to those received by the
Participant under any of the Corporation's pension (including, but not limited
to, tax-qualified plans), life insurance, health, accident, disability or other
welfare plans in which the Participant was participating, at costs
substantially similar to those paid by the Participant, immediately prior to
the Change in Control.
2.17 PNC - PNC Bank Corp. and any successors thereto.
2.18 Retirement - A Participant's termination of employment
with the Corporation (a) for any reason after completing a period of Credited
Service of at least 5 years and attaining age 55 (or age 50 in the case of any
Participant listed in Schedule A hereto), or (b) by the Participant for Good
Reason after a Change in Control or by the Corporation without Cause after a
Change in Control.
5
<PAGE> 6
9. Section 3.1 is hereby amended to replace the word "retirement"
with the word "Retirement" in the first two places such term appears, to
replace the words "year of service" with "year of Credited Service (including
fractions thereof)", and to add the words "(assuming that the Participant
elected a single life annuity under the Pension Plan and commenced receiving
benefits at age 62)" after the word "respectively".
10. Section 3.1.1 is hereby amended in its entirety to read as
follows:
The amount produced by 3.1(b) above will be reduced by the annual
amount of any benefit the Participant is entitled to receive under the
Pension Plan and the PNC Bank Corp. Supplemental Pension Plan,
assuming the Participant commenced receiving benefit payments in the
form of a single life annuity under such plans at age 62. Unless
instructed otherwise in writing by the Participant, the annual amount
payable pursuant to Section 3.1(a) or 3.1(b) and the preceding
sentence shall be paid in monthly installments, commencing on the
first day of the month coincident or next following the Retirement of
the Participant and continuing for fifteen years. Any benefit payment
made pursuant to Section 3.1(a) or 3.1(b) that commences prior to a
Participant's attainment of age 62 shall be actuarially reduced in
accordance with reduction factors used in the Pension Plan. A
Participant may, at any time at least one year before his Retirement,
elect in writing to receive, in lieu of the monthly retirement benefit
to which he is entitled hereunder, a lump-sum cash payment equal to
the present value of such monthly benefit, calculated using the
mortality rates and interest rate used under the Pension Plan as of
the date the payment is to be made. Notwithstanding the foregoing
sentence, a Participant who attains Retirement during the period
commencing on November 21, 1996 and ending on November 21, 1997 may
elect such lump sum payment in writing within thirty (30) days of
being notified of the foregoing election requirement.
11. Section 5 of the Plan is hereby amended to add the words "on the
date of a Participant's Retirement" at the end of the first sentence thereof
and to add the following sentence at the end thereof:
Notwithstanding the foregoing, in the sole discretion of the PNC and
its Subsidiaries, PNC and/or its Subsidiaries may establish a
nonqualified grantor trust and make contributions thereto for the
purpose of providing a source of funds to pay benefits as they become
due and payable hereunder; provided, however, that no such trust shall
result in a Participant being required to include in gross income for
Federal income tax purposes any benefits payable hereunder prior to
the date of actual payment. Notwithstanding the establishment of any
such trust, a Participant's rights hereunder shall be solely those of
a general unsecured creditor of PNC and its Subsidiaries. It is the
intention of PNC and its Subsidiaries and Participants hereunder that
the Plan be unfunded for tax purposes and for purposes of Title I of
the Employee Retirement Income Security Act of 1974, as amended.
12. Section 7 of the Plan is hereby amended to read as follows:
The Plan may be amended or terminated by the Board at any time, and
any Subsidiary of PNC that has adopted the Plan may withdraw from
further participation in the Plan at any time; provided, however, that
no such amendment, termination or withdrawal (each, a "Plan Change")
shall reduce or in any way adversely affect (a) the retirement or
disability benefits payable hereunder with respect to a Participant
who is entitled to benefits under 3.2 hereof by reason of having
become disabled prior to the date of the Plan Change or who has
terminated employment with the Corporation prior to the date of such
Plan Change, or (b) the amount of, or payment of, the Accrued Benefit
(as hereinafter defined) of any other Participant as of the date of
such Plan Change. For purposes of this Section 7, the term "Accrued
Benefit" means the amount of the retirement benefit that would be
payable to the Participant hereunder assuming that (a) the Participant
terminated employment immediately prior to the Plan Change, and (b)
solely for the purpose of determining the Participant's eligibility
for Retirement under this Plan and not for purposes of determining the
amount of his retirement benefit under 3.1 hereof, that the
Participant had attained age 55 and completed 5 years of Credited
Service (to the extent that the Participant had not yet attained such
age and completed such years of Credited Service immediately prior to
the Plan Change). After a Change in Control, the provisions of this
Section 7 and Section 10 hereof may not be amended with respect to a
Participant without the written consent of the Participant; provided,
however, that the failure of a Participant to consent to any such
amendment shall not impair the ability of the Board to amend the Plan
with respect to any other Participant who has consented to such
amendment.
6
<PAGE> 7
13. Section 9 of the Plan is hereby amended to delete the words "of
Directors of the Corporation".
14. A new Section 10 is hereby added to the Plan to read as follows:
10. Successors. In addition to any obligations imposed by law
upon any successor(s) to PNC and its Subsidiaries, PNC and its
Subsidiaries shall be obligated to require any successor(s) (whether
direct or indirect, by purchase, merger, consolidation, operation of
law, or otherwise) to all or substantially all of the business and/or
assets of PNC and its Subsidiaries to expressly assume and agree to
perform under this Plan in the same manner and to the same extent that
PNC and its Subsidiaries would be required to perform under it if no
such succession had taken place; in the event of such a succession,
references to "PNC," "PNC Bank Corp.," "Corporation" and "Subsidiary"
herein shall thereafter be deemed to include such successor(s).
15. A new Schedule A is hereby added to the Plan to read as attached
hereto.
IN WITNESS WHEREOF, PNC Bank Corp. has caused this Amendment to the
PNC Financial Corp Supplemental Executive Retirement Income and Disability Plan
to be duly adopted as of this 21st day of November, 1996.
PNC BANK CORP.
By: /s/ WILLIAM E. ROSNER
-------------------------
William E. Rosner
Senior Vice President
WITNESS:
/s/ THOMAS R. MOORE
- ------------------------
Thomas R. Moore
Assistant Corporate Secretary
SCHEDULE A - LIST OF PARTICIPANTS
Intentionally omitted.
7
<PAGE> 1
EXHIBIT 10.4
NOVEMBER 21, 1996
AMENDMENT TO THE PNC FINANCIAL CORP
SUPPLEMENTAL EXECUTIVE LIFE INSURANCE
AND SPOUSE'S BENEFIT PLAN
WHEREAS, PNC Bank Corp. ("PNC") maintains the PNC Financial Corp
Supplemental Executive Life Insurance and Spouse's Benefit Plan (the "Plan");
and
WHEREAS, Section 7 of the Plan authorizes PNC to amend the Plan at
any time; and
WHEREAS, it has been determined that it is in the best interest of
PNC and its subsidiaries to amend the Plan to (a) provide for the transfer to
participants of the split dollar life insurance policies maintained under the
Plan if, after a Change in Control, the Plan is terminated and not replaced by
an equivalent plan or premium payments on such policies cease, and (b) make
certain other changes;
NOW, THEREFORE, the Plan is hereby amended as follows:
1. The Plan is hereby renamed the "PNC Bank Corp. Supplemental
Executive Life Insurance and Spouse's Benefit Plan" and all references in the
Plan to "PNC Financial Corp" are hereby changed to "PNC Bank Corp."
2. Section 7 of the Plan is hereby amended to replace the words "the
Corporation" with "PNC Bank Corp. ("PNC")."
3. The Plan is hereby amended to redesignate Sections 8 and 9 as
Sections 10 and 11 and to add new Sections 8 and 9 to read as follows:
8. Certain Required Policy Transfers. If, after a Change in
Control, either (a) the Plan is terminated and is not replaced by a
plan that provides substantially equivalent benefits to Participants
in this Plan, or (b) the Corporation ceases making premium payments on
one or more of the Key Executive Equity Plan split dollar life
insurance policies (the "Split Dollar Policies") that cover
Participants hereunder, then (x) in the case of a termination
described in the preceding clause (a), all of the Split Dollar
Policies shall be promptly transferred to the respective Participants
on whose lives the policies were issued, and (y) in the case of a
cessation of premium payments described in the preceding clause (b),
the Split Dollar Policies on which premiums have ceased shall be
promptly transferred to the respective Participants on whose lives the
policies were issued. Such transfers shall be made without the
payment of any consideration by the affected Participants. For
purposes of this Section 8, the term "Change in Control" shall have
the meaning assigned to such term under the PNC Bank Corp.
Supplemental Executive Retirement Income and Disability Plan. The
provisions of this Section 8 and Section 9 may not be amended after a
Change in Control with respect to a Participant without the written
consent of the Participant; provided, however, that the failure of a
Participant to consent to any such amendment shall not impair the
ability of the Board of Directors of PNC to amend the Plan with
respect to any other Participant who has consented to such amendment.
9. Successors
In addition to any obligations imposed by law upon any
successor(s) to PNC and its Subsidiaries, PNC and its Subsidiaries
shall be obligated to require any successor(s) (whether direct or
indirect, by purchase, merger, consolidation, operation of law, or
otherwise) to all or substantially all of the business and/or assets
of PNC and its Subsidiaries to expressly assume and agree to perform
this Plan in the same manner and to the same extent that the PNC and
its Subsidiaries would be required to perform it if no such succession
had taken place; in the event of such a succession, references to "PNC
Bank Corp.", "PNC", "Corporation" and "Subsidiary" herein shall
thereafter be deemed to include such successor(s).
1
<PAGE> 2
IN WITNESS WHEREOF, PNC Bank Corp. has caused this Amendment
to the PNC Financial Corp Supplemental Executive Life Insurance and
Spouse's Benefit Plan to be duly adopted as of this 21st day of
November, 1996.
PNC BANK CORP.
By: /s/ WILLIAM E. ROSNER
----------------------------------
William E. Rosner
Senior Vice President
WITNESS:
/s/ THOMAS R. MOORE
- ------------------------------
Thomas R. Moore
Assistant Corporate Secretary
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EXHIBIT 10.6
FORM
OPTIONEE: _______________________
DATE OF GRANT: __________________
OPTION PRICE: ___________________
COVERED SHARES: _________________
PNC BANK CORP.
1992 LONG-TERM INCENTIVE AWARD PLAN
* * *
NONSTATUTORY STOCK OPTION AGREEMENT
1. Definitions. Terms defined in the 1992 Long-Term Incentive Award
Plan ("Plan") of PNC Bank Corp. ("Corporation") are used in this Agreement as
defined in the Plan unless otherwise defined in this Agreement. In addition,
except where the context otherwise indicates, the following definitions apply:
1.1 "Cause" means:
(a) the willful and continued failure of the Optionee to
substantially perform the Optionee's duties with the Corporation (other than
any such failure resulting from incapacity due to physical or mental illness),
after a written demand for substantial performance is delivered to the Optionee
by the Board or the Chief Executive Officer of the Corporation which
specifically identifies the manner in which the Board or Chief Executive
Officer believes that the Optionee has not substantially performed the
Optionee's duties; or
(b) the willful engaging by the Optionee in illegal conduct
or gross misconduct that is materially and demonstrably injurious to the
Corporation.
For purposes of the preceding clauses (a) and (b), no act or failure to act, on
the part of the Optionee, shall be considered "willful" unless it is done, or
omitted to be done, by the Optionee in bad faith and without reasonable belief
that the Optionee's action or omission was in the best interests of the
Corporation. Any act, or failure to act, based upon the instructions or prior
approval of the Board, the Chief Executive Officer or the Optionee's superior
or based upon the advice of counsel for the Corporation, shall be conclusively
presumed to be done, or omitted to be done, by the Optionee in good faith and
in the best interests of the Corporation. The cessation of employment of the
Optionee shall not be deemed to be for Cause unless and until there shall have
been delivered to the Optionee, as part of the notice of the Optionee's
termination, a copy of a resolution duly adopted by the affirmative vote of not
less than a majority of the entire membership of the Board, at a Board meeting
called and held for the purpose of considering such termination, finding that,
in the good faith opinion of the Board, the Optionee is guilty of the conduct
described in clause (a) or (b) above and specifying the particulars thereof in
detail. Such resolution shall be adopted only after reasonable notice of such
Board meeting is provided to the Optionee and the Optionee is given an
opportunity, together with counsel, to be heard before the Board.
1.2 "Change in Control" means a change of control of the Corporation
of a nature that would be required to be reported in response to Item 6(e) of
Schedule 14A of Regulation 14A (or in response to any similar item on any
similar schedule or form) promulgated under the Exchange Act, whether or not
the Corporation is then subject to such reporting requirement; provided,
however, that without limitation, a Change in Control shall be deemed to have
occurred if:
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(a) any Person, excluding employee benefit plans of the
Corporation, is or becomes the "beneficial owner" (as defined in Rules 13d-3
and 13d-5 under the Exchange Act or any successor provisions thereto), directly
or indirectly, of securities of the Corporation representing twenty percent
(20%) or more of the combined voting power of the Corporation's then
outstanding securities, provided, however, that such an acquisition of
beneficial ownership representing between twenty percent (20%) and forty
percent (40%), inclusive, of such voting power shall not be considered a Change
in Control if the Board approves such acquisition either prior to or
immediately after its occurrence;
(b) the Corporation consummates a merger, consolidation,
share exchange, division or other reorganization or transaction of the
Corporation (a "Fundamental Transaction") with any other corporation, other
than a Fundamental Transaction that results in the voting securities of the
Corporation outstanding immediately prior thereto continuing to represent
(either by remaining outstanding or by being converted into voting securities
of the surviving entity) at least sixty percent (60%) of the combined voting
power immediately after such Fundamental Transaction of (i) the Corporation's
outstanding securities, (ii) the surviving entity's outstanding securities, or
(iii) in the case of a division, the outstanding securities of each entity
resulting from the division;
(c) the shareholders of the Corporation approve a plan of
complete liquidation or winding-up of the Corporation or an agreement for the
sale or disposition (in one transaction or a series of transactions) of all or
substantially all of the Corporation's assets;
(d) as a result of a proxy contest, individuals who prior
to the conclusion thereof constituted the Board (including for this purpose any
new director whose election or nomination for election by the Corporation's
shareholders in connection with such proxy contest was approved by a vote of at
least two-thirds (2/3) of the directors then still in office who were directors
prior to such proxy contest) cease to constitute at least a majority of the
Board (excluding any Board seat that is vacant or otherwise unoccupied);
(e) during any period of twenty-four consecutive months,
individuals who at the beginning of such period constituted the Board
(including for this purpose any new director whose election or nomination for
election by the Corporation's shareholders was approved by a vote of at least
two-thirds (2/3) of the directors then still in office who were directors at
the beginning of such period) cease for any reason to constitute at least a
majority of the Board (excluding any Board seat that is vacant or otherwise
unoccupied); or
(f) the Board determines that a Change in Control has
occurred.
Notwithstanding anything to the contrary herein, a divestiture or spin-off of
a subsidiary or division of the Corporation shall not by itself constitute a
"Change in Control."
1.3 "CIC Failure" means the following:
(a) with respect to a CIC Triggering Event described in
Section 1.4(a), the Corporation's shareholders vote against the transaction
approved by the Board or the agreement to consummate the transaction is
terminated; or
(b) with respect to a CIC Triggering Event described in
Section 1.4(b), the proxy contest fails to replace or remove a majority of the
members of the Board.
1.4 "CIC Triggering Event" means the occurrence of either of the
following:
(a) the Board or the Corporation's shareholders approve a
transaction described in Subsection (b) of the definition of Change in Control
contained in Section 1.2 hereof; or
(b) the commencement of a proxy contest in which any Person
seeks to replace or remove a majority of the members of the Board.
1.5 "Coverage Period" means a period commencing on the earlier to
occur of (i) the date of a CIC Triggering Event and (ii) the date of a Change
in Control, and ending on the date that is two years after the date of the
Change in Control,
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provided, however, that in the event that a Coverage Period commences on the
date of a CIC Triggering Event such Coverage Period shall terminate upon the
earlier to occur of (x) the date of a CIC Failure and (y) the date that is two
years after the date of the Change in Control triggered by the CIC Triggering
Event. After the termination of any Coverage Period, another Coverage Period
shall commence upon the earlier to occur of clauses (i) and (ii) in the
preceding sentence.
1.6 "Date of Exercise" means the date on which the Corporation
receives written notice of the exercise in such form as the Committee may from
time to time prescribe, in whole or in part, of the Option pursuant to the
terms of this Agreement.
1.7 "Date of Expiration" means the date on which the Option shall
expire, which shall be the earliest of the following times:
(a) upon retirement of the Optionee from employment with
the Corporation prior to the date that the Option becomes exercisable pursuant
to Section 3.2 hereof;
(b) upon termination of the Optionee's employment with the
Corporation for Cause;
(c) upon termination of the Optionee's employment with the
Corporation for any reason other than (i) Cause, (ii) retirement, (iii) death,
(iv) permanent and total disability or (v) termination during a Coverage Period
by the Corporation without Cause or by the Optionee with Good Reason, unless
the Committee determines otherwise;
(d) one year after termination of the Optionee's employment
with the Corporation by reason of death;
(e) three years after the termination of the Optionee's
employment with the Corporation by reason of (i) retirement on or after the
date that the Option becomes exercisable pursuant to Section 3.2 hereof, (ii)
permanent and total disability, or (iii) termination during a Coverage Period
by the Corporation without Cause or by the Optionee with Good Reason; and
(f) ten years after the Date of Grant.
1.8 "Date of Grant" means the date set forth as the "Date of Grant"
on page 1 of this Agreement.
1.9 "Good Reason" means
(a) the assignment to the Optionee of any duties
inconsistent in any respect with the Optionee's position (including status,
offices, titles and reporting requirements), authority, duties or
responsibilities immediately prior to either the CIC Triggering Event or the
Change in Control, or any other action by the Corporation which results in a
diminution in any respect in such position, authority, duties or
responsibilities, excluding for this purpose an isolated, insubstantial and
inadvertent action not taken in bad faith that is remedied by the Corporation
promptly after receipt of notice thereof given by the Optionee;
(b) a reduction by the Corporation in the Optionee's annual
base salary as in effect on the Date of Grant, as the same may be increased
from time to time;
(c) the Corporation's requiring the Optionee to be based at
any office or location that is more than fifty (50) miles from the Optionee's
office or location immediately prior to either the CIC Triggering Event or the
Change in Control;
(d) the failure by the Corporation (i) to continue in
effect any bonus, stock option or other cash or equity-based incentive plan in
which the Optionee participates immediately prior to either the CIC Triggering
Event or the Change in Control that is material to the Optionee's total
compensation, unless a substantially equivalent arrangement (embodied in an
ongoing substitute or alternative plan) has been made with respect to such
plan, or (ii) to continue the Optionee's participation in such plan (or in such
substitute or alternative plan) on a basis at least as favorable, both in terms
of the amount of benefits
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<PAGE> 4
provided and the level of the Optionee's participation relative to other
participants, as existed immediately prior to the CIC Triggering Event or the
Change in Control; or
(e) the failure by the Corporation to continue to provide
the Optionee with benefits substantially similar to those received by the
Optionee under any of the Corporation's pension (including, but not limited to,
tax-qualified plans), life insurance, health, accident, disability or other
welfare plans in which the Optionee was participating, at costs substantially
similar to those paid by the Optionee, immediately prior to the CIC Triggering
Event or the Change in Control.
1.10 "Option" means the Nonstatutory Stock Option granted to the
Optionee in Section 2 of this Agreement pursuant to which the Optionee may
purchase Shares as provided in this Agreement.
1.11 "Option Price" means the dollar amount per Share set forth as
the "Option Price" on page 1 of this Agreement.
1.12 "Optionee" means the person identified as the "Optionee" on
page 1 of this Agreement.
1.13 "Person" has the meaning given in Section 3(a)(9) of the
Exchange Act and also includes any syndicate or group deemed to be a "person"
under Section 13(d)(3) of the Exchange Act.
2. Grant of Option. Pursuant to the Plan and subject to the terms of
this Agreement, the Corporation hereby grants to the Optionee an Option to
purchase from the Corporation that number of Shares specified on page 1 of this
Agreement as the "Covered Shares," exercisable at the Option Price.
3. Terms of the Option.
3.1 Type of Option. The Option is intended to be a Nonstatutory
Stock Option without Rights.
3.2 Option Period. The Option is exercisable, in whole or in part,
at any time and from time to time upon the earliest to occur of (i) the first
anniversary of the Date of Grant, (ii) the date of termination of the
Optionee's employment with the Corporation by reason of death or permanent and
total disability, and (iii) the date of termination of the Optionee's
employment during a Coverage Period either by the Corporation without Cause or
by the Optionee with Good Reason, provided in the case of clause (iii) that
such termination is at least six months after the Date of Grant and, if such
termination is prior to November 22, 1998, that the Corporation receives advice
from its outside auditors that such acceleration of exercisability would not
prevent accounting for a business combination as a pooling of interests if such
accounting treatment is desired by the Corporation. The Option shall remain
exercisable until the Date of Expiration.
3.3 Nontransferability. The Option is not transferable by the
Optionee other than by will or by the laws of descent and distribution, and is
exercisable, during the Optionee's lifetime, only by the Optionee or, in the
event of the Optionee's legal disability, by the Optionee's legal
representative.
4. Capital Adjustments. The number and class of unexercised Covered
Shares and the Option Price shall be subject to such adjustment, if any, as the
Committee in its sole discretion deems appropriate to reflect such events as
stock dividends, stock splits, recapitalizations, mergers, consolidations or
reorganizations.
5. Exercise of Option.
5.1 Notice and Effective Date. The Option may be exercised, in whole
or in part, by delivering to the Corporation written notice of such exercise,
in such form as the Committee may from time to time prescribe, accompanied by
full payment of (a) the Option Price with respect to that portion of the Option
being exercised and (b) any amounts required to be withheld pursuant to
applicable tax laws in connection with such exercise. In addition, the Optionee
may elect to use the cashless exercise procedure provided for pursuant to
Section 5.2 hereof. The effective date of such exercise shall be the Date
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<PAGE> 5
of Exercise. Until the Committee notifies the Optionee to the contrary, the
form attached to this Agreement as Annex A shall be used to exercise the Option
granted hereunder.
5.2 Payment of the Option Price. Upon exercise of the Option, in
whole or in part, the Optionee may pay the aggregate Option Price in cash, by
delivering duly endorsed certificates representing whole Shares having
aggregate Fair Market Value on the Date of Exercise not exceeding that portion
of the Option Price being paid by delivery of such Shares, or through a
combination of cash and Shares; provided, however, that no Shares may be used
to pay any portion of the Option Price that have not been held for at least six
months prior to the Date of Exercise or such other period as may be specified
by the Committee. Notwithstanding the foregoing, the Optionee may elect to
complete his or her option exercise through a brokerage service/margin account
pursuant to the cashless option exercise procedure under Regulation T of the
Board of Governors of the Federal Reserve System and in such manner as may be
permitted by the Committee from time to time, consistent with said Regulation.
5.3 Payment of Taxes. The Optionee may elect to satisfy applicable
tax withholding requirements by payment of cash or, subject to such terms and
conditions as the Committee may from time to time establish to satisfy any or
all federal, state, or local tax liabilities incurred upon such exercise,
through retention by the Corporation of Shares otherwise issuable upon such
exercise or by delivery to the Corporation of previously acquired Shares. Until
the Committee notifies the Optionee to the contrary, the form attached to this
Agreement as Annex B shall be used to make such election.
5.4 Effect. The exercise, in whole or in part, of the Option shall
cause a reduction in the number of unexercised Covered Shares equal to the
number of Shares with respect to which the Option is exercised.
6. Restrictions on Exercise and Upon Shares Issued Upon Exercise.
Notwithstanding any other provision of this Agreement, the Optionee agrees, for
himself (herself) and his (her) successors, that the Option may not be
exercised at any time that the Corporation does not have in effect a
registration statement under the Securities Act of 1933, as amended, relating
to the offer of Shares under the Plan, unless the Corporation agrees to permit
such exercise. The Optionee further agrees, for himself (herself) and his
(her) successors, that, upon the issuance of any Shares pursuant to the
exercise of the Option, he (she) will, upon the request of the Corporation,
agree in writing that he (she) is acquiring such Shares for investment only and
not with a view to resale, and that he (she) will not sell, pledge, or
otherwise dispose of such Shares unless and until (a) the Corporation is
furnished with an opinion of counsel to the effect that registration of such
Shares pursuant to the Securities Act of 1933, as amended, is not required by
that Act or by rules and regulations promulgated thereunder; (b) the staff of
the Securities and Exchange Commission has issued a "no-action" letter with
respect to such disposition; or (c) such registration or notification as is, in
the opinion of counsel for the Corporation, required for the lawful disposition
of such Shares has been filed and has become effective; provided, however, that
the Corporation is not obligated hereby to file any such registration or
notification. The Optionee further agrees that the Corporation may place a
legend embodying such restriction on the certificates evidencing such Shares.
7. Rights as Shareholder. The Optionee shall have no rights as a
Shareholder with respect to any Covered Shares until such time as the Option is
exercised and then only with respect to those Shares issued upon such exercise.
8. Employment. Neither the granting of the Option evidenced by this
Agreement nor any term or provision of this Agreement shall constitute or be
evidence of any understanding, expressed or implied, on the part of the
Corporation or any of its subsidiaries to employ the Optionee for any period.
References in this Agreement to the employment of the Optionee with the
Corporation shall include employment with any subsidiary of the Corporation.
9. Subject to the Plan. The Option evidenced by this Agreement and
the exercise thereof are subject to the terms and conditions of the Plan, which
is incorporated by reference herein and made a part hereof, but the terms of
the Plan shall not be considered an enlargement of any benefits under this
Agreement. In addition, the Option is subject to any rules and regulations
promulgated by the Committee.
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IN WITNESS WHEREOF, the Corporation has caused this Agreement to be
signed on its behalf effective as of the Date of Grant.
ATTEST: PNC BANK CORP.
________________________________ By: ___________________________________
Secretary Chairman and
Chief Executive Officer
Accepted and agreed to as of the Date of Grant.
__________________________________
Optionee
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EXHIBIT 10.7
FORM
PNC BANK CORP.
1996 LONG-TERM INCENTIVE AWARD PLAN
* * *
INCENTIVE SHARE AGREEMENT
GRANTEE:
DATE OF GRANT: June 22, 1995
INCENTIVE SHARES:
1. Definitions. Terms defined in the 1992 Long-Term Incentive Award Plan
("Plan") of PNC Bank Corp. ("Corporation") are used in this Agreement as
defined in the Plan unless otherwise defined in this Agreement. In addition,
except where the context otherwise indicates, the following definitions apply:
1.1 "Award Date" means the first Business Day following the achievement of
a Performance Goal.
1.21 "Awarded Shares" has the meaning set forth in Section 3.1.
1.3 "Business Day" means any day when the New York Stock Exchange is open
for this Agreement.
1.4 "Grant" means the total number of Incentive Shares granted pursuant to
Section 2 of this agreement.
1.5 "Performance Goal" means any consecutive twenty Business Day period
during which the average of the closing prices of a share of Common Stock in
New York Stock Exchange composite transactions, as reported in The Wall Street
Journal or other authoritative source, equals or exceeds $32.00 (for fifty
percent (50%) of the Grant) and $35.00 (for the remaining fifty percent (50%)
of the Grant) and the closing price of a share of Common Stock on the first
Business Day of each such period as reported in the foregoing manner is at
least $32.00 and $35.00, respectively.
1.6 "Restricted Period" means the period that begins on an Award Date and
ends two years after the Award Date.
1.7 "Termination Date" means the twentieth (20th) Business Day in January,
1999.
2. Grant of Incentive Shares. Pursuant to Article 12 of the Plan and
subject to the terms and conditions of this Agreement, the Corporation hereby
grants to the Grantee named above that number of shares of Common Stock
specified above as Incentive Shares.
3. Terms of Grant. The Grant shall be subject to the following terms and
conditions.
3.1 Upon the achievement of a Performance Goal prior to the Termination
Date and provided the Grantee has been continuously employed by the Corporation
or a Subsidiary for the period beginning on the Date of Grant trough to the
applicable Award Date, the Corporation shall issue to the Grantee on such Award
Date fifty percent (50%) of the Incentive Shares (or one hundred percent (100%)
of the Incentive Shares if the Award Date is the same for both Goals), which
Shares shall be deposited with the Corporation or its designee during the term
of the applicable Restricted Period (such Incentive Shares issued on the
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<PAGE> 2
Award Date shall hereinafter be referred to as "Awarded Shares"), unless issued
sooner as provided in Section 6 below, and the certificates representing such
Shares shall contain the following legend:
"This certificate and the shares of stock represented hereby are subject to the
terms and conditions (including forfeiture and restrictions against transfer)
contained in the PNC Bank Corp. 1992 Long-Term Incentive Award Plan and an
Agreement entered into between the registered owner and PNC Bank Corp. Release
from such terms and conditions shall be made only in accordance with the
provisions of the Plan and the Agreement, a copy of each of which is on file in
the office of the Corporate Secretary of PNC Bank Corp."
3.2 If the Grantee has been continuously employed by the Corporation or a
Subsidiary throughout the Restricted Period, the Awarded Shares deposited with
the Corporation or its designee shall be reissued to the Grantee as soon as
practicable following the end of the Restricted Period pursuant to Section 7
below.
3.3 If a Performance Goal is not achieved prior to the Termination Date,
none of the Incentive Shares relating to that Performance Goal (i.e., fifty
percent (50%) of the Grant) shall be issued to the Grantee and that portion of
the Grant relating to that Performance Goal shall be terminated.
4. Rights as Shareholder. Except as provided in Section 5 below, the
Grantee shall have all the rights and privileges of a shareholder with respect
to the Awarded Shares including, but not limited to, the right to vote the
Awarded Shares and the right to receive dividends thereon. All such rights and
privileges shall cease upon forfeiture of the Awarded Shares.
5. Prohibitions Against Sale, Assignment, etc. The Grant, Awarded Shares,
the right to vote Awarded Shares and the right to receive dividends thereon may
not be sold, assigned, transferred, exchanged, pledged, hypothecated or
otherwise encumbered until (except with respect to the Grant) reissued by the
Corporation to the Grantee pursuant to Section 7 below.
6. Forfeiture. In the event the Grantee's employment with the Corporation
or a Subsidiary terminated prior to the lapse of a Restricted Period. All
Awarded Shares shall be forfeited by the Grantee to the Corporation without
payment of any consideration by the Corporation, and neither the Grantee nor
any successor, heirs, assigns or personal representatives of the Grantee shall
thereafter have any further rights or interest in the Awarded Shares or the
certificates representing the Awarded Shares. Notwithstanding the foregoing, in
the event of the Grantee's death or substantial disability during a Restricted
Period, all Awarded Shares will be reissued by the Corporation to the Grantee
or his or her legal representative pursuant to Section 7 below. In the event of
the Grantee's retirement during a Restricted Period, all Awarded Shares will be
forfeited, unless the Committee determines that such Awarded Shares shall be
reissued by the Corporation to the Grantee in light of the facts and
circumstances applicable to the Grantee.
7. Termination of Prohibitions. In the event of the Grantee's death,
disability or retirement during the periods described in Section 6 (and subject
to the Committee's discretion, if any, as described in such Section), the
Corporation shall reissue, the certificate representing such Awarded Shares
without the legend referred to in Subsection 3.1 above and shall deliver such
certificate to the Grantee or his or her legal representative.
8. Payment of Withholding. The Grantee may satisfy any applicable federal,
state or local income tax withholding requirements arising from the vesting
(and, hence, reissuance) of Awarded Shares pursuant to this Agreement by
payment of cash or through retention by the Corporation of Awarded Shares then
to be reissued to the Grantee hereunder or by delivery to the Corporation of
previously acquired shares of Common Stock.
9. Employment. Neither the granting of the Incentive Shares evidenced by
this Agreement nor any term or provision of this Agreement shall constitute or
be evidence of any understanding, expressed or implied, on the part of the
Corporation or any Subsidiary to employ the Grantee for any period or in any
way alter the Grantee's status as an employee at will.
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10. Termination. The Grant and this Agreement shall terminate upon the
occurrence of the following events (whichever occurs first): the Grantee's
employment with the Corporation or a Subsidiary terminates, the Termination
Date (if no Restricted Periods are in existence on such Date) or the issuance
of all Awarded Shares.
11. Subject to the Plan and the Committee. The Grant and this Agreement
are subject to the terms and conditions of the Plan, which are incorporated
herein by reference and made a part hereof, but the terms of the Plan shall not
be considered an enlargement of any benefits under this Agreement. In addition,
the Grant and this Agreement are subject to any interpretations of or any rules
and regulations issued by the Committee.
IN WITNESS WHEREOF, the Corporation has caused this Agreement to be signed
on its behalf as of the 22nd day of June, 1995.
ATTEST: PNC BANK CORP.
________________________________ By:_______________________________
William F. Strome Thomas H. O'Brien
Accepted and agreed to as of the ____ day of ________, 1995.
______________________________
Grantee
<PAGE> 4
PNC BANK CORP.
AMENDMENT TO INCENTIVE SHARE AGREEMENT
PNC Bank Corp. (the "Corporation") and the undersigned officer of the
Corporation hereby amend Section 1.6 of the Incentive Share Agreement between
the undersigned and the Corporation granted as of June 22, 1995 pursuant to the
Company's 1992 Long-Term Incentive Award Plan with respect to _________ shares
of the Corporation's common stock to read in its entirety as follows:
1.6 "Restricted Period" means the period that begins on an Award Date
and ends on the earlier to occur of (i) the second anniversary of the
Award Date and (ii) the day immediately preceding the date of a
termination of the Grantee's employment that entitles the Grantee,
pursuant to the agreement between the Corporation and the Grantee dated as
of November 21, 1996, and relating to change in control events, to
"Severance Benefits," as such term is defined in such agreement.
Notwithstanding the preceding sentence, the Restricted Period shall not
end, as a result of clause (ii) of the preceding sentence, prior to
November 5, 1998, unless the Corporation receives advice from its outside
auditors that such termination of the Restricted Period would not prevent
accounting for a business combination as a pooling of interests if such
accounting treatment is desired by the Corporation.
IN WITNESS WHEREOF, the parties have executed this amendment as of the
21st day of November, 1996.
PNC BANK CORP.
By: _____________________________
William E. Rosner
Senior Vice President
______________________________
Name: [Grantee]
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EXHIBIT 10.12
PNC FINANCIAL CORP
SUPPLEMENTAL PENSION PLAN
A. Plan Provisions as of January 1, 1990
Section 1. Purpose of Plan
The purpose of this Supplemental Pension Plan (the "Plan") is to provide a
means of equalizing the benefits of those employees participating in the PNC
Financial Corp Pension Plan (the "Pension Plan") whose funded benefits under
the Pension Plan are or will be limited by application of the Employee
Retirement Income Security Act of 1974 (the "Act") or the regulations
promulgated thereunder as the Act or such regulations may be amended from time
to time. The Plan is to be operated as an exempt excess benefit plan as defined
in the Act.
Section 2. Administration of the Plan
The Pension Committee (the "Committee") under the Pension Plan shall
administer the Plan. The Committee shall have full authority to determine all
questions arising in connection with the Plan, including its interpretation,
may adopt procedural rules, and may employ and rely on such legal counsel, such
actuaries, such accountants and such agents as it may deem advisable to assist
in the administration of the Plan. Decisions of the Committee shall be
conclusive and binding on all persons.
Section 3. Participation in the Plan
All Participants of the Pension Plan (as defined in Pension Plan) shall be
eligible to participate in this Plan whenever their benefits under the Pension
Plan computed without taking into consideration the limitations on benefits
contained in Section 4.7 of the Pension Plan exceed the maximum benefits to
which they are entitled by reason of such limitations and such Participant's
Employer (as defined in the Pension Plan) shall have adopted the Plan. The
amount of such excess shall hereinafter be referred to as the "Excess
Benefits".
Section 4. Excess Benefits Related to the Retirement Plan
Each Employer that, with the approval of PNC Financial Corp (the
"Corporation") shall have adopted the Plan, shall pay in respect of each
Participant of the Pension Plan who is eligible to participate in this Plan a
supplemental retirement benefit equal to the Excess Benefit as defined in
Section III of this Plan. Such supplemental retirement benefit under this Plan
shall be payable in accordance with all the terms and conditions applicable to
the Participant's benefits under the Pension Plan, including whatever optional
benefits he may have elected. However, a Participant may elect to receive his
benefits under this Plan on a basis provided for in the Pension Plan which is
different from the basis upon which he receives benefits under the Pension
Plan, if he files an election in writing to that effect with the Committee at
least twelve months before his retirement date as provided under the Pension
Plan or, if this is impracticable, prior to some other date selected by the
Committee.
Section 5. Miscellaneous
This Plan may be terminated at any time by the Board of Directors of the
Corporation and any Employer that shall have adopted the Plan may at any time,
withdraw from further participation in the Plan, in either or both of which
events payments to Participants and beneficiaries of supplemental retirement
benefits accrued hereunder in respect of years (including fractional years)
prior to the date of such termination or withdrawal shall be made at the same
times and in the same amounts as would have been provided for under this Plan
if it had not been terminated or if such withdrawal had not occurred. This Plan
may also be amended at any time by the Board of Directors of the Corporation
except that no such amendment shall deprive any Participant or beneficiary of
his supplemental retirement benefit accrued at the time of such amendment.
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Benefits payable under this Plan shall not be funded and their payment
shall be made by or for the account of the Participant's Employer under the
Pension Plan, and the Corporation and the other Employers may make such
arrangements for payment out of the general funds of the Corporation or the
other Employers as they may deem appropriate with respect thereto.
This Plan shall be construed, administered and enforced according to the
laws of the Commonwealth of Pennsylvania.
Section 6. Effective Date
This Plan shall become effective as of December 1, 1984.
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NOVEMBER 21, 1996
AMENDMENT TO THE PNC FINANCIAL CORP
SUPPLEMENTAL PENSION PLAN
WHEREAS, PNC Bank Corp. (the "Corporation") maintains the PNC Financial
Corp Supplemental Pension Plan (the "Plan"); and
WHEREAS, Section 5 of the Plan authorizes the Corporation to amend the
Plan; and
WHEREAS, it has been determined that it is in the best interest of the
Corporation to amend the Plan to (a) clarify the Plan's prohibition against the
reduction of participants' accrued benefits as the result of a Plan amendment,
termination of the Plan, or the withdrawal of an affiliate from participation
in the Plan, (b) clarify that the Corporation may, in its discretion, establish
a trust to provide a source of funds for the payment of benefits under the
Plan, and (c) make certain other changes;
NOW, THEREFORE, the Plan is hereby amended as follows:
1. The Plan is hereby renamed the "PNC Bank Corp. Supplemental Pension
Plan" and all references in the Plan to "PNC Financial Corp" are hereby changed
to "PNC Bank Corp."
2. Section 1 of the Plan is hereby amended to read as follows:
The purpose of this Supplemental Pension Plan (the "Plan") is to provide a
means of equalizing the benefits of those employees participating in the
PNC Bank Corp. Pension Plan (the "Pension Plan") whose funded benefits
under the Pension Plan are or will be limited by application of Section
415 of the Internal Revenue Code of 1986, as amended. The Plan is to be
operated as an "excess benefit plan" as defined in Section 3(36) of the
Employee Retirement Income Security Act of 1974, as amended.
1. Section 2 of the Plan is hereby amended to add the following at the end
of the last sentence thereof:
";provided, however, that this sentence shall not apply after the
occurrence of a Change in Control (as defined in the PNC Bank Corp.
Supplemental Executive Retirement Income and Disability Plan as of the
date hereof)."
2. Section 3 of the Plan is hereby amended to add "(or any successor
provision)" after the words "Section 4.7 of the Pension Plan".
3. Section 5 of the Plan is hereby amended in its entirety to read as
follows:
The Plan may be amended or terminated by the Board of Directors of the
Corporation at any time, and any Employer that has adopted the Plan may
withdraw from further participation in the Plan at any time; provided,
however, that no such amendment, termination or withdrawal (each, a "Plan
Change") shall, without the consent of each affected Participant, reduce
or in any way adversely affect (a) the supplemental retirement benefits
payable hereunder with respect to a Participant who has terminated
employment with the Corporation or an Employer (as applicable) prior to
the date of such Plan Change, or (b) the amount of, or payment of, the
Accrued Benefit (as hereinafter defined) of any other Participant as of
the date of such Plan Change. For purposes of this Section 5, the term
"Accrued Benefit" means an amount equal to the product of (1) and (2),
where (1) is the supplemental retirement benefit that would be payable to
a Participant or his beneficiary under the terms of this Plan as in effect
immediately prior to the Plan Change, calculated as of the date (the
Participant's "Retirement Date") that retirement benefit payments to the
Participant or beneficiary commence under the Pension Plan, and (2) is a
fraction, the numerator of which is the number of years of service
credited to the Participant under the Pension Plan for benefit accrual
purposes ("Benefit Accrual Service") as of the date of the Plan Change,
and the denominator of which is the Participant's total Benefit Accrual
Service under the Pension Plan as of his Retirement Date. After a Change
in Control, the foregoing
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provisions of this Section 5 and Section 8 hereof may not be amended with
respect to a Participant without the written consent of the Participant;
provided, however, that the failure of a Participant to consent to any
such amendment shall not impair the ability of the Board of Directors of
the Corporation to amend the Plan with respect to any other Participant
who has consented to such amendment.
4. Section 6 of the Plan is hereby redesignated as Section 9 and new
Sections 6, 7, and 8 are hereby added to the Plan to read as follows:
6. Funding of Benefits. In the sole discretion of the Corporation,
the Corporation may establish a nonqualified grantor trust and make
contributions thereto for the purpose of providing a source of funds to
pay benefits as they become due and payable hereunder; provided, however,
that no such trust shall result in a Participant being required to include
in gross income for Federal income tax purposes any benefits payable
hereunder prior to the date of actual payment. Notwithstanding the
establishment of any such trust, a Participant's rights hereunder shall be
solely those of a general unsecured creditor of the Corporation and the
Employers. It is the intention of the Corporation, the Employers, and
Participants hereunder that the Plan be unfunded for tax purposes and for
purposes of Title I of ERISA.
7. Governing Law. This Plan shall be construed, administered, and
enforced according to the laws of the Commonwealth of Pennsylvania to the
extent not preempted by Federal law.
8. Successors. In addition to any obligations imposed by law upon any
successor(s) to the Corporation and the Employers, the Corporation and the
Employers shall be obligated to require any successor(s) (whether direct
or indirect, by purchase, merger, consolidation, operation of law, or
otherwise) to all or substantially all of the business and/or assets of
the Corporation and the Employers to expressly assume and agree to perform
under this Plan in the same manner and to the same extent that the
Corporation and the Employers would be required to perform under it if no
such succession had taken place; in the event of such a succession,
references to "Corporation" and "Employers" herein shall thereafter be
deemed to include such successor(s).
IN WITNESS WHEREOF, PNC Bank Corp. has caused this Amendment to the PNC
Financial Corp Supplemental Pension Plan to be duly adopted as of this 21st day
of November, 1996.
PNC BANK CORP.
By: /s/ WILLIAM E. ROSNER
---------------------------
William E. Rosner
Senior Vice President
WITNESS:
/s/ THOMAS R. MOORE
- ---------------------
Thomas R. Moore
Assistant Corporate Secretary
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EXHIBIT 10.17
FORM
CHANGE IN CONTROL SEVERANCE AGREEMENT
THIS CHANGE IN CONTROL SEVERANCE AGREEMENT (this "Agreement") dated as of
November 21, 1996 is made by and between PNC Bank Corp., a Pennsylvania
corporation (the "Company"), and ___________ (the "Executive").
WHEREAS the Board of Directors of the Company (the "Board") has determined
that it is in the best interest of the Company and its shareholders to enter
into agreements with the Company's senior executives regarding change in
control severance benefits and the Executive is a Company senior executive;
NOW THEREFORE, in consideration of the premises and the mutual covenants
herein contained and intending to be legally bound hereby, the Company and the
Executive hereby agree as follows:
1. Defined Terms. The definitions of capitalized terms used in this
Agreement are provided in the last Section and elsewhere in this Agreement.
2. Term of Agreement. This Agreement shall commence on the date hereof and
shall remain in effect until the Executive attains age sixty-five (65);
provided, however, that (a) the Company may terminate this Agreement, at any
time other than during a Coverage Period, if the Company gives the Executive at
least one (1) year advance written notice of termination (which notice shall
have no effect if the proposed date of termination falls within a Coverage
Period) and the Company terminates this Agreement simultaneously with all
similar agreements with other Company executives and (b) unless the Committee
determines otherwise, this Agreement shall terminate if at any time after the
date hereof, other than during a Coverage Period, the Executive is classified
below SEG 6. Notwithstanding the foregoing, any outstanding obligations of the
Company and the Executive hereunder arising from a termination of the
Executive's employment shall survive the termination of this Agreement until
such obligations have been fulfilled.
3. Company's Covenants Summarized. In order to induce the Executive to
remain in the employ of the Company and in consideration of the Executive's
covenants set forth in Section 4 hereof, the Company agrees, under the terms
and conditions set forth herein, that, in the event the Executive's employment
with the Company is terminated during a Coverage Period, the Company shall
provide the Executive the benefits and pay the Executive the amounts specified
in Section 5 hereof.
4. The Executive's Covenants.
4.1 No-Raid. The Executive agrees that, in the event the Executive's
employment with the Company is terminated for any reason whatsoever, and as a
result of such termination the Executive is entitled to receive the Severance
Benefits, the Executive shall not, for a period of one (1) year after the Date
of Termination, employ or offer to employ, solicit, actively interfere with the
Company's or any Company affiliate's relationship with, or attempt to divert or
entice away, any officer of the Company or any Company affiliate.
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4.2 Nondisclosure. During the Executive's employment with the Company and
thereafter, the Executive shall not disclose or use in any way any confidential
business or technical information or trade secret acquired in the course of
such employment, other than (i) information that is generally known in the
Company's industry or acquired from public sources, (ii) as required in the
course of such employment, (iii) as required by any court, supervisory
authority, administrative agency or applicable law, or (iv) with the prior
written consent of the Company.
5. Benefits and Rights upon Termination of Employment.
5.1. General Termination Rights and Benefits. If the Executive's
employment by the Company is terminated for any reason (whether by the Company
or the Executive) during a Coverage Period, the Company shall pay to the
Executive the payments described in Subsections (a) and (b) below.
(a) Pre-Termination Benefits. The Company shall pay the Executive's
base salary to the Executive through the Date of Termination in accordance with
the Company's normal payment practices at the highest rate in effect during the
sixty (60) day period preceding the date the Notice of Termination is given,
together with all other compensation and benefits payable to the Executive
through the Date of Termination under the terms of any compensation or benefit
plan, program or arrangement maintained by the Company during such period.
(b) Post-Termination Benefits. The Company shall pay the Executive's
normal post-termination compensation and benefits to the Executive as such
payments become due. Such post-termination compensation and benefits shall be
determined under, and paid in accordance with, the Company's retirement,
insurance, pension, welfare and other compensation or benefit plans, programs
and arrangements.
5.2. Severance Benefits. In addition to the payments provided for by
Section 5.1 hereof, but subject to Section 7.16 hereof, the Company shall pay
to the Executive the payments described in Subsections (a) through (e) below
(the "Severance Benefits") upon termination of the Executive's employment with
the Company during a Coverage Period, unless such termination is (i) by the
Company for Cause, (ii) by reason of the Executive's death or Disability or
after the Executive attains age sixty-five (65) or (iii) by the Executive
without Good Reason.
(a) Lump-Sum Severance Payment. In lieu of any further salary payments
to the Executive for periods subsequent to the Date of Termination, the Company
shall pay to the Executive a lump sum severance payment, in cash, equal to the
Classification Factor (or, if less, the Retirement Factor) times the sum of (i)
the Executive's Annual Base Salary and (ii) the Executive's Annual Bonus;
provided, however, that a portion of such lump-sum severance payment equal to
6% of the product of (x) the Classification Factor (or, if less, the Retirement
Factor) and (y) the Executive's Annual Base Salary shall be credited, together
with a matching contribution from the Company equal to 100% of such amount, to
the Executive's account under the Supplemental Savings Plan. Such amount that
is credited to the Executive's account under the Supplemental Savings Plan
shall be administered in the same manner as other amounts credited to the
Executive under such plan and shall be distributed to the Executive at the time
and in the manner that the Executive's account under such plan is distributed.
(b) Bonus.
(i) Termination Year Bonus. The Company shall pay to the Executive
a lump sum cash payment at a minimum equal to the product of (x) the
Executive's highest annual base salary in effect during the one (1) year period
preceding the Executive's Date of Termination and (y) the Executive's highest
Target Percentage in effect during the fiscal year preceding the Termination
Year.
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(ii) Preceding Fiscal Year Bonus. To the extent that as of the Date
of Termination the Company has not yet determined and paid to the Executive any
incentive award to which the Executive is entitled under any Company incentive
plan with respect to the fiscal year preceding the Termination Year, the
Company shall also pay to the Executive a lump sum cash payment at a minimum
equal to the product of (x) the Executive's highest annual base salary in
effect during such fiscal year and (y) the Executive's highest Target
Percentage in effect during such fiscal year.
(iii) General. Any payment made to the Executive under this Section
5.2(b) shall be deemed to be a payment made in fulfillment of the Company's
then existing or future cash bonus obligations, if any, to the Executive under
any Company cash bonus incentive compensation plan with respect to such fiscal
years.
(iv) Deferral Option. If the Executive so elects by notifying the
Company in writing at least one year prior to the Date of Termination, (x) all
or a portion, as specified by the Executive in such election notice, of the
payment provided for by the foregoing provisions of this Section 5.2(b), and
(y) a portion of the lump-sum severance payment provided for by Section 5.2(a)
hereof, as specified by the Executive in the election notice, up to the product
of the Classification Factor (or, if less, the Retirement Factor) and the
Executive's Annual Bonus, shall not be paid to the Executive, but instead shall
be credited to an account established for the Executive under the Deferred
Compensation Plan. Such credited amount shall be administered in the same
manner as amounts otherwise deferred under the Deferred Compensation Plan and
shall be distributed to the Executive at the time and in the manner specified
in the Executive's election notice.
(c) Continued Welfare Benefits. Commencing on the Date of Termination
and continuing thereafter for the number of months equal to the product of
twelve (12) and the Classification Factor (or, if less, the Retirement Factor)
(such period is referred to herein as the "Benefits Period"), the Company shall
provide the Executive with life insurance (including group term and
supplemental executive life insurance), health insurance and long-term
disability insurance benefits ("Welfare Benefits") substantially similar in all
respects to those which the Executive was receiving immediately prior to the
Notice of Termination. The receipt of such Welfare Benefits shall be
conditioned upon the Executive continuing to pay the premiums for such Welfare
Benefits that the Executive paid immediately prior to the Notice of
Termination. Benefits otherwise receivable by an Executive pursuant to this
Section 5.2(c) (and the corresponding premium payments made by the Executive
therefor) shall be reduced to the extent substantially similar benefits are
actually received by or made available to the Executive by any other employer
during the Benefits Period at a cost to the Executive that is commensurate with
the cost incurred by the Executive immediately prior to the Notice of
Termination; provided, however, that if the Executive becomes employed by a new
employer that maintains a medical plan that either (i) does not cover the
Executive or a family member or dependent with respect to a preexisting
condition that was covered under the applicable Company medical plan, or (ii)
does not cover the Executive or a family member or dependent for a designated
waiting period, the Executive's coverage under the applicable Company medical
plan shall continue (but shall be limited in the event of noncoverage due to a
preexisting condition, to such preexisting condition) until the earlier of (x)
the end of the applicable period of noncoverage under the new employer's plan
and (y) the end of the Benefits Period. The Executive agrees to report to the
Company any coverage and benefits actually received by or made available to the
Executive from such other employer(s). During the Benefits Period, the
Executive shall be entitled to elect to change the Executive's level of
coverage and/or choice of coverage options (such as Executive only or family
medical coverage) with respect to the Welfare Benefits to be provided by the
Company to the Executive to the same extent that actively employed senior
executives of the Company are permitted to make such changes; provided,
however, that in the event of any such changes the premiums paid by the
Executive for such Welfare Benefits shall reflect any cost increase or decrease
that would actually be paid or received by an actively employed senior
executive of the Company who made the same changes. For purposes of this
Section 5.2(c), any measurement of Welfare Benefits, premium payments, or costs
that is based on the Welfare Benefits, premium payments or costs that the
Executive was receiving, paying or incurring immediately prior to the Notice of
Termination shall be determined without giving effect to any change thereto
during the
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Coverage Period which constituted Good Reason pursuant to Section 8.21(e). To
the extent that the Company is unable to provide the Executive with any of the
Welfare Benefits required by this Section 5.2(c) under the Company's benefit
plans, the Company shall either purchase such Welfare Benefits for the
Executive or pay to the Executive a cash payment equal to the value thereof.
(d) Other Benefits. The Company shall pay to the Executive a lump sum
cash payment equal to the product of (i) the Classification Factor (or, if
less, the Retirement Factor) and (ii) the average annual amount of club
membership fees (excluding any one-time initiation fees) and automobile
expenses paid by the Company to or on behalf of the Executive during the three
fiscal years (or such shorter period during which the Executive has been
employed by the Company or receiving these perquisites) immediately preceding
the Termination Year. Any club membership bond or certificate held by the
Company on behalf of the Executive shall be transferred to the Executive as
appropriate to enable the Executive to retain such club membership. In
addition, during the Benefits Period, the Company shall continue to pay for and
provide the Executive with access to personal financial consulting services
that are substantially similar to that which the Company provided the Executive
with during the fiscal year immediately preceding the Termination Year.
(e) Pension Benefits.
(i) Pension Plan Benefits. The pension benefits accrued by the
Executive under the Pension Plan shall be paid to the Executive in accordance
with the terms of such plan.
(ii) Certain Previously Accrued Pension Benefits. If the Executive
so elects by notifying the Company in writing at least one year prior to the
Date of Termination, in lieu of the pension benefits to which the Executive
would be entitled under the Excess Plan and the SERP, the Company shall pay to
the Executive a lump sum amount, in cash, equal to the actuarial equivalent
present value of the pension benefits that the Executive accrued under such
plans as of the Date of Termination, calculated in accordance with Section
5.2(e)(iv) hereof. If the Executive does not elect to receive the lump sum
payment provided for by this Section 5.2(e)(ii), the pension benefits accrued
by the Executive under the Excess Plan and the SERP shall be paid to the
Executive in accordance with the terms of such plans.
(iii) Certain Benefits Period Pension Accruals. In addition to
amounts payable to the Executive pursuant to Section 5.2(e)(ii) hereof and/or
the Pension Plan, the Excess Plan and the SERP (the "Company Pension Plans"),
the Company shall pay to the Executive a lump sum amount, in cash, equal to the
actuarial equivalent present value of the additional pension benefits that the
Executive would have accrued under the Company Pension Plans assuming the
Executive remained employed (after the Date of Termination) for the Benefits
Period, was compensated during such period at the Executive's Annual Base
Salary and Annual Bonus, and was fully vested under the Company Pension Plans.
Such actuarial equivalent present value amount shall be calculated in
accordance with Section 5.2(e)(iv) hereof.
(iv) Calculation of Lump Sum Amounts. The actuarial equivalent
present value lump sum amounts provided for by Sections 5.2(e)(ii) and
5.2(e)(iii) shall be determined: (1) based on the pension benefits that would
be payable to the Executive as a straight life annuity commencing as of the
later of (A) the Executive's attainment of age fifty-five (55) and (B) the Date
of Termination (in the case of the lump sum amount provided for by Section
5.2(e)(ii) hereof) or the last day of the Benefits Period (in the case of the
lump sum amount provided for by Section 5.2(e)(iii) hereof); (2) using the same
methods and assumptions utilized under the Pension Plan in determining lump sum
payments immediately prior to the Date of Termination; and (3) without giving
effect to any amendments to the Company Pension Plans during the Coverage
Period that adversely affect in any manner the amount of pension benefits
payable to the Executive under the Company Pension Plans.
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5.3. Gross-Up Payment; Certain Limitations on Payments and Benefits.
(a) In the event that (i) the Executive becomes entitled to the
Severance Benefits or any other benefits or payments in connection with a
Change in Control or the termination of the Executive's employment, whether
pursuant to the terms of this Agreement or otherwise (collectively, the "Total
Benefits"), and (ii) any of the Total Benefits will be subject to the Excise
Tax, the Company shall pay to the Executive an additional amount (the "Gross-Up
Payment") such that the net amount retained by the Executive from the Gross-Up
Payment, after deduction of any federal, state and local income taxes, Excise
Tax, and FICA and Medicare withholding taxes upon the Gross-Up Payment, shall
be equal to the Excise Tax on the Total Benefits. For purposes of determining
the amount of such Excise Tax, the amount of the Total Benefits that shall be
treated as subject to the Excise Tax shall be equal to (i) the Total Benefits,
minus (ii) the amount of such Total Benefits that, in the opinion of tax
counsel selected by the Company and reasonably acceptable to the Executive
("Tax Counsel"), are not excess parachute payments (within the meaning of
Section 280G(b)(1) of the Code).
(b) For purposes of this Section 5.3, the Executive shall be deemed to
pay federal income taxes at the highest marginal rate of federal income
taxation in the calendar year in which the Excise Tax is (or would be) payable
and state and local income taxes at the highest marginal rate of taxation in
the state and locality of the Executive's residence on the Date of Termination,
net of the reduction in federal income taxes which could be obtained from
deduction of such state and local taxes (calculated by assuming that any
reduction under Section 68 of the Code in the amount of itemized deductions
allowable to the Executive applies first to reduce the amount of such state and
local income taxes that would otherwise be deductible by the Executive). Except
as otherwise provided herein, all determinations required to be made under this
Section 5.3 shall be made by Tax Counsel, which determinations shall be
conclusive and binding on the Executive and the Company absent manifest error.
(c) In the event that the Excise Tax on the Total Benefits is
subsequently determined to be less than the amount taken into account hereunder
at the time of termination of the Executive's employment, the Executive shall
repay to the Company, at the time that the amount of such reduction in Excise
Tax is finally determined, the portion of the Gross-Up Payment attributable to
such reduction (plus that portion of the Gross-Up Payment attributable to the
Excise Tax, federal, state and local income taxes and FICA and Medicare
withholding taxes imposed on the Gross-Up Payment being repaid by the Executive
to the extent that such repayment results in a reduction in any such taxes
and/or a federal, state or local income tax deduction) plus interest on the
amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the
Code. In the event that the Excise Tax on the Total Benefits is determined to
exceed the amount taken into account hereunder at the time of the termination
of the Executive's employment (including by reason of any payment the existence
or amount of which cannot be determined at the time of the Gross-Up Payment),
the Company shall make an additional Gross-Up Payment (which shall be
calculated by Tax Counsel in the same manner and using the same assumptions as
set forth in Sections 5.3(a) and 5.3(b) hereof) to the Executive in respect of
such excess (plus any interest, penalties or additions payable by the Executive
with respect to such excess to the Internal Revenue Service or any other
federal, state, local or foreign taxing authority) at the time that the amount
of such excess is finally determined.
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5.4. Timing of Payments. The payments provided for in Sections 5.1 through
5.3 (other than Section 5.1(b), Section 5.2(c) and the last sentence of Section
5.2(d) and other than payments (and related gross-up payments) that are
deferred in accordance with Section 5.2) shall be made on the Date of
Termination, provided, however, that if the amounts of such payments cannot be
finally determined on or before such day, the Company shall pay to the
Executive on such day an estimate, as determined in good faith by the Company,
of the minimum amount of such payments. The Company shall pay the remainder of
such payments (together with interest at the rate provided in Section
1274(b)(2)(B) of the Code from the Date of Termination to the payment of such
remainder) as soon as the amount thereof can be determined, but in no event
later than the thirtieth (30th) day after the Date of Termination. In the event
that the amount of the estimated payments exceeds the amount subsequently
determined to have been due, such excess shall constitute a loan by the Company
to the Executive, payable on the fifth (5th) business day after written demand
by the Company to the Executive (together with interest at the rate provided in
Section 1274(b)(2)(B) of the Code from the Date of Termination to the repayment
of such excess).
5.5. Reimbursement of Legal Costs. The Company shall pay to the Executive
all reasonable legal fees and expenses incurred by the Executive as a result of
a bona fide dispute regarding the application of any provision of this
Agreement including all such fees and expenses, if any, incurred (i) in
disputing any Notice of Termination under Section 6.2 hereof, (ii) in seeking
to obtain or enforce any right or benefit provided by this Agreement or (iii)
in connection with any tax audit or proceeding to the extent attributable to
the application of Section 4999 of the Code to any payment or benefit provided
hereunder. Such payments shall be made within five (5) business days after
delivery of the Executive's respective written requests for payment accompanied
with such evidence of fees and expenses incurred as the Company reasonably may
require.
6. Termination Procedures.
6.1 Notice of Termination. During a Coverage Period or pursuant to Section
7.2 or Section 7.3 hereof, any termination of the Executive's employment (other
than by reason of death) must be preceded by a written Notice of Termination
from one party hereto to the other party hereto in accordance with Section 7.6
hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a
notice that shall (i) specify the Executive's date of termination (the "Date of
Termination") which shall not be more than sixty (60) days from the date such
Notice of Termination is given, (ii) indicate the notifying party's opinion
regarding the specific provisions of this Agreement that will apply upon such
termination and (iii) set forth in reasonable detail the facts and
circumstances claimed to provide a basis for the application of the provisions
indicated. Termination of the Executive's employment shall occur on the
specified Date of Termination even if there is a dispute between the parties
pursuant to Section 6.2 hereof relating to the provisions of this Agreement
applicable to such termination.
6.2 Dispute Concerning Applicable Termination Provisions. If within thirty
(30) days of receiving the Notice of Termination the party receiving such
notice notifies the other party that a dispute exists concerning the provisions
of this Agreement that apply to such termination, the dispute shall be resolved
either (i) by mutual written agreement of the parties or (ii) by a final
judgment, order or decree of a court of competent jurisdiction (which is not
appealable or with respect to which the time for appeal therefrom has expired
and no appeal has been perfected). The parties shall pursue the resolution of
such dispute with reasonable diligence. Within five (5) business days of such a
resolution, any party owing any payments pursuant to the provisions of this
Agreement shall make all such payments together with interest accrued thereon
at the rate provided in Section 1274(b)(2)(B) of the Code.
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7. Miscellaneous.
7.1 No Mitigation. The Executive is not required to seek other employment
or to attempt in any way to reduce any amounts payable to the Executive by the
Company pursuant to this Agreement. The amount of any payment or benefit
provided for under this Agreement (other than to the extent provided in Section
5.2(c) and Section 7.16) shall not be reduced by any compensation earned by the
Executive as the result of employment by another employer, by retirement
benefits, by offset against any amount claimed to be owed by the Executive to
the Company, or otherwise.
7.2 Successors. In addition to any obligations imposed by law upon any
successor to the Company, the Company shall be obligated to require any
successor (whether direct or indirect and whether by purchase, merger,
consolidation, operation of law, or otherwise) to all or substantially all of
the business, property and/or assets of the Company to expressly assume and
agree to perform this Agreement in the same manner and to the same extent that
the Company would be required to perform it if no such succession had taken
place; in the event of such a succession, references to the "Company" herein
shall thereafter be deemed to include such successor. Failure of the Company to
obtain such assumption and agreement prior to the effectiveness of any such
succession shall be a breach of this Agreement. Such breach shall entitle the
Executive to terminate the Executive's employment at any time within six months
of such succession and thereafter to receive compensation and benefits from the
Company in the same amount and on the same terms as the Executive would be
entitled to hereunder if the Executive were to terminate the Executive's
employment for Good Reason during a Coverage Period. Failure of the Executive
to exercise any right to terminate the Executive's employment pursuant to this
Section 7.2 shall not affect any other right of the Executive under this
Agreement.
7.3 Terminations in Anticipation of Change in Control. The Executive's
employment shall be deemed to have been terminated by the Company without Cause
during a Coverage Period if the Executive's employment is terminated by the
Company without Cause not during a Coverage Period and such termination of
employment (a) was at the request of a third party that has taken steps
reasonably calculated to effect a Change in Control, or (b) otherwise arose in
anticipation of a Change in Control. The Executive's employment shall be deemed
to have been terminated by the Executive for Good Reason during a Coverage
Period if the Executive terminates his or her employment with Good Reason not
during a Coverage Period and the circumstance or event that constitutes Good
Reason (a) occurs at the request of a third party that has taken steps
reasonably calculated to effect a Change in Control or (b) otherwise arose in
anticipation of a Change in Control. In the event of a termination of
employment described in this Section 7.3, the Executive shall be entitled to
all payments and other benefits to which the Executive would have been entitled
had such termination occurred during a Coverage Period, provided that the
Executive shall only be entitled to salary and other compensation and benefits
pursuant to Section 5.1(a) hereof until the Executive's actual date of
termination. Notwithstanding the preceding sentences of this Section 7.3 or
any other provision of this Agreement, the Executive shall not be entitled to
receive, and the Company shall have no obligation to pay or provide to the
Executive, any Severance Benefits as a result of a termination of the
Executive's employment described in this Section 7.3, unless and until a
Coverage Period commences within three (3) months of such termination.
Notwithstanding the provisions of Section 7.15 hereof, for purposes of this
Section 7.3 only, the burden of proving that the requirements of clauses (a)
and (b) of the first and second sentences of this Section 7.3 have been met
shall be on the Executive and the standard of proof to be met by the Executive
shall be clear and convincing evidence. For purposes of this Section 7.3 only,
the definition of "Change in Control" shall exclude the provision in Section
8.7(a).
7.4 Incompetency. Any benefit payable to or for the benefit of the
Executive, if legally incompetent, or incapable of giving a receipt therefor,
shall be deemed paid when paid to the Executive's guardian or to the party
providing or reasonably appearing to provide for the care of such person, and
such payment shall fully discharge the Company.
7
<PAGE> 8
7.5 Death. This Agreement shall inure to the benefit of and be enforceable
by the Executive's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If the
Executive shall die while any amount would still be payable to the Executive
hereunder if the Executive had continued to live (other than amounts which, by
their terms, terminate upon the death of the Executive), such amount, unless
otherwise provided herein, shall be paid in accordance with the terms of this
Agreement to the executors, personal representatives or administrators of the
Executive's estate.
7.6 Notices. In any case where any notice or other communication is
required or permitted to be given hereunder, such notice or communication shall
be in writing and shall be deemed to have been duly given and delivered, (a) if
delivered in person, on the date of such delivery or (b) if sent by a
recognized overnight courier service or registered U.S. mail (with postage
prepaid and return receipt requested), on the date of receipt of such mail, and
shall be sent or delivered to the following address (or such other address as a
party may designate from time to time in a written notice to the other party
hereto):
To the Company:
PNC Bank Corp.
One PNC Plaza
249 Fifth Avenue
Pittsburgh, Pennsylvania 15222
Attention: William E. Rosner,
Senior Vice President and Director of
Human Resources
With a copy (which shall not be deemed notice) to:
Helen P. Pudlin
Senior Vice President and General Counsel
PNC Bank Corp.
One PNC Plaza
249 Fifth Avenue
Pittsburgh, Pennsylvania 15222
To the Executive:
_________________________________
_________________________________
_________________________________
7.7 Modification; Waiver. No provision of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed to
in writing and signed by the Executive and such officer as may be specifically
designated by the Board. No waiver by either party hereto at any time of any
breach of, or failure to comply with, any condition or provision of this
Agreement that is to be satisfied or performed by the other party hereto shall
be deemed a waiver of similar or dissimilar provisions or conditions at the
same or at any prior or subsequent time.
8
<PAGE> 9
7.8 Entire Agreement. No agreements or representations, oral or otherwise,
express or implied, with respect to the subject matter hereof have been made by
either party which are not expressly set forth in this Agreement.
7.9 Governing Law and Venue. The validity, interpretation, construction
and performance of this Agreement shall be governed by the laws of the
Commonwealth of Pennsylvania applicable to agreements made and entirely to be
performed within such jurisdiction. The party bringing any action under this
Agreement shall only be entitled to choose the federal or state courts in the
Commonwealth of Pennsylvania as the venue for such action, and each party
consents to the jurisdiction of the court chosen in such manner for such
action.
7.10 Changes to Statutes, Employee Benefit Plans and Employee
Classification Systems. All references to sections of, or regulations
promulgated under, the Exchange Act, the Code or other statutes shall be deemed
also to refer to such sections or regulations as amended from time to time and
to any successor provisions to such sections or regulations. All references to
employee benefit plans and employee classification systems of the Company shall
be deemed also to refer to such plans and classification systems as amended
from time to time and to any successor plans or classification systems thereto.
7.11 Withholding. Any payments provided for hereunder shall be paid net of
any applicable withholding required under federal, state or local law and any
additional withholding to which the Executive has agreed.
7.12 Validity. The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.
7.13 No Right to Continued Employment. Nothing in this Agreement shall be
deemed to give the Executive the right to be retained in the employ of the
Company, or to interfere with the right of the Company to discharge the
Executive at any time, subject in all cases to the terms of this Agreement.
7.14 No Assignment of Benefits. Except as otherwise provided herein or by
law, no right or interest of the Executive under this Agreement shall be
assignable or transferable, in whole or in part, either directly or by
operation of law or otherwise, including without limitation by execution, levy,
garnishment, attachment or pledge; no attempted assignment or transfer thereof
shall be effective.
7.15 Burden and Standard of Proof. Except as otherwise expressly provided
in Section 7.3 hereof, in any proceeding (regardless of who initiates such
proceeding) in which the payment of Severance Benefits or other benefits under
this Agreement is at issue, the burden of proof as to whether any termination
of the Executive's employment has been for Cause or without Good Reason for
purposes of this Agreement shall be upon the Company or its successor, and the
standard of proof to be met with respect thereto shall be clear and convincing
evidence.
7.16 Reduction of Agreement Benefits by Other Required Benefits.
Notwithstanding any other provision of this Agreement to the contrary, if in
connection with the termination of the Executive's employment for any reason
the Company is obligated by law or by contract (including any employment or
severance agreement other than this Agreement) or by Company plan or policy to
(i) pay the Executive with respect to any notice period prior to termination,
(ii) pay the Executive severance pay (including any payments based upon unpaid
or contingent awards pursuant to any incentive compensation plan or based upon
added years of service credit or any other credit or addition under any pension
or savings plan), a termination indemnity, notice pay, or the like, or (iii)
provide the Executive with life, disability, accident or health insurance or
other welfare benefits after the Executive's termination (or a cash payment in
lieu thereof), then any Severance Benefits hereunder shall be reduced by the
amount of any payments and similar benefits described in clauses (i), (ii) and
(iii), as applicable.
9
<PAGE> 10
7.17 Headings. The headings and captions herein are provided for reference
and convenience only, shall not be considered part of this Agreement, and shall
not be employed in the construction of this Agreement.
8. Definitions.
8.1 "Annual Base Salary" means the greater of (a) the Executive's highest
annual base salary in effect during the one (1) year period preceding the
commencement of the applicable Coverage Period and (b) the Executive's highest
annual base salary in effect during the one (1) year period preceding the
Executive's Date of Termination.
8.2 "Annual Bonus" means the product of (a) the greater of (i) the
Executive's average Bonus Percent for the three fiscal years (or such shorter
period during which the Executive has been employed by the Company) immediately
preceding the fiscal year during which the applicable Coverage Period commences
and (ii) the Executive's average Bonus Percent for the three fiscal years (or
such shorter period during which the Executive has been employed by the
Company) immediately preceding the Termination Year, and (b) the Annual Base
Salary.
8.3 "Benefits Period" has the meaning assigned to such term in Section
5.2(c) hereof.
8.4 "Board" means the Board of Directors of the Company.
8.5 "Bonus Percent" means the bonus amount paid or payable to the
Executive with respect to a particular fiscal year divided by the aggregate
base salary paid or payable to the Executive for such fiscal year; provided,
however, that with respect to the fiscal year preceding the Termination Year
the Bonus Percent shall not be less than the Executive's highest Target
Percentage that was in effect during such fiscal year.
8.6 "Cause" means:
(a) the willful and continued failure of the Executive to
substantially perform the Executive's duties with the Company (other than any
such failure resulting from incapacity due to physical or mental illness),
after a written demand for substantial performance is delivered to the
Executive by the Board or the Chief Executive Officer of the Company which
specifically identifies the manner in which the Board or Chief Executive
Officer believes that the Executive has not substantially performed the
Executive's duties; or
(b) the willful engaging by the Executive in illegal conduct or gross
misconduct that is materially and demonstrably injurious to the Company.
For purposes of the preceding clauses (a) and (b), no act or failure to
act, on the part of the Executive, shall be considered "willful" unless it is
done, or omitted to be done, by the Executive in bad faith and without
reasonable belief that the Executive's action or omission was in the best
interests of the Company. Any act, or failure to act, based upon the
instructions or prior approval of the Board, the Chief Executive Officer or the
Executive's superior or based upon the advice of counsel for the Company, shall
be conclusively presumed to be done, or omitted to be done, by the Executive in
good faith and in the best interests of the Company. The cessation of
employment of the Executive shall not be deemed to be for Cause unless and
until there shall have been delivered to the Executive, as part of the Notice
of Termination, a copy of a resolution duly adopted by the affirmative vote of
not less than a majority of the entire membership of the Board, at a Board
meeting called and held for the purpose of considering such termination,
finding that, in the good faith opinion of the Board, the Executive is guilty
of the conduct described in clause (a) or (b) above and specifying the
particulars thereof in detail. Such resolution shall be adopted only after
reasonable notice of such Board meeting is provided to the Executive and the
Executive is given an opportunity, together with counsel, to be heard before
the Board.
10
<PAGE> 11
8.7 A "Change in Control" means a change of control of the Company of a
nature that would be required to be reported in response to Item 6(e) of
Schedule 14A of Regulation 14A (or in response to any similar item on any
similar schedule or form) promulgated under the Exchange Act, whether or not
the Company is then subject to such reporting requirement; provided, however,
that without limitation, a Change in Control shall be deemed to have occurred
if:
(a) any Person, excluding employee benefit plans of the Company, is or
becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the
Exchange Act), directly or indirectly, of securities of the Company
representing twenty percent (20%) or more of the combined voting power of the
Company's then outstanding securities, provided, however, that such an
acquisition of beneficial ownership representing between twenty percent (20%)
and forty percent (40%), inclusive, of such voting power shall not be
considered a Change in Control if the Board approves such acquisition either
prior to or immediately after its occurrence;
(b) the Company consummates a merger, consolidation, share exchange,
division or other reorganization or transaction of the Company (a "Fundamental
Transaction") with any other corporation, other than a Fundamental Transaction
that results in the voting securities of the Company outstanding immediately
prior thereto continuing to represent (either by remaining outstanding or by
being converted into voting securities of the surviving entity) at least sixty
percent (60%) of the combined voting power immediately after such Fundamental
Transaction of (i) the Company's outstanding securities, (ii) the surviving
entity's outstanding securities, or (iii) in the case of a division, the
outstanding securities of each entity resulting from the division;
(c) the shareholders of the Company approve a plan of complete
liquidation or winding-up of the Company or an agreement for the sale or
disposition (in one transaction or a series of transactions) of all or
substantially all of the Company's assets;
(d) as a result of a proxy contest, individuals who prior to the
conclusion thereof constituted the Board (including for this purpose any new
director whose election or nomination for election by the Company's
shareholders in connection with such proxy contest was approved by a vote of at
least two-thirds (2/3) of the directors then still in office who were directors
prior to such proxy contest) cease to constitute at least a majority of the
Board (excluding any Board seat that is vacant or otherwise unoccupied);
(e) during any period of twenty-four consecutive months, individuals
who at the beginning of such period constituted the Board (including for this
purpose any new director whose election or nomination for election by the
Company's shareholders was approved by a vote of at least two-thirds (2/3) of
the directors then still in office who were directors at the beginning of such
period) cease for any reason to constitute at least a majority of the Board
(excluding any Board seat that is vacant or otherwise unoccupied); or
(f) the Board determines that a Change in Control has occurred.
Notwithstanding anything to the contrary herein, a divestiture or spin-off of a
Subsidiary or division of the Company shall not by itself constitute a "Change
in Control."
8.8 "CIC Failure" means the following:
(a) with respect to a CIC Triggering Event described in Section
8.9(a), the Company's shareholders vote against the transaction approved by the
Board or the agreement to consummate the transaction is terminated; or
(b) with respect to a CIC Triggering Event described in Section
8.9(b), the proxy contest fails to replace or remove a majority of the members
of the Board.
11
<PAGE> 12
8.9 "CIC Triggering Event" means the occurrence of either of the
following:
(a) the Board or the Company's shareholders approve a transaction
described in Subsection (b) of the definition of Change in Control contained in
Section 8.7 hereof; or
(b) the commencement of a proxy contest in which any Person seeks to
replace or remove a majority of the members of the Board.
8.10 "Classification Factor" shall mean 'three (3)' if the Executive is
classified by the Company at SEG 14 or above and 'two (2)' if the Executive is
classified by the Company at SEG 13 or below. For each Coverage Period, the
Classification Factor shall be determined as of the day prior to the
commencement of such Coverage Period. Notwithstanding the foregoing, in the
event that the Executive was previously classified at SEG 14 or above and has
subsequently been reclassified below SEG 14, the Committee may, within sixty
(60) days of such reclassification, determine that the "Classification Factor"
shall remain 'three (3)' for the Executive.
8.11 "Code" means the Internal Revenue Code of 1986.
8.12 "Committee" means the Personnel and Compensation Committee of the
Board.
8.13 "Company" means PNC Bank Corp., a Pennsylvania corporation.
References herein to employment with the Company shall include employment with
a Subsidiary. In addition, if the Executive becomes employed by a Subsidiary,
references to payments, benefits, privileges or other rights to be accorded by
the "Company" shall be deemed to include such payments, benefits, privileges or
other rights to be provided by such Subsidiary.
8.14 "Coverage Period" means a period commencing on the earlier to occur
of (i) the date of a CIC Triggering Event and (ii) the date of a Change in
Control, and ending on the date that is the Classification Factor years after
the date of the Change in Control, provided, however, that in the event that a
Coverage Period commences on the date of a CIC Triggering Event such Coverage
Period shall terminate upon the earlier to occur of (x) the date of a CIC
Failure and (y) the date that is the Classification Factor years after the date
of the Change in Control triggered by the CIC Triggering Event. After the
termination of any Coverage Period, this Agreement shall continue in effect and
another Coverage Period shall commence upon the earlier to occur of clauses (i)
and (ii) in the preceding sentence.
8.15 "Date of Termination" has the meaning assigned to such term in
Section 6.1 hereof.
8.16 "Deferred Compensation Plan" means the PNC Bank Corp. and Affiliates
Deferred Compensation Plan, provided, however, that no amendment or termination
of the Plan, during a Coverage Period or after the Date of Termination, that
adversely affects the administration or payment of the Executive's benefits
shall be given effect for purposes of this Agreement without the written
consent of the Executive.
8.17 "Disability" means the Executive's absence from the full-time
performance of the Executive's duties with the Company as a result of the
Executive's incapacity due to physical or mental illness, which is determined
to be total and permanent under the Company's long-term disability plan(s) that
cover the Executive.
8.18 "Excess Plan" means the PNC Bank Corp. Supplemental Pension Plan.
8.19 "Exchange Act" means the Securities Exchange Act of 1934.
8.20 "Excise Tax" means any excise tax imposed under Section 4999 of the
Code.
12
<PAGE> 13
8.21 "Good Reason" means:
(a) the assignment to the Executive of any duties inconsistent in any
respect with the Executive's position (including status, offices, titles and
reporting requirements), authority, duties or responsibilities immediately
prior to either the CIC Triggering Event or the Change in Control, or any other
action by the Company which results in a diminution in any respect in such
position, authority, duties or responsibilities, excluding for this purpose an
isolated, insubstantial and inadvertent action not taken in bad faith that is
remedied by the Company promptly after receipt of notice thereof given by the
Executive;
(b) a reduction by the Company in the Executive's annual base salary
as in effect on the date hereof, as the same may be increased from time to
time;
(c) the Company's requiring the Executive to be based at any office or
location that is more than fifty (50) miles from the Executive's office or
location immediately prior to either the CIC Triggering Event or the Change in
Control;
(d) the failure by the Company (i) to continue in effect any bonus,
stock option, or other cash or equity-based incentive plan in which the
Executive participates immediately prior to either the CIC Triggering Event or
the Change in Control that is material to the Executive's total compensation,
unless a substantially equivalent arrangement (embodied in an ongoing
substitute or alternative plan) has been made with respect to such plan, or
(ii) to continue the Executive's participation in such plan (or in such
substitute or alternative plan) on a basis at least as favorable, both in terms
of the amount of benefits provided and the level of the Executive's
participation relative to other participants, as existed immediately prior to
the CIC Triggering Event or the Change in Control; or
(e) the failure by the Company to continue to provide the Executive
with benefits substantially similar to those received by the Executive under
any of the Company's pension (including, but not limited to, tax-qualified
plans), life insurance, health, accident, disability or other welfare plans in
which the Executive was participating, at costs substantially similar to those
paid by the Executive, immediately prior to the CIC Triggering Event or the
Change in Control.
8.22 "Notice of Termination" has the meaning assigned to such term in
Section 6.1 hereof.
8.23 "Pension Plan" means the PNC Bank Corp. Pension Plan.
8.24 "Person" has the meaning given in Section 3(a)(9) of the Exchange Act
and also includes any syndicate or group deemed to be a "person" under Section
13(d)(3) of the Exchange Act.
8.25 "Retirement Factor" means the number of years, including fractions,
from the Date of Termination until the Executive will reach age sixty-five
(65).
8.26 "SERP" means the PNC Bank Corp. Supplemental Executive Retirement
Income and Disability Plan.
8.27 "Severance Benefits" has the meaning assigned to such term in Section
5.2 hereof.
8.28 "Subsidiary" means any corporation controlled by the Company,
directly or indirectly.
13
<PAGE> 14
8.29 "Supplemental Savings Plan" means the PNC Bank Corp.
Supplemental Incentive Savings Plan, provided, however, that no amendment
or termination of such plan, during a Coverage Period or after the Date of
Termination, that adversely affects the administration or payment of the
Executive's benefits thereunder shall be given effect for purposes of this
Agreement without the written consent of the Executive.
8.30 "Target Percentage" means the percentage of the Executive's
annual base salary on which the Executive's target cash incentive award
pursuant to the 1994 Plan, the 1996 Plan or any other Company incentive
compensation plan then in effect is based for a particular fiscal year.
Such percentage is established annually by the Committee in administering
the applicable plan.
8.31 "Termination Year" means the Company's fiscal year during which
the Executive's Date of Termination occurs.
8.32 "1994 Plan" means the PNC Bank Corp. 1994 Annual Incentive Award
Plan.
8.33 "1996 Plan" means the PNC Bank Corp. 1996 Executive Incentive
Award Plan.
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed
by its officer, thereunto duly authorized, and the Executive has executed this
Agreement, all as of the day and year first above written.
PNC BANK CORP.
By:_____________________
Name:
Title:
By:_____________________
[Name of Executive]
14
<PAGE> 1
EXHIBIT 10.18
TRUST AGREEMENT
Between
PNC BANK CORP.,
as Settlor
-and-
NATIONSBANK N.A.,
as Trustee
As Amended and Restated Effective December 31, 1996
<PAGE> 2
TRUST AGREEMENT
INDEX
<TABLE>
<CAPTION>
Page
<S> <C> <C>
SECTION I TRUST FUND..................................................... 1
1.1 Name of Trust.................................................. 1
1.2 Establishment of Trust Fund.................................... 1
1.3 Description of Trust........................................... 2
1.4 Revocability................................................... 2
1.5 Acceptance by the Trustee...................................... 2
SECTION II AUTHORITY...................................................... 2
2.1 Distributions from Trust Fund.................................. 2
2.2 Indemnification................................................ 3
2.3 Trustee Responsibility for Payments When Company Is
(or Is Deemed To Be) Insolvent................................. 3
SECTION III EFFECT OF A CIC TRIGGER EVENT OR A
CHANGE IN CONTROL.............................................. 3
3.1 Contributions to the Trust;
Irrevocably of the Trust....................................... 3
3.2 Payments to the Company........................................ 4
3.3 Disputes Between Participant
and Trustee.................................................... 5
3.4 Insufficiency of Trust Fund.................................... 5
SECTION IV INVESTMENT OF THE TRUST FUND................................... 5
4.1 General........................................................ 5
4.2 Appointment of Investment Managers
by the Company................................................. 5
4.3 Allocation of Assets by the Company
for Investment................................................. 6
4.4 Investment Responsibility of the
Trustee ....................................................... 6
4.5 Investment Powers of Trustee................................... 6
4.6 Administrative Powers of the
Trustee........................................................ 7
SECTION V DIVERSIFICATION................................................ 8
SECTION VI FIDUCIARY RESPONSIBILITY....................................... 8
SECTION VII TAXES AND TRUSTEE'S COMPENSATION............................... 9
7.1 Trustee's Compensation......................................... 9
7.2 Taxes.......................................................... 9
SECTION VIII BOOKS, RECORDS AND ACCOUNTS.................................... 9
SECTION IX RESIGNATION AND REMOVAL OF
TRUSTEE........................................................ 10
</TABLE>
<PAGE> 3
<TABLE>
<S> <C> <C>
SECTION X AMENDMENT AND TERMINATION...................................... 11
10.1 Prior to a Change in Control and Other Than During
a Change in Control Period..................................... 11
10.2 Following a Change in Control or During a
Change in Control Period....................................... 11
10.3 Compliance with ERISA and the
Code........................................................... 11
10.4 Execution of Amendments........................................ 11
10.5 Winding Up..................................................... 11
SECTION XI CONSOLIDATION OR MERGER........................................ 12
SECTION XII SPENDTHRIFT TRUST.............................................. 12
SECTION XIII PARTICIPATING EMPLOYERS........................................ 12
13.1 Adoption of Trust by Affiliated Employers...................... 12
13.2 Actions by Affiliates.......................................... 12
13.3 Company Amends on Behalf of
All Employers.................................................. 12
13.4 Any Employer May Terminate..................................... 13
SECTION XIV CHOICE OF LAW.................................................. 13
SECTION XV NECESSARY PARTIES; THIRD PARTY
BENEFICIARIES.................................................. 13
SECTION XVI SUCCESSORS TO THE COMPANY AND
ITS AFFILIATES................................................. 13
SECTION XVII DEFINITIONS.................................................... 14
17.1 Change in Control.............................................. 14
17.2 CIC Failure.................................................... 14
17.3 CIC Period..................................................... 15
17.4 CIC Trigger Event.............................................. 15
17.5 Code........................................................... 15
17.6 Person......................................................... 15
</TABLE>
ATTACHMENT A: PLANS
<PAGE> 4
TRUST AGREEMENT
This amended and restated Agreement, made as of the 31st day of December
1996, by and between PNC BANK CORP., a corporation duly established and
existing under the laws of the Commonwealth of Pennsylvania (the "Company") and
NationsBank N.A., a national bank organized under the laws of the United
States, with an office in Charlotte, North Carolina (the "Trustee").
W I T N E S S E T H:
WHEREAS, the Company and its subsidiaries and affiliates are or may become
obligated under the employee benefit plans and agreements listed on Attachment
A hereto (the "Plans") to make payments to certain of its former, present and
future employees and directors (collectively, the "Participants"); and
WHEREAS, for purposes of ensuring that such payments will not be
improperly withheld in the event of a Change in Control of the Company, the
Company has heretofore established a grantor trust (the "Trust") pursuant to a
Trust Agreement, dated as of January 12, 1991, between the Company and
NationsBank N.A., as Trustee, that provides for the funding of benefit
obligations under the Plans; and
WHEREAS, the Company and the Trustee have determined that it is desirable
to amend and restate the Trust Agreement as set forth herein;
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants contained herein and intending to be legally bound hereby, the
Company and the Trustee hereby covenant and agree as follows:
SECTION I
TRUST FUND
1.1 Name of Trust
The trust fund referred to herein shall be known as the PNC BANK CORP.
BENEFIT FUNDING TRUST.
1.2 Establishment of Trust Fund
A trust fund (the "Trust Fund") is hereby established with the Trustee
consisting of such sums of money and such other property (including insurance
policies) as may be acceptable to the Trustee as from time to time shall be
paid or delivered to the Trustee in accordance with the terms hereof and for
the purposes hereof. All cash or other property so received, together with the
income therefrom, shall be held, managed and administered by the Trustee
pursuant to the terms of this Agreement without distinction between principal
and income.
The Trust is intended to be a "grantor trust", within the meaning of
Section 671 of the Code, and the assets thereof at all times shall be subject
to the claims of the Company's creditors in the event of the insolvency of the
Company. The Company has not and shall not create a security interest in the
Trust Fund in favor of any Participant or any of the Plans or any creditor.
-1-
<PAGE> 5
For accounting purposes only, separate accounts may be established for
individual Participants in the Plans. Monies allocated to any such individual
accounts shall be distributable only to the Participants for whom the accounts
are established (or to the beneficiaries of such Participants) pursuant to the
provisions of the applicable Plan.
The Trust Fund shall be held separate and apart from other funds of the
Company and shall be used exclusively for the purpose of assuring payment by
the Company and its subsidiaries and affiliates of future obligations of the
Company and its subsidiaries and affiliates arising under the Plans, except to
the extent otherwise set forth herein.
1.3 Description of Trust
The Company represents and agrees that the Trust established under this
Agreement is intended to fund only the Plans. The Trust is, and is intended to
be, a depositary arrangement with the Trustee for the setting aside of cash and
other assets of the Company as and when it so determines in its sole discretion
and as required by the terms of Section 3.1 hereof, for the purpose of
satisfying future obligations under the Plans. The Company represents that each
Plan is an excess benefit plan (within the meaning of Section 3(36) of ERISA),
a benefit arrangement for a select group of management or highly compensated
active and/or former employees (within the meaning of Sections 201(2),
301(a)(3) and 401(a)(1) of ERISA) or is not covered by ERISA. The Company
further represents that the Plans are not qualified under Section 401 of the
Code and, therefore, are not subject to the Code's requirements applicable to
tax-qualified plans.
1.4 Revocability
The Trust shall be revocable by the Company, and Participants shall have
no right to any part of the Trust Fund; provided, however, that the Trust may
not be revoked during a Change in Control Period or after a Change in Control.
1.5 Acceptance by the Trustee
The Trustee accepts the Trust established under this Trust Agreement on
the terms and subject to the provisions set forth herein, and agrees to
discharge and perform fully and faithfully all of the duties and obligations
imposed upon it under this Trust Agreement.
SECTION II
AUTHORITY
A designated "Representative" appointed by the Company shall have the
authority to act on behalf of the Company, subject to the terms hereof. In its
sole discretion, the Representative may designate one or more individuals to
act on its behalf. The Trustee shall be entitled to deal with the
Representative until notified otherwise by the Company. The Company shall
provide the Trustee with a certified list of the names and specimen signatures
of its Representative, or any individuals designated by the Representative to
act on its behalf, and shall also notify the Trustee in writing, from time to
time, of any changes to the names so provided.
2.1 Distributions from Trust Fund
The Trustee shall make payments (including the payment of Trust expenses)
and other disbursements from the Trust Fund only upon the express written
instructions of the Representative or as expressly authorized by the terms of
this Agreement. Such payments may be made either directly to the person or
persons specified in such written instructions, or deposited in a checking
account maintained on behalf of the Trust Fund for the purpose of making
payments or disbursements in accordance with the provisions of the Plans.
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2.2 Indemnification
To the extent permitted by law, the Company shall fully indemnify and hold
the Trustee harmless from any liability and expense incident to any act or
omission by reason of the Trustee's reliance upon, and compliance with, written
instructions issued by the Representative not in contravention of the terms of
the Plans.
2.3 Trustee Responsibility for Payments When Company Is (or Is Deemed To
Be) Insolvent
(a) If at any time the Trustee has actual knowledge, or has determined
in accordance with Section 2.3(c) below, that the Company is insolvent under
the standards set forth in Section 2.3(b) below, the Trustee shall hold for the
benefit of, or deliver upon the order of a court of competent jurisdiction, any
undistributed portion of the Trust Fund to satisfy the claims of the Company's
general creditors.
(b) The Company shall be considered insolvent for purposes of this
Agreement if (i) it is unable to pay its debts as they become due; or (ii) it
is subject to a pending proceeding as a debtor under the United States
Bankruptcy Code.
(c) The Company agrees that its Chief Executive Officer or General
Counsel, as from time to time acting, shall have the duty to inform the Trustee
of the Company's insolvency. The Chief Executive Officer or General Counsel may
discharge such obligation through a Representative. If the Company or a person
claiming to be a creditor of the Company alleges in writing to the Trustee that
the Company has become insolvent, the Trustee shall independently determine,
within thirty (30) days after receipt of such notice, whether the Company is
insolvent in accordance with the standards therefor established in this
Agreement, and pending such determination, shall discontinue all payments from
the Trust Fund. The Company shall cooperate with the Trustee in its
investigation. The Trustee may refuse any request for an analysis of insolvency
if such request is received within 90 days of its concluding a prior analysis.
The Trustee shall resume payments in accordance with the terms of this
Agreement only after the Trustee has determined that the Company is not
insolvent (or is no longer insolvent, if the Trustee initially determined the
Company to be insolvent). Nothing in this Agreement shall in any way diminish
any rights of any Participant to pursue his or her rights as a general creditor
of the Company with respect to benefits under the terms of the Plans.
(d) Unless the Trustee has received notice or otherwise has actual
knowledge of the Company's insolvency or alleged insolvency, the Trustee shall
have no duty to inquire as to whether the Company is insolvent.
(e) If the Trustee discontinues payments to a person from the Trust
Fund pursuant to Section 2.3(b) above and subsequently resumes such payments,
the first payment to such person following the discontinuance shall include the
aggregate amount of all payments which would have been made to such person in
accordance with the terms of the Plan during such period, less the aggregate
amount of such payments to each person made by or on behalf of the Company
during such period, as certified in writing to the Trustee by the
Representative.
SECTION III
EFFECT OF A CIC TRIGGER EVENT OR A CHANGE IN CONTROL
3.1 Contributions to the Trust
(a) Upon the occurrence of a CIC Trigger Event or a Change in Control
(if no CIC Trigger Event precedes the Change in Control), the Company shall
deliver to the Trustee to be held in trust hereunder an amount of cash,
marketable securities (valued at fair market value), insurance policies or a
combination thereof (the "Required Contribution") equal to the amount, that
together with any amounts already held by the Trust Fund, will be sufficient to
provide for the obligations of the Company and its subsidiaries and affiliates
under the Plans.
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Such amount shall be determined by the Company in its discretion, but shall not
be less than such amount as would be determined (i) using an annual interest
rate assumption of 6%, (ii) using the UP-84 mortality table for benefits
payable under the Plans three or more years after the date of the Required
Contribution and no mortality assumption for benefits payable less than three
years from the date of the Required Contribution, (iii) assuming that, for
purposes of determining the amount to be transferred to the Trust with respect
to those Plans that are agreements (the "CIC Agreements") providing for the
payment of benefits in the event of certain terminations of employment
following a Change in Control, that all Participants who are covered by such
agreements are terminated without "Cause" (as defined in such agreements) by
the Company as of the first day of the applicable "Coverage Period" (as defined
in the agreements) and (d) assuming that, for purposes of determining the
amount to be transferred to the Trust with respect to each Plan that is not a
CIC Agreement, that each Participant terminates employment with the Company and
its subsidiaries and affiliates as of the earliest date as of which the
Participant is entitled to begin receiving benefits under each such Plan
(assuming the Participant terminated employment as of such date). If such
Required Contribution is made as the result of a CIC Trigger Event, such
Required Contribution, as adjusted for income and losses, shall be returned to
the Company upon the written request of the Company; provided, however, that
the Required Contribution may not be returned to the Company during the
existence of a Change in Control Period or after a Change in Control.
(b) At twelve-month intervals commencing twelve (12) months after the
date a Required Contribution is made pursuant to Section 3.1(a) hereof, unless
a Change in Control Period has ceased to exist and no Change in Control has
occurred, the Company shall recalculate the Required Contribution that would be
required to be delivered pursuant to Section 3.1(a) hereof assuming a CIC
Trigger Event occurred as of the end of the month immediately preceding such
twelve-month interval date. If the amount so calculated exceeds the fair market
value of the Trust Fund's assets, the Company shall promptly (and in no event
later than seven (7) days from the date of such twelve-month interval date) pay
to the Trustee an amount in cash (or marketable securities or any combination
thereof) equal to such excess.
(c) The Chief Executive Officer or the General Counsel of the Company
(or one of their Representatives) shall promptly notify the Trustee in writing
of the occurrence of any of the following: a CIC Trigger Event, a Change in
Control, or the cessation of a Change in Control Period. After a Change in
Control and during the existence of a Change in Control Period: (i) this Trust
shall be irrevocable, as provided in Section 3.2; (ii) all payments due in
accordance with the provisions of the Plans, as determined by the Trustee in
its reasonable judgment, shall be made directly by the Trustee to Participants;
and (iii) the Trustee shall not act upon any direction from the Company or the
Representative that is contrary to the foregoing provisions.
(d) The Trustee shall be fully protected in making such payments from
time to time in accordance with the provisions of this Section 3.1 and shall be
charged with no responsibility whatsoever respecting the application of such
monies, except as otherwise required by law.
(e) The Company shall provide the Trustee with copies of all of the
Plan documents, including any amendments thereto.
3.2 Payments to the Company
(a) Prior to a Change in Control and other than during the existence
of a Change in Control Period, the Company or the Representative may direct the
Trustee to pay all or a portion of the Trust Fund to the Company. After a
Change in Control and during the existence of a Change in Control Period,
neither the Company, nor the Representative shall have any power to direct the
Trustee to return to the Company or to pay to others (other than Participants,
their beneficiaries or the Company's general creditors) any portion of the
Trust Fund prior to the complete satisfaction of the Company's obligations to
Participants and their beneficiaries under the terms of the Plans.
(b) Notwithstanding the provisions of Section 3.2(a), if after a
Change in Control or during a Change in Control Period, the Company determines
that a portion of the Trust Fund will never be required to satisfy such
obligations assuming that the Trust Fund earns a zero rate of return, such
portion may be returned to the Company if (a) the Trustee is directed to make
such payment by the Company or the Representative and (b)
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the Trustee has satisfied itself that the amount remaining in the Trust Fund
will be sufficient to pay or provide for all future benefits under the Plans
using such assumptions as it deems appropriate in its sole discretion;
provided, however, that no amounts may be returned to the Company pursuant to
this Section 3.2 prior to the third anniversary of the date of a Change in
Control.
(c) Notwithstanding the foregoing provisions of Section 3.2, the
Representative may, at any time within sixty days of the date of any payment
made by the Company to Participants in satisfaction of the Company's
obligations under the Plans, direct the Trustee to reimburse the Company for
such payments; provided, however, that such reimbursement shall be made to the
Company only to the extent that (i) all amounts due and payable under the Plans
have been paid in full and (ii) the Trustee determines that the reimbursement
of such amounts will not impair the ability of the Trust to fully fund future
benefit payments under the Plans using such assumptions as it deems appropriate
in its sole discretion.
3.3 Disputes Between Participant and Trustee
It is recognized that a Participant may dispute the amount of benefit paid
by the Trustee under one or more Plans, or may assert a right to receive a
benefit payment when the Trustee determines that no payment is due to the
Participant under one or more Plans. In either such event, the Trustee shall
gather information from all sources it may deem appropriate (including the
Company) and shall permit the Participant to make a written submission. After
consideration of all such materials, the Trustee shall provide the Participant
with its decision as rendered in its reasonable judgment. If such decision is
adverse to the Participant's claim, the decision shall be accompanied by a
written explanation of the basis for the Trustee's decision. The Trustee's
decision shall be final and binding. During the period that the Trustee is
considering the claim, the Trustee shall make payment of only the amount of
benefits (if any) as to which there is no dispute. If the Trustee then reaches
a decision that the Participant's benefits should have been increased, it shall
make a single sum payment equal to the excess of the revised benefit amount
over the amount actually paid together with simple interest at a rate of 9% per
annum from each benefit payment date to the date of the lump sum payment.
3.4 Insufficiency of Trust Fund
If, as of the date of any payment of Plan benefits from the Trust Fund,
the Trustee determines that the Trust Fund is insufficient to provide for the
payment to Participants of the full amount of their Plan benefits to be paid as
of such date, the amount of Plan benefits paid to each Participant from the
Trust Fund as of such date shall be reduced in proportion to the ratio which
the aggregate fair market value of the Trust Fund bears to the aggregate amount
otherwise payable at that time to each such Participant. At all times the
Company and its subsidiaries and affiliates shall continue to be fully liable
for the payment of all Plan benefits notwithstanding any insufficiency of the
Trust Fund.
SECTION IV
INVESTMENT OF THE TRUST FUND
4.1 General
Except as otherwise provided herein, the Trustee shall invest and reinvest
the assets of the Trust Fund in accordance with the written directions of the
Representative or its designate.
4.2 Appointment of Investment Managers by the Company
Before a Change in Control and other than during a Change in Control
Period, the Company or the Representative, in their sole discretion, may
appoint one or more Investment Managers (including the Trustee) to manage and
control the assets of the Trust Fund. Any Investment Manager so appointed shall
be either: (a) an investment adviser registered as such under the Investment
Advisers Act of 1940, as amended; (b) a bank, as defined in that Act; (c) an
insurance company qualified to perform investment management services under the
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laws of more than one state; or (d) a subsidiary or affiliate of the Company
authorized to perform investment management services. Any Investment Manager
shall certify in writing that it is qualified to act in such capacity, and
acknowledge that it assumes the fiduciary duties established by this Agreement.
4.3 Allocation of Assets by the Company for Investment
Before a Change in Control and other than during a Change in Control
Period, the Company or the Representative shall direct the manner of allocation
among Investment Managers of assets of the Trust Fund, and may direct the
transfer of assets between its managers on reasonable notice to the Trustee and
any affected Investment Manager. An Investment Manager designated to manage
assets allocated to it shall have exclusive authority to manage, acquire and
dispose of such assets subject to any investment policy that may, from time to
time, be established by the Representative or the Company.
Unless the Trustee participates knowingly in, or knowingly undertakes to
conceal, an act or omission of an Investment Manager, where such act or
omission would be a breach of the fiduciary responsibility of such Investment
Manager, the Trustee shall be under no liability for any loss of any kind which
may result by reason of any action taken by it in accordance with any direction
of such Investment Manager or by reason of its failure to exercise any power or
authority with respect to allocated assets because of the failure of the
Investment Manager to issue proper and timely directions to the Trustee.
4.4 Investment Responsibility of the Trustee
After a Change in Control and during any Change in Control Period, the
Trustee shall have responsibility for the management and control of the assets
of the Trust Fund, subject to any investment policy (a "Pre-CIC Investment
Policy") established by the Company or the Representative prior to the
commencement of the Change in Control Period or the Change in Control (if no
Change in Control Period precedes the Change in Control). After a Change in
Control and during any Change in Control Period, the Trustee may continue to
retain or terminate the services of any Investment Manager previously appointed
by the Company or the Representative, and in its sole discretion, exercise the
powers described in Sections 4.2 and 4.3 hereof (without regard to the
limitation on the exercise all of such powers by the Company or the
Representative to periods prior to a Change in Control and other than during a
Change in Control Period) subject to the terms of any Pre-CIC Investment
Policy.
4.5 Investment Powers of Trustee
In addition to any power granted under any statute or laws pertaining to
the investment of trust assets, the Trustee's investment powers shall include,
but shall not be limited to, the investment of trust assets in the following:
(a) bonds or other obligations of the United States of America, and
any agencies thereof, or any bonds or other obligations which are directly or
indirectly guaranteed by the United States, or any agency thereof;
(b) open-end or closed-end investment companies that offer investment
funds, the assets of which correspond to those described under (a) above with
at least $10 billion under management;
(c) savings accounts, certificates of deposit and other types of time
deposits with any financial institution or quasi-financial institution whose
combined capital and surplus is not less than $1 billion, including the
Trustee's banking department; and
(d) to the extent permitted by applicable law, any collective, common
or pooled trust fund operated by the Trustee, the assets of which primarily
correspond to those described under (a) above, but which also may include bonds
or obligations of non-governmental issuers which are rated among the top three
ratings categories of any nationally recognized rating agency. The provisions
of any such collective, common or pooled investment trust shall be incorporated
herein by reference during, but only during the period that any portion of this
Trust Fund is a part of such trust.
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Prior to a Change in Control and other than during any Change in Control
Period, the Trustee shall exercise the powers set forth in this Section 4.5
only in accordance with the directions of the Representative or its designee.
After a Change in Control and during any Change in Control Period the Trustee
shall have full discretion to exercise the powers set forth in this Section 5,
subject to the terms of any Pre-CIC Investment Policy.
4.6 Administrative Powers of the Trustee
The Trustee is authorized and empowered to:
(a) sell, exchange, convey, transfer or otherwise dispose of, any
property, real or personal, held in the Trust Fund and to make any sale by
private contract or public auction, and for cash or credit, or partly for cash
and partly for credit, and no person dealing therewith shall be bound to see
the application of the purchase money or to inquire into the validity,
expediency or propriety of any such sale or disposition;
(b) vote in person or by proxy any stocks, bonds or other securities
held in the Trust Fund, without any obligation to inquire as to or follow the
wishes of the Company or the Representative with respect to such voting;
(c) exercise any rights appurtenant to any such stocks, bonds or other
securities for the conversion thereof into other stocks, bonds or securities,
or to exercise rights or options to subscribe for or purchase additional
stocks, bonds or other securities, and to make any and all necessary payments
with respect to such conversion or exercise;
(d) join in, dissent from or oppose the reorganization,
recapitalization, consolidation, sale or merger of corporations or properties
of which the Trust Fund may hold stocks, bonds or other securities or in which
it may be interested, upon such terms and conditions as may be deemed
advisable, to pay any expenses, assessments or subscriptions in connection
therewith, and to accept any securities or property, whether or not trustees
would be authorized to invest in such securities or property, which may be
issued upon any such reorganization, recapitalization, consolidation, sale or
merger and thereafter to hold the same without any duty to sell;
(e) borrow or raise monies from any lender, excluding the Trustee in
its corporate capacity, if permitted by law, for the benefit of the Trust Fund
and in conjunction with its duties under this Agreement, in such amount and
upon such terms and conditions as may be deemed advisable; and for any sums so
borrowed to issue promissory notes and to secure the repayments thereof by
mortgaging or pledging all or any part of the Trust Fund except any common,
collective or pooled trust units which may be held in the Trust Fund; and no
person lending money to the Trust Fund shall be bound to see to the application
of the money loaned or to inquire into the validity, expediency or propriety of
any such borrowing;
(f) cause any investment of the Trust Fund to be registered in, or
transferred into, the Trustee's name or the names of a nominee or nominees, or
to retain such investment unregistered or in a form permitting transfer by
delivery, provided that the books and records of the Trustee shall at all times
show that all such investments are part of the Trust Fund;
(g) purchase or otherwise acquire and make payment therefor from the
Trust Fund any bond or other form of guarantee or surety required by any
authority having jurisdiction over this Trust Fund and its operation, or
believed to be in the best interests of the Trust Fund, except the Trustee or
Investment Manager may not obtain any insurance whose premium obligation
extends to the Trust Fund which would protect the Trustee or Investment Manager
against their liability for breach of fiduciary duty;
(h) defend against or participate in any legal actions involving the
Trust Fund in the manner and to the extent it deems advisable, the costs of any
such defense or participation to be borne by the Trust Fund unless paid by the
Company; provided, however, that the Trustee or Investment Manager shall not be
entitled to costs if either shall have committed a breach of fiduciary duty;
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(i) compromise, compound and settle any debt or obligation due to the
Trust Fund and to reduce the rate of interest on, to extend or otherwise
modify, or to foreclose upon default or otherwise enforce any such obligation;
or
(j) enforce any right, obligation or claim in its absolute discretion
and in general to protect in any way the interest of the Trust Fund, either
before or after default with respect to any such right, obligation or claim,
and in case it shall consider such action in the best interest of the Trust
Fund, in its absolute discretion to abstain from the enforcement of any right,
obligation or claim and to abandon any property, whether real or personal,
which at any time may be held by it.
The Trustee shall at all times be authorized and empowered to exercise all
of the powers listed in this Section 4.6; provided that, prior to a Change in
Control and other than during the existence of a Change in Control Period the
Trustee shall exercise the powers described in clauses (b), (d), (e), (h), (i)
and (j) of this Section 4.6 only if it has not received direction from the
Representative, otherwise it shall be obligated to follow the direction of the
Representative.
SECTION V
DIVERSIFICATION
Prior to a Change in Control and other than during the existence of a
Change in Control Period, the Company or its Representative shall be solely
responsible for the manner in which investments of the Trust Fund are prudently
diversified. After a Change in Control and during the existence of a Change in
Control Period, the Trustee shall be responsible for the manner in which Trust
Fund investments are prudently diversified, subject to any Pre-CIC Investment
Policy.
The Trustee shall have no liability or responsibility for the
diversification of the investments of the Trust Fund: (a) held in any account
under the direction of an Investment Manager, or (b) when the Trust Fund is
managed in accordance with the written directions of the Representative or its
designee.
SECTION VI
FIDUCIARY RESPONSIBILITY
The Representative, the Trustee, and any designated Investment Manager
shall, under those circumstances where each or any of them are charged with the
responsibility for the investment management of assets of the Trust Fund,
discharge their duties as provided in this Agreement with the care, skill,
prudence and diligence under the circumstances then prevailing that a prudent
person acting in a like capacity and familiar with such matters would use in
the conduct of an enterprise of a like character with the like aims and by
diversifying the investments held hereunder so as to minimize the risk of large
losses, unless under the circumstances, it would clearly not be prudent to do
so; provided, however, that the Representative, the Trustee, or any designated
Investment Manager does not guarantee (a) the Trust Fund in any manner against
investment loss or depreciation in asset value, or (b) the adequacy of the
Trust Fund to meet and discharge all or any liabilities of the Plans.
The Representative, the Trustee, or any designated Investment Manager may,
in its discretion, keep such portion of the Trust Fund in cash or cash balances
as it may deem reasonably necessary from time to time, and shall keep such
portion of the Trust Fund in cash or cash balances as may be required to meet
contemplated payments from the Trust Fund. No liability shall accrue for any
interest on any cash balances so maintained.
The Representative, or the Trustee is specifically authorized to appoint
ministerial agents as to part or all of the Trust Fund and functions incident
thereto where, in its sole discretion, such delegation is necessary,
appropriate or desirable to facilitate the operations of the Trust Fund and
consistent with the purposes of the Trust Fund.
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SECTION VII
TAXES AND TRUSTEE'S COMPENSATION
7.1 Trustee's Compensation
The Trustee shall be entitled to such reasonable compensation for services
rendered as mutually agreed upon in writing with the Company, and shall be
reimbursed for all reasonable expenses (except those arising from a breach of
fiduciary duty) incurred by the Trustee as a result of the performance of its
duties hereunder, including, but not limited to, legal and accounting expenses
incurred as a result of disbursements and payments made by the Trustee, and
reasonable compensation for agents, counsel or other services rendered to the
Trustee by third parties, and expenses incident thereto. Any such compensation,
and reimbursement for any such expenses shall be paid by the Trust Fund to the
Trustee, unless paid by the Company.
7.2 Taxes
The Trustee shall notify the Representative of any tax assessments that it
receives on any property held in the Trust Fund, and, unless notified to the
contrary by the Representative within ninety (90) days, shall either pay or pay
over to the Company funds sufficient to cover such assessments if so directed
by the Representative. If the Representative notifies the Trustee within said
period that such assessments are invalid or that they should be contested, the
Trustee shall take whatever action is indicated in the notice received from the
Representative, including contesting the assessment or litigating any claims.
Notwithstanding anything herein to the contrary, the Company shall at all
times be responsible for the payment and reporting of taxes due on the income
and gains of the Trust Fund, and for the withholding, payment, and reporting of
any and all taxes withheld from payments from the Trust Fund to Participants
under the Plans (or to their designated beneficiaries). The Trustee shall
notify the Company or its Representative of the income and gains of the Trust
Fund in order to facilitate the Company's responsibilities in regard to such
payment and reporting of taxable income of the Trust Fund. The Trustee shall
pay over to the Company such sums as may be required for payment of withholding
tax obligations with respect to benefit payments under the Plans made by the
Trustee from the Trust Fund; provided, however, that no amounts shall be paid
from the Trust Fund with respect to withholding tax obligations other than
those that arise as of the date of actual payment of benefits from the Trust
Fund to a Participant. The Company shall notify the Trustee of any and all
amounts to be withheld from any payments to be made to individual Participants
(or to their designated beneficiaries) and issue directions to the Trustee
regarding payment over to the Company of such sums so withheld. The Trustee
shall have no duty or obligation to determine the actual taxable income to be
paid by the Company on the income and gains of the Trust Fund, or of any amount
of federal, state, or local income taxes to be withheld, reported, or paid by,
or on behalf, of any Participant or their designated beneficiaries. However, it
shall be the duty of the Trustee to file, or cause to be filed, any Fiduciary
Tax Return that may be required under Section 671 of the Code.
SECTION VIII
BOOKS, RECORDS AND ACCOUNTS
The Trustee shall keep accurate and detailed accounts of all investments,
receipts and disbursements and other transactions hereunder (including those
transactions related to accounts under the management of a designated
Investment Manager) and all such accounts, books and records relating thereto
shall be open at all reasonable times to inspection and audit by any person
designated by the Representative.
Within a reasonable time period following the close of each fiscal year of
the Trust Fund, and within one hundred twenty (120) days, or such other agreed
upon time, following the removal or resignation of the Trustee or the
termination of the Trust, the Trustee shall file with the Representative a
certified written report setting forth all investments, receipts and
disbursements, and other transactions effected during the fiscal year, or other
period from the close of the preceding report to the date of such removal,
resignation or termination,
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including a description of all securities and investments then held in the
Trust Fund, and such other information customarily provided by the Trustee.
Upon the expiration of one hundred eighty (180) days following the close
of a fiscal year of the Trust Fund for which an annual accounting is filed, or
ninety (90) days from the date of filing of any interim accounting, the Trustee
shall, to the extent permitted by law, be forever released and discharged from
any liability or accountability to anyone for clerical errors apparent on the
face of such accounting.
No participant or beneficiary under the Plans, shall have the right to
demand or be entitled to any accounting by the Trustee, other than those to
which they may be entitled under the law.
Notwithstanding any other provision hereof or of the Plans, the Trustee
shall not be subject to any liability for any act or omission, regardless of
its nature, after three (3) years following the date on which a plaintiff had
actual knowledge of such act or omission; provided, however, that in the case
of fraud or concealment the Trustee may be held liable at any time within six
(6) years after the date of discovery of such error or omission.
The Trustee shall determine the fair market value of the Trust Fund in its
customary manner at such times as may be required by the Representative, or in
order to carry out the provisions of the Plans.
All records and accounts maintained by the Trustee with respect to the
Trust Fund shall be preserved for such period as may be required under any
applicable law. Upon the expiration of any such retention period, the Trustee
shall have the right to destroy such records and accounts after first notifying
the Company or the Representative in writing of its intention, and transferring
to the Company or to the Representative any such books, records, and accounts
as requested. The Trustee shall have the right to preserve all books, records,
or accounts in original form, or on microfilm, magnetic tape, or any other
similar process.
SECTION IX
RESIGNATION AND REMOVAL OF TRUSTEE
The Trustee may be removed by the Company at any time upon written notice
to the Trustee to that effect; provided, however, that after a Change in
Control or during the existence of a Change in Control Period the Trustee may
not be removed by the Company without the written consent of at least
seventy-five percent (75%) of the Participants as of the date of removal who
were Participants as of the day preceding the Change in Control or the
commencement of the Change in Control Period (if removal or the Trustee is to
occur during a Change in Control Period). The Trustee may resign as Trustee of
the Trust Fund upon written notice to that effect delivered to the Company.
Such removal or resignation shall become effective as of the last day of
the month which coincides with or next follows the expiration of ninety (90)
days from the date of the delivery of such written notice, unless an earlier or
later date is agreed upon by the Company and the Trustee.
In the event of removal or resignation, a successor trustee shall be
appointed by the Company to become Trustee as of the time such removal or
resignation becomes effective; provided, however, that after a Change in
Control and during the existence of a Change in Control Period any appointment
of a successor trustee must be approved in writing by at least seventy-five
percent (75%) of the Participants as of the date of appointment who were
Participants as of the day preceding the Change in Control or the commencement
of the Change in Control Period (if the appointment is to occur during the
Change in Control Period). No successor trustee appointed hereunder shall be
held responsible or liable for the acts or omissions of its predecessor
trustee.
Upon the appointment of a successor trustee, the retiring Trustee shall
endorse, transfer, assign, convey and deliver to the successor trustee all of
the funds, securities and other property then held by it in the Trust Fund,
except such amounts as it may consider necessary to cover its compensation and
its expenses in
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connection with the settlement of its accounts and the delivery of the Trust
Fund to the successor trustee. The balance remaining of any amount so reserved
shall be transferred and paid over to the successor trustee promptly upon
settlement of its accounts, subject to the right of the retiring Trustee to
retain any property deemed unsuitable by it for transfer until such time as
transfer can be made.
Nothing herein shall be construed to deny the Trustee the right to a
settlement of its accounts either by: (a) a receipt and release executed by the
Company; or (b) settlement by order of a court of competent jurisdiction.
SECTION X
AMENDMENT AND TERMINATION
10.1 Prior to a Change in Control and Other Than During a Change in
Control Period. Prior to a Change in Control and other than during a Change in
Control Period, the Company may from time to time amend, in whole or in part,
any or all of the provisions of this Trust Agreement without the consent of any
Participant; provided, however, that (a) no amendment shall be made to this
Trust Agreement or the Plans that will cause this Trust Agreement, the Plans or
the assets of the Trust Fund to be governed by or subject to Part 2, 3 or 4 of
Title I of ERISA, (b) no amendment will be made that will cause the assets of
the Trust Fund to be taxable to Participants prior to the distribution of
benefits therefrom, and (c) no amendment shall increase the duties or
responsibilities of the Trustee, unless the Trustee consents thereto in
writing.
10.2 Following a Change in Control or During a Change in Control Period.
Following a Change in Control and during the existence of a Change in Control
Period, this Trust Agreement may be amended (subject to the restrictions set
forth in the provisos Section 10.1) only with the prior written consent of
seventy-five percent (75%) of the Participants as of the date of the amendment
who were Participants immediately preceding the Change in Control or the Change
in Control Period (if the amendment occurs during a Change in Control Period).
Upon receipt of a request from the Company for an amendment, the Trustee shall
be responsible for attempting to secure such consents in a timely fashion, and
unless ordered by a court of competent jurisdiction, shall not reveal to the
Company or to any other person any information concerning such consents, except
whether the required majority has been achieved.
10.3 Compliance with ERISA and the Code. Notwithstanding anything in this
Section X to the contrary, this Trust Agreement and the Plans shall be amended
from time to time (without the consent of any Participant) to (a) maintain the
"unfunded" status of the Plans for purposes of ERISA and the Code, (b) maintain
the Trust as a "grantor trust" for purposes of the Code, (c) ensure that
contributions to the Trust by the Company will not result in the recognition of
income by Participants and that income and gains of the Trust Fund will not
constitute taxable income to the Trust or Participants, and (d) ensure that
benefits paid to Participants from the Trust Fund will be deductible by the
Company in the year of payment (but only to the extent that any such amendment
does not result in a material detriment to Participants).
10.4 Execution of Amendments. The Company and the Trustee shall execute
such amendments to this Trust Agreement as shall be necessary to give effect to
any amendment made pursuant to this Article X.
10.5 Winding Up. The Trust Fund shall remain in existence until the Plans
are terminated and all benefits payable thereunder are paid to Participants or
their designated beneficiaries. Upon payment of or provision for all such
benefits pursuant to the terms of the Plans, this Trust Fund shall be
terminated and any assets remaining in the Trust Fund shall be distributed to
the Company, pursuant to the directions of the Representative.
In making such distribution, the Trustee shall presume that such
distribution is in full compliance with, and is not in violation of, any
applicable law regulating the termination of the Plans, and the Trustee may
require the Company or the Representative to furnish it with evidence that such
distribution does not violate any applicable law. The Company shall assume all
liability of any kind whatsoever arising from any such distribution
-11-
<PAGE> 15
made by the Trustee to the Company or at the direction of the Representative as
a result of the termination of the Plans, and shall indemnify and save harmless
from any attempt to impose any liability on the Trustee with respect to such
distributions.
In no event shall this Trust continue for a period longer than twenty-one
years following the date of death of the last surviving individual who is a
Participant in any of the Plans on the date of execution of this Trust
Agreement.
SECTION XI
CONSOLIDATION OR MERGER
Any corporation into which the Trustee may be merged or with which it may
be consolidated, or any corporation resulting from any merger or consolidation
to which the Trustee is a party, or any corporation succeeding to the trust
business of the Trustee, shall become the successor of the Trustee hereunder,
without the execution or filing of any instrument or the performance of any
further act on the part of the parties thereto.
SECTION XII
SPENDTHRIFT TRUST
The rights, benefits, and payments of any Participant or designated
beneficiary payable under the Plans and the assets of the Trust Fund shall not
be subject in any manner to anticipation, sale, assignment, alienation,
transfer, pledge, encumbrance, or charge, voluntary or involuntary, by any
Participant or beneficiary. Any attempt by a Participant or beneficiary to
anticipate, alienate, sell, transfer, assign, pledge, encumber, or charge the
same shall be void. The assets of the Trust Fund shall not in any manner be
liable for or subject to the debts, contracts, liabilities, engagements, or
torts of any Participant or beneficiary entitled to benefits under the Plans
and such benefits shall not be considered an asset of a Participant or a
beneficiary in the event of his or her insolvency or bankruptcy.
SECTION XIII
PARTICIPATING EMPLOYERS
13.1 Adoption of Trust by Affiliated Employers. The Company may from time
to time consent to the participation in this Trust by any of its subsidiaries
or affiliates. The Company may require, as a condition of the joining of the
Trust by any such entity, that such entity take such action as is necessary to
establish that any plan arrangement or agreement which such entity maintains
(or is a party to) meets the criteria described in Section 1.3, and may adopt a
supplement or supplements to this Trust setting forth the identity of the plan,
arrangement or agreement involved and special rules, if any, as to the
interests of persons covered by such other plan.
13.2 Actions by Affiliates. Any subsidiary or affiliate participating
hereunder shall become a party to the Trust and become an "Employer" hereunder
when its Board of Directors delivers a resolution to the Company approving such
action along with an adoption agreement, in the form prescribed by the
Representative, executed by its officers. A copy thereof shall be filed with
the Trustee. Any such Employer shall contribute its allocable share to the cost
of maintaining and administering the Trust so long as it remains a party to the
Trust.
13.3 Company Amends on Behalf of All Employers. The Company shall have the
right to amend the Trust Agreement on behalf of all Employers. However, all of
the other provisions of this Trust Agreement (specifically including, but not
limited to, Sections 1.3, 2.3 and 3.3) shall apply to the separate share of the
Trust Fund attributable to an Employer, mutatis mutandis.
-12-
<PAGE> 16
13.4 Any Employer May Terminate. The right is reserved by each Employer to
terminate the Trust with respect to Participants who are employed by it;
provided, however, that after a Change in Control and during the existence of a
Change in Control Period, an Employer may not terminate the Trust with respect
to Participants who were Participants immediately prior to the CIC Trigger
Event or the Change in Control (if no CIC Trigger Event precedes the Change in
Control). In the event that any subsidiary or affiliate of the Company shall
withdraw or shall be deemed to have withdrawn from participation in the Plan,
the Representative shall instruct the Trustee in writing as to the disposition
to be made pursuant to the Plan of that portion of the Trust Fund held for
employees of such withdrawing subsidiary or affiliate. Any corporation into
which an Employer may merge, or with which it may be consolidated, or any
corporation resulting from such merger or consolidation or which otherwise
succeeds to substantially all of the assets of such entity shall be and shall
continue as that entity for all purposes of this Trust Agreement without the
execution or filing of any additional instrument or the performance of any
further act; provided, that it continues to meet the definition of "Employer"
as set forth in this Trust Agreement.
SECTION XIV
CHOICE OF LAW
This Trust Agreement shall be construed and enforced, to the extent
possible, according to the laws of the State of North Carolina, and all
provisions hereof shall be administered according to the laws of said State and
any federal laws, regulations or rules which may from time to time be
applicable.
SECTION XV
NECESSARY PARTIES; THIRD PARTY BENEFICIARIES
(a) To the extent permitted by law, prior to a Change in Control and other
than during the existence of a Change in Control Period, only the Trustee and
the Company shall be necessary parties in any application to the courts for an
interpretation of this Trust Agreement or for an accounting by the Trustee, and
no Participant or designated beneficiary under the Plans, or other person
having an interest in the Trust Fund, shall be entitled to any notice or
service of process. Any final judgment entered in such an action or proceedings
shall, to the extent permitted by law, be conclusive upon all persons claiming
under this Trust Agreement or the Plans.
(b) Participants in the Plans are intended to be third-party beneficiaries
of this Agreement and shall be entitled to enforce the terms of this Agreement
to the same extent as a party hereto.
SECTION XVI
SUCCESSORS TO THE COMPANY AND ITS AFFILIATES
In addition to any obligations imposed by law upon any successor(s) to the
Company and the Employers, the Company and the Employers shall be obligated to
require any successor(s) (whether direct or indirect, by purchase, merger,
consolidation, operation of law, or otherwise) to all or substantially all of
the business and/or assets of the Company and the Employers to expressly assume
and agree to perform this Agreement in the same manner and to the same extent
that the Company and the Employers would be required to perform it if no such
succession had taken place; in the event of such a succession, references to
"Company" and "Employers" herein shall thereafter be deemed to include such
successor(s).
-13-
<PAGE> 17
SECTION XVII
DEFINITIONS
17.1 A "Change in Control" means: a change of control of the Company of a
nature that would be required to be reported in response to Item 6(e) of
Schedule 14A of Regulation 14A (or in response to any similar item on any
similar schedule or form) promulgated under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), whether or not the Company is then
subject to such reporting requirement; provided, however, that without
limitation, a Change in Control shall be deemed to have occurred if:
(a) any Person, excluding employee benefit plans of the Company, is or
becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the
Exchange Act or any successor provisions thereto), directly or indirectly, of
securities of the Company representing twenty percent (20%) or more of the
combined voting power of the Company's then outstanding securities, provided,
however, that such an acquisition of beneficial ownership representing between
twenty percent (20%) and forty percent (40%), inclusive, of such voting power
shall not be considered a Change in Control if the Board of Directors of the
Company (the "Board") approves such acquisition either prior to or immediately
after its occurrence;
(b) the Company consummates a merger, consolidation, share exchange,
division or other reorganization or transaction of the Company (a "Fundamental
Transaction") with any other corporation, other than a Fundamental Transaction
that results in the voting securities of the Company outstanding immediately
prior thereto continuing to represent (either by remaining outstanding or by
being converted into voting securities of the surviving entity) at least sixty
percent (60%) of the combined voting power immediately after such Fundamental
Transaction of (i) the Company's outstanding securities, (ii) the surviving
entity's outstanding securities, or (iii) in the case of a division, the
outstanding securities of each entity resulting from the division;
(c) the shareholders of the Company approve a plan of complete
liquidation or winding-up of the Company or an agreement for the sale or
disposition (in one transaction or a series of transactions) of all or
substantially all of the Company's assets;
(d) as a result of a proxy contest, individuals who prior to the
conclusion thereof constituted the Board (including for this purpose any new
director whose election or nomination for election by the Company's
shareholders in connection with such proxy contest was approved by a vote of at
least two-thirds (2/3) of the directors then still in office who were directors
prior to such proxy contest) cease to constitute at least a majority of the
Board (excluding any Board seat that is vacant or otherwise unoccupied);
(e) during any period of twenty-four consecutive months, individuals
who at the beginning of such period constituted the Board (including for this
purpose any new director whose election or nomination for election by the
Company's shareholders was approved by a vote of at least two-thirds (2/3) of
the directors then still in office who were directors at the beginning of such
period) cease for any reason to constitute at least a majority of the Board
(excluding any Board seat that is vacant or otherwise unoccupied); or
(f) the Board determines that a Change in Control has occurred.
Notwithstanding anything to the contrary herein, a divestiture or spin-off of a
subsidiary or division of the Company shall not by itself constitute a "Change
in Control."
17.2 "CIC Failure" means the following:
(a) with respect to a CIC Trigger Event described in Section 17.4(a),
the Company's shareholders vote against the transaction approved by the Board
or the agreement to consummate the transaction is terminated; or
(b) with respect to a CIC Trigger Event described in Section 17.4(b),
the proxy contest fails to replace or remove a majority of the members of the
Board.
-14-
<PAGE> 18
17.3 "Change in Control Period" means the period beginning on the date of
a CIC Trigger Event and ending on the earlier of the date of a CIC Failure or
the occurrence of a Change in Control; provided, however, that a Change in
Control Period shall not terminate if subsequent to the commencement of the
Change in Control Period another CIC Trigger Event occurs and a CIC Failure has
not occurred with respect to that CIC Trigger Event.
17.4 "CIC Trigger Event" means the occurrence of either of the following:
(a) the Board or the Company's shareholders approve a transaction
described in Subsection (b) of the definition of Change in Control contained in
Section 17.1 hereof; or
(b) the commencement of a proxy contest in which any Person seeks to
replace or remove a majority of the members of the Board.
17.5 "Code" means the Internal Revenue Code of 1986, as amended from time
to time.
17.6 "Person" shall have the meaning given in Section 3(a)(9) of the
Exchange Act and shall also include any syndicate or group deemed to be a
"person" under Section 13(d)(3) of the Exchange Act.
PNC BANK CORP
By: /s/ WILLIAM E. ROSNER
-----------------------------
Senior Vice President
ATTEST:
/s/ THOMAS R. MOORE
- -------------------------------
Assistant Corporate Secretary
NationsBank N.A.
By: /s/ SCOTT SLOCUM
------------------------------
Vice President
ATTEST:
/s/ CATHY DYER
- -------------------------------
Vice President
-15-
<PAGE> 19
ATTACHMENT "A"
PLANS
PNC BANK CORP. SUPPLEMENTAL INCENTIVE
SAVINGS PLAN
PNC BANK CORP. SUPPLEMENTAL EXECUTIVE
RETIREMENT INCOME AND DISABILITY PLAN
PNC BANK CORP. SUPPLEMENTAL PENSION PLAN
PNC BANK CORP. SUPPLEMENTAL EXECUTIVE LIFE
INSURANCE AND SPOUSE'S BENEFIT PLAN
PNC BANK CORP. DIRECTOR'S DEFERRED
COMPENSATION PLAN
PITTSBURGH NATIONAL BANK DEFERRED DIRECTOR'S FEES
PNC BANK CORP. AND AFFILIATES DEFERRED
COMPENSATION PLAN
ALL CHANGE IN CONTROL SEVERANCE AGREEMENTS
ENTERED INTO BETWEEN PNC BANK CORP.
AND EXECUTIVES OF PNC BANK CORP. AND
ITS SUBSIDIARIES AND AFFILIATES
-16-
<PAGE> 1
EXHIBIT 11
PNC BANK CORP. AND SUBSIDIARIES
CALCULATION OF PRIMARY AND FULLY DILUTED EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
In thousands, except per share data 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CALCULATION OF PRIMARY EARNINGS PER COMMON SHARE
Income before cumulative effect of change in accounting principle $992,226 $408,060 $891,456
Cumulative effect of change in accounting principle, net of tax benefits of $4,598 (7,528)
--------------------------------------
Net income 992,226 408,060 883,928
Less: Preferred dividends declared 5,480 3,327 6,163
--------------------------------------
Net income applicable to primary earnings per common share $986,746 $404,733 $877,765
--------------------------------------
Weighted average common shares outstanding 338,636 336,455 342,308
Weighted average common shares to be issued using average market price and assuming:
Exercise of stock options 1,610 2,679 2,906
--------------------------------------
Primary weighted average common shares outstanding 340,246 339,134 345,214
======================================
PRIMARY EARNINGS PER COMMON SHARE
Primary before cumulative effect of change in accounting principle $2.90 $1.19 $2.56
Cumulative effect of change in accounting principle (.02)
--------------------------------------
Primary earnings per common share $2.90 $1.19 $2.54
======================================
CALCULATION OF FULLY DILUTED EARNINGS PER COMMON SHARE
Income before cumulative effect of change in accounting principle $992,226 $408,060 $891,456
Cumulative effect of change in accounting principle, net of tax benefit of $4,598 (7,528)
--------------------------------------
Net income 992,226 408,060 883,928
Add: Interest expense on convertible debentures (net of tax) 3,416 3,842 4,012
Less: Dividends declared on non-convertible preferred stock 4,084 1,813 4,531
--------------------------------------
Net income applicable to fully diluted earnings per common share $991,558 $410,089 $883,409
--------------------------------------
Weighted average shares of common stock outstanding 338,636 336,455 342,308
Weighted average common 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 173 198 225
Conversion of preferred stock Series C 562 616 681
Conversion of preferred stock Series D 759 815 859
Conversion of debentures 2,790 3,105 3,228
Exercise of stock options 2,434 3,733 2,917
--------------------------------------
Fully diluted weighted average common shares outstanding 345,354 344,922 350,218
--------------------------------------
FULLY DILUTED EARNINGS PER COMMON SHARE
Fully diluted before cumulative effect of change in accounting principle $2.87 $1.19 $2.54
Cumulative effect of change in accounting principle (.02)
--------------------------------------
Fully diluted earnings per common share $2.87 $1.19 $2.52
================================================================================================================================
</TABLE>
<PAGE> 1
EXHIBIT 12.1
PNC BANK CORP. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS
TO COMBINED FIXED CHARGES
<TABLE>
<CAPTION>
Year ended December 31
Dollars in thousands 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
EARNINGS
Income before taxes and cumulative effect of changes
in accounting principles $1,527,551 $627,012 $1,209,916 $1,140,487 $787,994
Fixed charges excluding interest on deposits 1,096,893 1,487,279 1,104,573 704,228 582,854
-----------------------------------------------------------------
Subtotal 2,624,444 2,114,291 2,314,489 1,844,715 1,370,848
Interest on deposits 1,428,771 1,551,816 1,159,242 1,005,658 1,546,576
-----------------------------------------------------------------
Total $4,053,215 $3,666,107 $3,473,731 $2,850,373 $2,917,424
=================================================================
FIXED CHARGES
Interest on notes and debentures $683,744 $620,415 $556,432 $316,031 $201,977
Interest on borrowed funds 381,103 834,654 514,133 360,288 353,633
Amortization of notes and debentures 816 927 1,761 1,418 1,505
Interest component of rentals 29,839 31,283 32,247 26,491 25,739
Distributions on Mandatorily Redeemable Capital
Securities of Subsidiary Trust 1,391
-----------------------------------------------------------------
Subtotal 1,096,893 1,487,279 1,104,573 704,228 582,854
Interest on deposits 1,428,771 1,551,816 1,159,242 1,005,658 1,546,576
-----------------------------------------------------------------
Total $2,525,664 $3,039,095 $2,263,815 $1,709,886 $2,129,430
=================================================================
RATIO OF EARNINGS TO FIXED CHARGES
Excluding interest on deposits 2.39x 1.42x 2.10x 2.62x 2.35x
Including interest on deposits 1.60 1.21 1.53 1.67 1.37
===============================================================================================================================
</TABLE>
<PAGE> 1
EXHIBIT 12.2
PNC BANK CORP. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS
TO COMBINED FIXED CHARGES
<TABLE>
<CAPTION>
Year ended December 31
Dollars in thousands 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
EARNINGS
Income before taxes and cumulative effect of changes in
accounting principles $1,527,551 $627,012 $1,209,916 $1,140,487 $787,994
Fixed charges and preferred stock dividends excluding
interest on deposits 1,105,324 1,492,391 1,112,564 712,339 592,902
---------------------------------------------------------------
Subtotal 2,632,875 2,119,403 2,322,480 1,852,826 1,380,896
Interest on deposits 1,428,771 1,551,816 1,159,242 1,005,658 1,546,576
---------------------------------------------------------------
Total $4,061,646 $3,671,219 $3,481,722 $2,858,484 $2,927,472
===============================================================
FIXED CHARGES
Interest on notes and debentures $683,744 $620,415 $556,432 $316,031 $201,977
Interest on borrowed funds 381,103 834,654 514,133 360,288 353,633
Amortization of notes and debentures 816 927 1,761 1,418 1,505
Interest component of rentals 29,839 31,283 32,247 26,491 25,739
Distributions on Mandatorily Redeemable Capital
Securities of Subsidiary Trust 1,391
Preferred stock dividend requirements 8,431 5,112 7,991 8,111 10,048
---------------------------------------------------------------
Subtotal 1,105,324 1,492,391 1,112,564 712,339 592,902
Interest on deposits 1,428,771 1,551,816 1,159,242 1,005,658 1,546,576
---------------------------------------------------------------
Total $2,534,095 $3,044,207 $2,271,806 $1,717,997 $2,139,478
===============================================================
RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND
PREFERRED STOCK DIVIDENDS
Excluding interest on deposits 2.38x 1.42x 2.09x 2.60x 2.33x
Including interest on deposits 1.60 1.21 1.53 1.66 1.37
=================================================================================================================================
</TABLE>
<PAGE> 1
EXHIBIT 13
Excerpts From 1996 Annual Report to Shareholders
Corporate
FINANCIAL REVIEW 1996 versus 1995
This Corporate Financial Review should be read in conjunction with the PNC Bank
Corp. and subsidiaries ("Corporation" or "PNC Bank") Consolidated Financial
Statements and Statistical Information included herein.
OVERVIEW
PNC BANK CORP. The Corporation is one of the largest diversified financial
services companies in the United States and operates five lines of business:
Consumer Banking, Corporate Banking, Real Estate Banking, Mortgage Banking and
Asset Management. Each line of business focuses on specific customer segments
and offers financial products and services in PNC Bank's primary geographic
locations in Pennsylvania, New Jersey, Delaware, Ohio and Kentucky and
nationally through retail distribution networks and alternative delivery
channels.
On December 31, 1995, Midlantic Corporation ("Midlantic"), a bank holding
company with $13.6 billion in assets, merged with the Corporation. Each
outstanding share of Midlantic common stock was converted into 2.05 shares of
PNC Bank's common stock. Approximately 112 million shares were issued in
connection with the merger. The transaction was accounted for as a pooling of
interests and accordingly all financial data prior to January 1, 1996 has
been restated as if the entities were combined for all such prior periods.
SUMMARY FINANCIAL RESULTS Net income for 1996 was $992 million or $2.87 per
fully diluted share compared with $408 million and $1.19 per fully diluted
share in 1995. These results reflect continued progress in implementing
strategic initiatives including: completion of the balance sheet repositioning
to reduce wholesale leverage; solid growth from fee-based businesses;
successful integration of the Midlantic acquisition; and the initiation of
share repurchases in the second half of 1996.
The 1996 results include a $22 million after-tax charge for a special one-time
deposit insurance assessment mandated by Congress to recapitalize the Savings
Association Insurance Fund ("SAIF"). In 1995, $380 million of after-tax charges
were recorded in connection with the Midlantic merger and actions taken to
reposition the balance sheet. The following table sets forth a summary of
financial results for 1996 and 1995 showing the impact of these charges.
<TABLE>
<CAPTION>
--------------------
Year ended December 31 1996 1995
- ---------------------------------------------------------------
<S> <C> <C>
AS REPORTED
Net income (in millions) $992 $408
Fully diluted earnings per common share 2.87 1.19
Return on
Average common shareholders' equity 17.18% 7.05%
Average assets 1.40 .54
EXCLUDING NONRECURRING CHARGES
Earnings (in millions) $1,015 $788
Fully diluted earnings per common share 2.94 2.29
Return on
Average common shareholders' equity 17.58% 13.67%
Average assets 1.43 1.05
- ---------------------------------------------------------------
</TABLE>
Taxable-equivalent net interest income increased 13.2% to $2.5 billion and net
interest margin widened 68 basis points to 3.83% for 1996. These increases were
primarily due to loan growth, the October 1995 Chemical Bank, New Jersey
("Chemical") acquisition and changes in balance sheet composition.
Noninterest income before securities transactions increased 10.7% to $1.4
billion for 1996. The increase was broad-based, led by strong growth in asset
management, mutual fund processing, deposit services, treasury management,
brokerage and corporate finance.
Operating expenses totaled $2.3 billion in 1996 compared with $2.5 billion in
1995. Excluding the SAIF assessment in 1996 and one-time charges taken in 1995,
the efficiency ratio improved to 58.8% for 1996 compared with 64.3% a year ago.
This improvement reflects cost savings associated with the Midlantic
integration, cost control strategies and lower Bank Insurance Fund premiums.
26
<PAGE> 2
At December 31, 1996, total assets were $73.3 billion. Average earning assets
declined $4.8 billion during 1996 to $64.7 billion primarily due to reductions
in securities partially offset by the Chemical acquisition, loan growth and
credit card portfolio purchases. Average loans increased $3.5 billion in 1996
to $49.1 billion, representing 75.9% of average earning assets compared with
65.6% a year ago. Excluding the Chemical acquisition and purchased credit card
portfolios, average loans increased 3.7%.
Asset quality and coverage ratios remained strong. Net charge-offs for 1996
were .33% of average loans compared with .29% for 1995. The allowance for
credit losses as a percent of nonperforming loans and total loans was 334% and
2.25%, respectively, at December 31, 1996 compared with 352% and 2.59% a year
ago.
PNC Bank aggressively pursued capital management initiatives in the second half
of 1996. The Corporation repurchased 22.7 million shares of common stock and
the common stock dividend was increased 5.7%. The Corporation also issued $300
million of preferred stock and $350 million of trust preferred capital
securities to reduce the overall cost of equity. The proceeds from these
issuances are being used for share repurchases.
The Midlantic acquisition was the largest merger transaction executed by PNC
Bank and, at the time of the merger announcement, was the sixth largest in
banking history. This transaction, along with the Chemical acquisition, created
a unique opportunity to accelerate the balance sheet realignment, increase the
base of stable core deposits and significantly expand PNC Bank's position in
the strategically important Philadelphia and New Jersey markets. The major goal
for 1996 was to successfully integrate these acquisitions and achieve the
financial objectives stated at the time of the Midlantic merger announcement.
These objectives included increasing earnings per share to $2.87 in 1996,
improving net interest margin and balance sheet composition, and generating
cost savings through merger integration of $81 million in 1996. These
objectives were all accomplished. Earnings per share were $2.87 in 1996, and
$2.94, excluding the SAIF charge. Net interest margin widened 68 basis points to
3.83% and cost savings of approximately $110 million were generated through
aggressive execution of the integration plan. These accomplishments positioned
PNC Bank to accelerate AAA-related initiatives as cost savings and excess
capital are available for reinvestment in this growth opportunity.
Management believes the Corporation is well positioned to achieve continued
increases in earnings per share in 1997. Revenue growth is anticipated from
consumer initiatives, primarily AAA-related, and continued expansion of
fee-based businesses. Expenses are expected to increase primarily due to
investments associated with the nationwide rollout of services to AAA members.
Management expects modest loan loss provisions for 1997 and anticipates
earnings per share will continue to benefit from additional common share
repurchases.
BUSINESS STRATEGIES Financial services providers are challenged by intense
competition. Loan pricing and credit standards are under competitive pressure
as lenders seek to deploy capital and a broader range of borrowers have access
to capital markets. Traditional deposit activities are subject to pricing
pressures and customer migration as the competition for consumer investment
dollars intensifies among banks and other financial services companies. In this
environment, PNC Bank's strategies are focused on investing in businesses with
growth opportunities, aggressively managing capital and generating appropriate
returns from traditional spread businesses by managing leverage and reducing
delivery costs.
In Consumer Banking, which contributed 49% of total line of business earnings
in 1996, changes in consumer preferences and technological advancements are
transforming the way consumer products and services are delivered. Traditional
delivery channels, such as retail branches, are being reduced and replaced with
more technologically-advanced, cost-efficient means such as telebanking,
automated teller machines ("ATM") and on-line banking through personal
computers. Investments in alternative delivery channels allow PNC Bank to
reduce costs and expand the geographic scope of the Corporation's markets.
27
<PAGE> 3
Corporate
FINANCIAL REVIEW 1996 versus 1995
The AAA agreement gives PNC Bank the exclusive right to offer a wide range of
financial products and services to the organization's 34 million members
nationwide. Substantially all of the products will be offered through
alternative delivery channels thereby leveraging the existing technology
infrastructure.
In Corporate Banking, PNC Bank is focused on developing fee-based products and
services as alternatives to traditional balance sheet leverage. These include
syndication, treasury management, interest rate risk management and capital
markets. Fee-based products and services are targeted to industries such as
health care, communications, energy, metals and mining and financial
institutions. Total fee-based revenues in Corporate Banking increased 27.9% in
1996 reflecting these targeted initiatives. Corporate Banking also provides a
full range of leasing and commercial finance products as alternatives to
traditional financings.
PNC Bank is a recognized industry leader in treasury management providing
collection, disbursement, information management and investment management
services. Treasury management emphasizes the use of technology to facilitate
electronic commerce and improve productivity and customer service.
PNC Bank's Asset Management business, with $109 billion in assets under
management, is among the largest in the country. It is the second largest U.S.
bank manager of mutual funds and one of the largest mutual fund service
providers. Asset Management's initiatives focus on expanding product marketing
and distribution channels and leveraging mutual fund processing capabilities.
The mutual fund processing business specializes in providing institutional
customers with custom designed products and custody, transfer agent, accounting
and administrative services.
Compass Capital Funds(SM) ("Compass"), PNC Bank's proprietary mutual fund
family, with approximately $11 billion in assets, provide institutional and
individual investors with a full range of equity, bond and money market
investment options. The funds are offered throughout the Corporation's retail
branch network and marketed nationally through agreements with over 70 brokerage
firms. Growth in Compass assets benefited from strong performance relative to
respective benchmarks. Of the sixteen funds currently ranked by Morningstar,
nine have received a four or five star rating.
Real Estate Banking has consistently been a leading provider of credit services
to the real estate industry. This line of business is challenged by competitive
lending pressures and disintermediation as nonbank competitors increasingly
enter the market. In this environment, Real Estate Banking is focused on
enhancing financial performance through business cycles by reducing reliance on
balance sheet leverage, expanding fee-based revenue and enhancing distribution
capabilities. Targeted growth areas include treasury management, loan
syndication, commercial mortgage-backed securitizations and private debt
placements.
Mortgage banking remains a highly-fragmented, commodity-based business
requiring an efficient infrastructure and increasingly higher volumes. To
remain competitive and produce appropriate returns, the Mortgage Banking line
of business is focused on reducing costs by consolidating back office
operations and utilizing technology to enhance origination and operating
platform efficiencies. Mortgage Banking continues to expand origination
capabilities by leveraging the Corporation's distribution network and private
banking capabilities and by expanding the retail distribution network in
certain geographic regions.
FORWARD-LOOKING STATEMENTS PNC Bank has made, and may continue to make, various
forward-looking statements with respect to earnings per share, costs savings
related to the Midlantic acquisition, the AAA agreement, credit quality,
corporate objectives and other financial and business matters. The Corporation
cautions that these forward-looking statements are subject to numerous
assumptions, risks and uncertainties, all of which may change over time. Actual
results could differ materially from forward-looking statements.
In addition to factors previously disclosed by the Corporation and factors
identified elsewhere herein, the following factors, among others, could cause
actual results to differ materially from such forward-looking statements:
continued pricing pressures on loan and deposit products; success and timing of
business strategies; extent and timing of capital management actions;
competition; changes in economic conditions; the extent and timing of actions
of the Federal Reserve Board; continued customer disintermediation; customers'
acceptance of PNC Bank's products and services; and the extent and timing of
legislative and regulatory actions and reforms.
28
<PAGE> 4
LINE OF BUSINESS REVIEW
The management accounting process uses various methods of balance sheet and
income statement allocations and transfers 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 PNC Bank's
management structure and is not necessarily comparable with similar information
for any other financial services institution. Allocations and transfers may
change from time to time as the management accounting system is enhanced and
business or product lines change.
The Corporation operates five lines of business: Consumer Banking, Corporate
Banking, Real Estate Banking, Mortgage Banking and Asset Management. Line of
business results presented herein 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 the net asset
or liability position. Consumer Banking was a net generator of funds and,
accordingly, was assigned securities, while the other lines of business
received an assignment of borrowings as net asset generators.
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 will vary from consolidated
shareholders' equity.
Total line of business results differ from consolidated results primarily due
to asset/liability management activities, the provision for credit losses and
certain nonrecurring and unallocated items.
Asset/liability management activities reflect the residual of the assignment of
wholesale assets and liabilities to the lines of business. In addition,
securities transactions and the impact of financial derivatives used for
interest rate risk management are included in this adjustment. The line of
business provision for credit losses is a charge or credit to earnings to
reflect current loss experience. Nonrecurring and other items primarily consist
of the one-time SAIF assessment in 1996 and merger related special charges in
1995.
LINE OF BUSINESS
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
Return on
Average Assets Revenue Earnings Assigned Capital
-----------------------------------------------------------------------------------------
Year ended December 31- dollars in 1996 1995 1996 1995 1996 1995 1996 1995
millions
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Consumer Banking $39,197 $37,213 $2,217 $2,021 $462 $431 21% 21%
Corporate Banking 16,930 16,182 769 731 266 237 13 13
Real Estate Banking 3,802 3,886 181 192 89 88 15 14
Mortgage Banking 13,387 12,385 401 401 63 48 10 9
Asset Management 587 449 314 255 58 43 34 33
- -------------------------------------------------------------------------------------------------------------
Total line of business 73,903 70,115 3,882 3,600 938 847 17 16
Asset/liability management activities (3,492) 4,213 (41) (464) (35) (341)
Unallocated provision 89 64
Nonrecurring and other items 396 803 33 13 (162)
- -------------------------------------------------------------------------------------------------------------
Total consolidated $70,807 $75,131 $3,874 $3,149 $992 $408 17 7
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
29
<PAGE> 5
Corporate
FINANCIAL REVIEW 1996 versus 1995
CONSUMER BANKING
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
Community Banking Private Banking Total
------------------------------------------------------------------------------
Year ended December 31- dollars in millions 1996 1995 1996 1995 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT
Net interest income $1,503 $1,403 $93 $78 $1,596 $1,481
Noninterest income 365 322 256 218 621 540
------------------------------------------------------------------------------
Total revenue 1,868 1,725 349 296 2,217 2,021
Provision for credit losses 121 65 1 1 122 66
Noninterest expense 1,145 1,069 242 212 1,387 1,281
------------------------------------------------------------------------------
Pretax earnings 602 591 106 83 708 674
Income taxes 207 213 39 30 246 243
------------------------------------------------------------------------------
Earnings $395 $378 $67 $53 $462 $431
- ------------------------------------------------------------------------------------------------------------------------------
AVERAGE BALANCE SHEET
Loans $15,214 $13,479 $2,340 $1,903 $17,554 $15,382
Assigned assets 20,324 20,742 20,324 20,742
Other assets 912 664 407 425 1,319 1,089
------------------------------------------------------------------------------
Total assets $36,450 $34,885 $2,747 $2,328 $39,197 $37,213
------------------------------------------------------------------------------
Net deposits $34,299 $32,783 $1,621 $1,456 $35,920 $34,239
Assigned funds 175 143 175 143
Other funds 231 326 678 495 909 821
Assigned capital 1,920 1,776 273 234 2,193 2,010
------------------------------------------------------------------------------
Total funds $36,450 $34,885 $2,747 $2,328 $39,197 $37,213
- ------------------------------------------------------------------------------------------------------------------------------
PERFORMANCE RATIOS
After-tax profit margin 21% 22% 19% 18% 21% 21%
Efficiency 62 62 69 72 63 63
Return on assigned capital 21 21 24 22 21 21
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Consumer Banking line of business includes: Community Banking which serves
small business customers and all other consumers who use traditional branch and
direct banking services; and Private Banking which provides affluent customers
with personal and charitable trust, brokerage and specialized retail banking
financial services.
Consumer Banking earnings accounted for 49% of total line of business earnings
in 1996 compared with 51% a year ago. Earnings increased $31 million or 7%
reflecting 10% growth in revenue offset by a higher allocated provision for
credit losses and an 8% increase in expenses. The provision for credit losses
increased $56 million primarily due to credit card portfolio growth and the
impact of the Chemical acquisition. Noninterest expense increased primarily due
to the Chemical acquisition and investments in AAA-related initiatives. Average
loans in the Consumer Bank increased 14% in the comparison. Excluding the
Chemical acquisition average loans increased 6%. Consumer loan growth primarily
consisted of credit cards including purchased AAA-affinity portfolios, higher
education lending and mortgages in the Private Bank.
Earnings from Community Banking increased 4% in the comparison to $395 million
in 1996 due to revenue growth driven by an increase in average earning assets
and growth in deposit service fees. Higher revenue levels offset higher
expenses associated with the Chemical acquisition and AAA-related initiatives.
Private Banking earnings increased 26% primarily due to new trust business and
higher brokerage revenue. Return on assigned capital increased to 24% compared
with 22% a year ago.
In January 1996, an agreement was reached with AAA to exclusively offer
financial products and services to the organization's 34 million members
nationwide. The agreement provides for an initial term of ten years, with two
five-year renewal options. A full range of consumer products and services will
be offered including credit card, automobile, student, home equity and
residential mortgage loans, as well as deposit accounts and money market mutual
funds. These products and services will be marketed in conjunction with AAA and
will be delivered primarily through the Corporation's direct banking channels.
In connection with this agreement, the Corporation acquired five AAA-affinity
credit card portfolios totaling $1.6 billion at a premium of $249 million and
assumed the operation of an affinity card service center. In 1997, the
Corporation expects to aggressively market products and services to AAA
members, primarily credit card related. Due to the incentives and costs
associated with these initiatives, expenses are expected to exceed related
revenues in 1997.
30
<PAGE> 6
CORPORATE BANKING
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Middle Market Large Corporate Equity Management Total
- --------------------------------------------------------------------------------------------------------------------------
Year ended December 31- 1996 1995 1996 1995 1996 1995 1996 1995
dollars in millions
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT
Net interest income $416 $438 $113 $107 $(3) $(4) $526 $541
Noninterest income 119 105 52 51 72 34 243 190
---------------------------------------------------------------------------------------------
Total revenue 535 543 165 158 69 30 769 731
Provision for credit loses (4) 35 4 (2) 33
Noninterest expense 251 255 91 76 7 4 349 335
---------------------------------------------------------------------------------------------
Pretax earnings 288 253 70 84 62 26 420 363
Income taxes 113 91 19 26 22 9 154 126
---------------------------------------------------------------------------------------------
Earnings $175 $162 $51 $58 $40 $17 $266 $237
- --------------------------------------------------------------------------------------------------------------------------
AVERAGE BALANCE SHEET
Loans $11,571 $11,336 $4,401 $4,202 $49 $31 $16,021 $15,569
Other assets 557 361 168 95 184 157 909 613
---------------------------------------------------------------------------------------------
Total assets $12,128 $11,697 $4,569 $4,297 $233 $188 $16,930 $16,182
---------------------------------------------------------------------------------------------
Net deposits $1,555 $1,557 $490 $453 $2,045 $2,010
Assigned funds 8,568 8,332 3,565 3,360 $139 $115 12,272 11,807
Other funds 566 444 20 26 17 592 481
Assigned capital 1,439 1,364 514 464 68 56 2,021 1,884
---------------------------------------------------------------------------------------------
Total funds $12,128 $11,697 $4,569 $4,297 $233 $188 $16,930 $16,182
---------------------------------------------------------------------------------------------
PERFORMANCE RATIOS
After-tax profit margin 33% 30% 31% 37% 58% 57% 35% 32%
Efficiency 47 47 55 48 11 12 45 46
Return on assigned capital 12 12 10 13 59 30 13 13
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Corporate Banking line of business includes: Middle Market which serves
customers with annual sales of $5 million to $250 million and those in certain
specialized industries; Large Corporate which serves customers with annual
sales of more than $250 million; and Equity Management which makes venture
capital investments.
Corporate Banking contributed 28% of total line of business earnings in both
1996 and 1995. Earnings increased $29 million or 12% primarily due to higher
venture capital gains and a lower allocated provision. Net interest income
declined in the comparison as narrower lending spreads more than offset the
impact from a $452 million increase in average loans. Excluding venture capital
gains, Corporate Banking fee-based revenue increased 10% due to expanded
treasury management and corporate finance activities. Treasury management
continues to produce revenue growth exceeding national averages. Revenues
increased 18% over 1995.
Middle Market earnings increased 8% in the comparison as a lower allocated
provision resulting from improved asset quality more than offset a decline in
revenue driven by narrower lending spreads. Fee-based revenue increased
primarily due to treasury management services. Large Corporate earnings
declined primarily due to operating expenses reflecting investments in
expanded treasury management and capital markets initiatives. Equity Management
earnings increased $23 million due to higher venture capital gains.
Corporate Banking traditionally relies on balance sheet leverage to generate
returns. Traditional spread-based lending requires high capital levels and is
under intense competition from banks and nonbanks seeking opportunities to
extend credit in a market with narrowing spreads. In this environment, PNC Bank
aggressively manages capital to generate more appropriate returns employing
various techniques such as measuring risk-adjusted customer profitability and
using off-balance-sheet financing alternatives. This line of business is also
focused on expanding fee-based revenue by developing products and services as
alternatives to spread-based lending.
Management expects revenue in this line of business to be generated
increasingly from fee-based sources such as treasury management, corporate
finance and capital markets. Corporate Banking's capital markets capabilities
continue to be expanded to meet the changing needs of customers. The
Corporation has also expanded product capabilities in the merger and
acquisition advisory, private placement, interest rate risk management and
leasing product areas. Investments in syndication capabilities contributed to a
28% increase in the number, nearly doubling the par value, of agented
transactions underwritten. This resulted in a 56% increase in related fee
revenue.
31
<PAGE> 7
Corporate
FINANCIAL REVIEW 1996 versus 1995
REAL ESTATE BANKING
<TABLE>
<CAPTION>
--------------------
Year ended December 31-
dollars in millions 1996 1995
- -------------------------------------------------------------
<S> <C> <C>
INCOME STATEMENT
Net interest income $167 $174
Noninterest income 14 18
--------------------
Total revenue 181 192
Provision for credit losses 2
Noninterest expense 39 60
--------------------
Pretax earnings 140 132
Income taxes 51 44
--------------------
Earnings $89 $88
--------------------
AVERAGE BALANCE SHEET
Loans $3,901 $3,957
Other assets (99) (71)
--------------------
Total assets $3,802 $3,886
--------------------
Net deposits $167 $159
Assigned funds 3,013 3,122
Other funds 18 (6)
Assigned capital 604 611
--------------------
Total funds $3,802 $3,886
- -------------------------------------------------------------
PERFORMANCE RATIOS
After-tax profit margin 49% 46%
Efficiency 22 31
Return on assigned capital 15 14
- -------------------------------------------------------------
</TABLE>
Real Estate Banking serves national, regional and local real estate developers,
owners, property managers and mortgage bankers by providing credit and
non-credit services, mortgage securitization, private debt placements and
treasury management services.
Real Estate Banking contributed 10% of total line of business earnings in 1996
and 1995. Earnings were consistent in the comparison as a decline in revenue,
attributable to narrower lending spreads, was mitigated by gains from
disposition of foreclosed assets and a decline in workout expenses related to
lower levels of nonperforming assets.
Real Estate Banking has traditionally been driven by balance sheet leverage and
required significant levels of assigned capital. A key initiative in this line
of business is to alter the business mix to reduce leverage and improve returns
by expanding fee-based services such as treasury management, interest rate risk
management and debt placement activities. PNC Bank is one of the largest real
estate loan syndicators in the U.S., having a leading role in over $1.5 billion
of syndication volume in 1996.
MORTGAGE BANKING
<TABLE>
<CAPTION>
----------------------
Year ended December 31-
dollars in millions 1996 1995
- -------------------------------------------------------------
<S> <C> <C>
INCOME STATEMENT
Net interest income $211 $161
Noninterest income 190 240
----------------------
Total revenue 401 401
Provision for credit losses 12 6
Noninterest expense 288 319
----------------------
Pretax earnings 101 76
Income taxes 38 28
----------------------
Earnings $63 $48
- -------------------------------------------------------------
AVERAGE BALANCE SHEET
Loans $11,169 $10,632
Other assets 2,218 1,753
-----------------------
Total assets $13,387 $12,385
-----------------------
Net deposits $2,277 $2,637
Assigned funds 8,898 8,135
Other funds 1,563 1,053
Assigned capital 649 560
-----------------------
Total funds $13,387 $12,385
- -------------------------------------------------------------
PERFORMANCE RATIOS
After-tax profit margin 16% 12%
Efficiency 72 80
Return on assigned capital 10 9
- -------------------------------------------------------------
</TABLE>
Mortgage Banking activities include acquisition, origination, securitization
and servicing of residential mortgages, as well as retention of selected loans
in the portfolio.
Mortgage Banking contributed 7% of total line of business earnings in 1996
compared with 6% in 1995. Earnings increased $15 million or 31% due to a
reduction in operating expenses. Net interest income increased 31% to $211
million in 1996 primarily due to a $537 million increase in portfolio loans and
wider spreads. Noninterest income from mortgage origination and servicing
activities declined $50 million primarily due to lower sales of servicing
rights. Noninterest expense declined $31 million or 10% reflecting benefits
from consolidating back office operations, and utilizing technology to enhance
loan origination and servicing and lower amortization of mortgage servicing
rights ("MSR"). Mortgage Banking results reflect the impact of significant
noncash expense items such as MSR amortization. Excluding the effect of these
items, cash returns currently exceed the Corporation's required return for this
line of business.
32
<PAGE> 8
The Mortgage Banking business continues to be affected by intense competition.
In this environment, PNC Bank continues to pursue several strategic objectives
including the use of advanced, cost-effective technologies, leveraging
processing, underwriting and servicing capabilities and entering into
alliances with third parties to expand the reach of the distribution network.
MORTGAGE SERVICING PORTFOLIO
<TABLE>
<CAPTION>
-----------------------
In millions 1996 1995
- -------------------------------------------------------------
<S> <C> <C>
January 1 $37,299 $40,389
Originations 5,614 5,423
Purchases 3,737 364
Repayments (6,075) (4,751)
Sales (1,032) (4,126)
-----------------------
December 31 $39,543 $37,299
- -------------------------------------------------------------
</TABLE>
During 1996, the Corporation funded $5.6 billion of residential mortgages with
70% representing new financings. The comparable amounts were $5.4 billion and
81%, respectively, in 1995.
At December 31, 1996, PNC Bank's mortgage servicing portfolio totaled $39.5
billion, had a weighted-average coupon of 7.93% and an estimated fair value of
$449 million. The servicing portfolio included $27.3 billion of loans serviced
for others. Capitalized MSR totaled $313 million at December 31, 1996.
The value of MSR is affected, in part, by changes in interest rates. If
interest rates decline and the rate of prepayment increases, the underlying
servicing fees and related MSR fair value would be reduced. In a period of
rising interest rates, a converse relationship would exist. The Corporation
seeks to manage this risk by using financial instruments whose values move in
the opposite direction of MSR value changes.
ASSET MANAGEMENT
<TABLE>
<CAPTION>
-----------------------------------------------------------
Investment Mutual Fund
Management Processing Total
-----------------------------------------------------------
Year ended December 31- dollars in millions 1996 1995 1996 1995 1996 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT
Advisory and processing fee income $188 $156 $119 $94 $307 $250
Net interest income (1) (2) 8 7 7 5
-----------------------------------------------------------
Total revenue 187 154 127 101 314 255
Operating expenses 141 122 80 64 221 186
-----------------------------------------------------------
Pretax earnings 46 32 47 37 93 69
Income taxes 17 12 18 14 35 26
-----------------------------------------------------------
Earnings $29 $20 $29 $23 $58 $43
- --------------------------------------------------------------------------------------------------------------------
PERFORMANCE RATIOS
After-tax profit margin 16% 13% 23% 22% 19% 17%
Efficiency 75 79 63 64 70 73
Return on assigned capital 26 24 50 47 34 33
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
The Asset Management line of business includes: Investment Management and
Mutual Fund Processing. Investment Management provides liquidity, fixed income,
and equity advisory services to institutional, family wealth and retail
clients. It also performs wholesale marketing activities for Compas Capital
Funds(SM), PNC Bank's proprietary mutual funds. Mutual Fund Processing provides
accounting, administration, transfer and custody services to financial
institutions and integrated banking services to the brokerage community.
Asset Management contributed 6% of total line of business earnings in 1996
compared with 5% in 1995. Earnings increased $15 million or 35% due to
significant fee income growth. Advisory and processing fee income increased 23%
due to an increase in assets under administration driven by new business,
appreciation in value and the acquisition of BlackRock Financial Management,
L.P. ("BlackRock"). Noninterest expense increased primarily due to the
BlackRock acquisition and incremental costs associated with servicing new
business.
Assets under administration increased $48 billion in the comparison to $330
billion at December 31, 1996. Managed assets totaled $109 billion at December
31, 1996 compared with $96 billion a year ago. At December 31, 1996, the
composition of managed assets under administration was 45% fixed income, 28%
liquidity management and 27% equity.
33
<PAGE> 9
Corporate
FINANCIAL REVIEW 1996 versus 1995
At December 31, 1996, PFPC, Inc., the Corporation's mutual fund processing
operation, provided third party services for $130 billion in
accounting/administration assets, $200 billion in custody assets, 4.3 million
shareholder accounts and 1.6 million checking and credit/debit card accounts.
The comparable amounts a year ago were $96 billion, $162 billion, 3.6 million
and 1.2 million, respectively. Mutual fund services revenue increased 26%
despite a consolidating market reflecting responsiveness to the existing client
base, product innovation, and a new business development.
The generation of new managed asset business resulted, in part, from the strong
performance of investment products relative to respective benchmarks. During
1996, BlackRock's marketing of institutional management capabilities resulted
in the addition of over $11 billion in new business. CastleInternational, the
Corporation's recently created international equity manager in Edinburgh,
Scotland, manages over $1.6 billion of assets.
Revenue from investment management and mutual fund processing is included in
Asset Management. Revenue from marketing asset management products and services
to consumers is included in the Consumer Banking line of business. The
following table sets forth revenue and earnings included in each line of
business.
<TABLE>
<CAPTION>
ASSET MANAGEMENT REVENUE AND EARNINGS
-------------------------
Year ended December 31 - Revenue
-------------------------
in millions Fees Other Total Earnings
- ----------------------------------------------------------------
<S> <C> <C> <C> <C>
1996
Asset Management $302 $12 $314 $58
Consumer Banking 195 11 206 42
---------------------------------
Total $497 $23 $520 $100
- ----------------------------------------------------------------
1995
Asset Management $245 $10 $255 $43
Consumer Banking 175 12 187 38
---------------------------------
Total $420 $22 $442 $81
- ----------------------------------------------------------------
</TABLE>
Asset Management revenue is primarily affected by the volume of new business,
the value of assets managed or serviced, investment performance and financial
market conditions. Revenue may be positively affected by strong investment
performance or improving financial markets. Conversely, declining performance
or deteriorating financial markets may adversely affect revenue.
CONSOLIDATED INCOME STATEMENT REVIEW
INCOME STATEMENT HIGHLIGHTS
<TABLE>
<CAPTION>
---------------------------------
Year ended December 31 - in 1996 1995 Change
millions
- ---------------------------------------------------------------
<S> <C> <C> <C>
Net interest income
(taxable-equivalent basis) $2,479 $2,189 $290
Provision for credit losses 6 (6)
Noninterest income before
net securities gains/losses 1,373 1,240 133
Net securities gains (losses) 22 (280) 302
Noninterest expense before
special charges 2,312 2,209 103
Special charges 260 (260)
Income taxes 535 219 316
Net income 992 408 584
- ---------------------------------------------------------------
</TABLE>
NET INTEREST INCOME Net interest income is the difference between interest
income and interest expense. The level and volatility of interest rates affect
interest received or paid on assets, liabilities and off-balance-sheet
financial instruments and, as a result, impact net interest income.
34
<PAGE> 10
NET INTEREST INCOME ANALYSIS
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
Taxable-equivalent basis Average Balances Interest Income/Expense Average Yields/Rates
----------------------------------------------------------------------------------------
Year ended December 31 -
dollars in millions 1996 1995 Change 1996 1995 Change 1996 1995 Change
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets
Securities $13,550 $22,140 $(8,590) $864 $1,409 $(545) 6.38% 6.36% 2 bp
Loans, net of unearned income 49,116 45,624 3,492 3,985 3,822 163 8.11 8.38 (27)
Other interest-earning assets 2,059 1,771 288 135 122 13 6.54 6.89 (35)
------------------------------------------------------------
Total interest-earning assets/
interest income 64,725 69,535 (4,810) 4,984 5,353 (369) 7.69 7.70 (1)
Noninterest-earning assets 6,082 5,596 486
-------------------------------
Total assets $70,807 $75,131 $(4,324)
- -------------------------------------------------------------------
Interest-bearing liabilities
Interest-bearing deposits $35,217 $35,718 $(501) 1,428 1,528 (100) 4.05 4.28 (23)
Borrowed funds 6,654 13,386 (6,732) 381 834 (453) 5.73 6.23 (50)
Notes and debentures 11,660 9,790 1,870 685 617 68 5.88 6.31 (43)
------------------------------------------------------------
Total interest-bearing
liabilities/ interest expense 53,531 58,894 (5,363) 2,494 2,979 (485) 4.66 5.06 (40)
---------------------------------------------------------
Noninterest-bearing liabilities and
shareholders' equity 17,276 16,237 1,039
------------------------------
Total liabilities and
shareholders' equity $70,807 $75,131 $(4,324)
- ------------------------------------------------------------------
Interest rate spread 2,490 2,374 116 3.03 2.64 39
Impact of noninterest-bearing sources .81 .78 3
----------------------------
Net interest margin before
financial derivatives 3.84 3.42 42
Effect of financial derivatives on
Interest income (11) (157) 146 (.01) (.23) 22
Interest expense 28 (28) .04 (4)
---------------------------------------------------------
Total effect of financial derivatives (11) (185) 174 (.01) (.27) 26
---------------------------------------------------------
Net interest income $2,479 $2,189 $290 3.83% 3.15% 68 bp
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Taxable-equivalent net interest income increased $290 million or 13.2%. The net
interest margin widened 68 basis points to 3.83% for 1996 compared with 3.15%
in the prior year. Net interest income and margin increases reflect the
benefits of the Chemical acquisition and changes in balance sheet composition
including a lower cost of financial derivatives used for interest rate risk
management. Total interest income declined $369 million primarily due to the
decline in securities and lower yields on loans, partially offset by a $3.5
billion increase in average loans. The cost of interest-bearing liabilities
declined $485 million due to a reduction in higher-cost wholesale funds, an
increase in the proportion of retail deposits to total sources of funds and
lower rates in the comparison. The cost of financial derivatives used in
interest rate risk management declined $174 million.
Net interest income and margin depend on a number of factors including the
volume and composition of earning assets and related yields as well as
associated funding costs. In 1996, loans comprised 75.9% of average earning
assets. Accordingly, loan growth and the related yields earned have a
significant impact on net interest income. During 1996, loan growth was modest
and yields declined reflecting competitive pricing pressure. Management expects
these conditions to continue. Funding cost is affected by the composition of
and rates paid on various funding sources. During 1996, average deposits
comprised 63.7% of the Corporation's total sources of funding with the
remainder comprised of wholesale funding obtained at prevailing market rates.
The ability to attract and retain deposits will continue to be affected by
competition and customer preferences for higher yielding products, such as
mutual funds.
35
<PAGE> 11
Corporate
FINANCIAL REVIEW 1996 versus 1995
NONINTEREST INCOME
<TABLE>
<CAPTION>
Change
---------------------------------
Year ended December 31 -
dollars in millions 1996 1995 Amount Percent
- --------------------------------------------------------------
<S> <C> <C> <C> <C>
Asset management and trust
Asset management $104 $73 $31 42.5%
Mutual fund 179 154 25 16.2
Trust 214 193 21 10.9
------------------------
Total asset
management and
trust 497 420 77 18.3
Service fees
Deposit 289 240 49 20.4
Corporate finance 65 53 12 22.6
Consumer services 64 52 12 23.1
Brokerage 54 42 12 28.6
Credit card and
merchant services 30 47 (17) (36.2)
Insurance 30 25 5 20.0
Other 34 36 (2) (5.6)
------------------------
Total service fees 566 495 71 14.3
Mortgage banking
Servicing 119 120 (1) (.8)
Marketing 24 33 (9) (27.3)
Sale of servicing 11 34 (23) (67.6)
------------------------
Total mortgage banking 154 187 (33) (17.6)
Other 156 138 18 13.0
------------------------
Total noninterest income
before securities
gains/losses 1,373 1,240 133 10.7
Net securities gains (losses) 22 (280) 302 NM
------------------------
Total $1,395 $960 $435 45.3%
- --------------------------------------------------------------
</TABLE>
NM - not meaningful
Noninterest income before securities transactions totaled $1.4 billion in 1996,
an increase of 10.7% compared with the prior year. This growth reflects the
Corporation's continuing emphasis on expanding fee-based revenue led by
significant increases in asset management, mutual fund processing, deposit
services, treasury management, brokerage and corporate finance.
The decline in credit card and merchant services reflects the impact of
alliances entered in 1995 with third parties to provide certain administrative,
marketing, data processing and customer support services for these businesses.
Generally, the third parties receive fee-based revenues and incur operating
costs associated with offering such services. In July 1996, the Corporation
canceled one such agreement and paid a termination fee of $4 million. The costs
and fee income associated with services provided under that agreement are
reflected in the results of operations after the termination date.
NONINTEREST EXPENSE
<TABLE>
<CAPTION>
Change
----------------------------------
Year ended December 31 -
dollars in millions 1996 1995 Amount Percent
- --------------------------------------------------------------
<S> <C> <C> <C> <C>
Compensation $930 $863 $67 7.8%
Employee benefits 180 202 (22) (10.9)
----------------------------------
Total staff expense 1,110 1,065 45 4.2
Net occupancy 197 180 17 9.4
Equipment 172 166 6 3.6
Intangible asset and
MSR amortization 117 115 2 1.7
Taxes other than income 53 53
Federal deposit
insurance 41 58 (17) (29.3)
SAIF assessment 35 35 NM
Other 587 572 15 2.6
----------------------------------
Total noninterest expense
before special charges 2,312 2,209 103 4.7
Special charges 260 (260) NM
----------------------------------
Total $2,312 $2,469 $(157) (6.4)%
- --------------------------------------------------------------
</TABLE>
NM - not meaningful
Noninterest expense before special charges increased $103 million or 4.7%
primarily due to the Chemical acquisition, incentive compensation and the
one-time SAIF assessment. Excluding the SAIF assessment and one-time charges,
the efficiency ratio improved to 58.8% compared with 64.3% a year ago.
Compensation expense increased primarily due to acquisitions and incentive
compensation in fee-based businesses including asset management and brokerage.
Average FTEs totaled 25,020 in 1996 compared with 25,450 a year ago. Lower
staff levels from the integration of Midlantic and Chemical and from reductions
in the branch network were partially offset by additions to support initiatives
in telebanking and Asset Management.
Conversion of Midlantic's products and systems were completed in 1996 with cost
savings ahead of expectations. Management continues to believe annual cost
savings from the consolidation or elimination of overlapping facilities and
operations will exceed the original estimate of $150 million beginning in 1997.
However, these savings are expected to be offset by investments in AAA and
related credit card initiatives.
The Corporation recorded a pre-tax charge in 1996 of $35.1 million for a
special one-time assessment mandated by Congress to recapitalize the SAIF. The
legislation also included provisions that will result in a modest reduction in
future annual deposit insurance costs.
36
<PAGE> 12
BALANCE SHEET REVIEW
AVERAGE BALANCE SHEET HIGHLIGHTS
<TABLE>
<CAPTION>
Change
-------------------------------------
Year ended December 31 -
dollars in millions 1996 1995 Amount Percent
- --------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets $70,807 $75,131 $(4,324) (5.8)%
Earning assets 64,725 69,535 (4,810) (6.9)
Loans, net of
unearned income 49,116 45,624 3,492 7.7
Securities 13,550 22,140 (8,590) (38.8)
Deposits 45,117 44,830 287 .6
Borrowed funds 6,654 13,386 (6,732) (50.3)
Notes and debentures 11,660 9,790 1,870 19.1
Shareholders' equity 5,828 5,784 44 .8
- --------------------------------------------------------------
</TABLE>
Average assets and earning assets were $70.8 billion and $64.7 billion,
respectively, in 1996 compared with $75.1 billion and $69.5 billion,
respectively, a year ago. The decline was due to the planned securities
portfolio reduction partially offset by loan growth and the Chemical
acquisition. Securities to earning assets declined to 20.9% from 31.8% in the
prior year.
Average loans increased $3.5 billion or 7.7% to $49.1 billion for the year
ended December 31, 1996 and represented 75.9% of earning assets in 1996
compared with 65.6% a year ago. Excluding the Chemical acquisition, loans
increased 4.0% in the comparison.
AVERAGE LOANS
<TABLE>
<CAPTION>
ended December 31 -
dollars in millions 1996 1995 Change
-------------------------------------
<S> <C> <C> <C>
Consumer $13,357 $12,013 11.2%
Residential mortgage 12,049 10,812 11.4
Commercial 17,150 15,852 8.2
Commercial real estate 4,763 5,014 (5.0)
Other 1,797 1,933 (7.0)
-------------------------------------
Total, net of unearned
income $49,116 $45,624 7.7
- --------------------------------------------------------------
</TABLE>
Average deposits increased slightly to $45.1 billion in 1996 compared with a
year ago. The Chemical acquisition added $2.7 billion of retail core deposits.
The ratio of deposits to sources of funds increased to 63.7% compared with
59.7% a year ago. During 1996, the ratio of wholesale funding to total sources
of funds decreased to 27.5% compared with 34.1% a year ago.
YEAR-END BALANCE SHEET HIGHLIGHTS
<TABLE>
<CAPTION>
Change
-------------------------------------
December 31 -
dollars in millions 1996 1995 Amount Percent
- --------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets $73,260 $73,404 $(144) (.2)%
Loans, net of
unearned income 51,798 48,653 3,145 6.5
Securities 11,917 15,839 (3,922) (24.8)
Deposits 45,676 46,899 (1,223) (2.6)
Borrowed funds 7,860 8,665 (805) (9.3)
Notes and debentures 11,744 10,398 1,346 12.9
Shareholders' equity 5,869 5,768 101 1.8
- --------------------------------------------------------------
</TABLE>
Total assets were $73.3 billion at December 31, 1996 compared with $73.4
billion at year-end 1995. The decline was primarily due to a reduced securities
portfolio offset by loan growth.
LOANS
<TABLE>
<CAPTION>
-----------------------
December 31 - in millions 1996 1995
- -------------------------------------------------------------
<S> <C> <C>
Consumer
Home equity $4,569 $4,541
Automobile 3,731 4,236
Credit card 2,776 1,004
Student 1,725 1,512
Other 2,067 2,246
-----------------------
Total consumer 14,868 13,539
Residential mortgage 12,703 11,689
Commercial
Manufacturing 3,718 3,363
Retail/Wholesale 3,243 3,148
Service providers 2,359 2,402
Real estate related 1,452 1,291
Communications 1,239 1,083
Financial services 708 1,082
Health care 1,207 1,028
Other 4,136 3,415
-----------------------
Total commercial 18,062 16,812
Commercial real estate
Mortgage 2,467 2,775
Medium-term financing 1,312 1,250
Construction and development 845 889
-----------------------
Total commercial real estate 4,624 4,914
Lease financing and other 1,926 2,102
Unearned income (385) (403)
-----------------------
Total, net of unearned income $51,798 $48,653
- -------------------------------------------------------------
</TABLE>
Loans outstanding increased $3.1 billion from year-end 1995 to $51.8 billion at
December 31, 1996. Loan portfolio composition remained relatively consistent in
the comparison except for an increase in the credit card portfolio attributable
to AAA-related initiatives. The portfolio is geographically diversified among
numerous industries and types of businesses.
37
<PAGE> 13
Corporate
FINANCIAL REVIEW 1996 versus 1995
Unfunded commercial commitments, net of participations and syndications,
totaled $27.1 billion and $24.3 billion at December 31, 1996 and 1995. Unfunded
consumer commitments increased $14.7 billion to $22.0 billion primarily due to
home equity and credit card lines. Commercial commitments generally have fixed
expiration dates, may require payment of a fee, and contain termination clauses
in the event the customer's credit quality deteriorates. Based on the
Corporation's historical experience, approximately 50% to 75% of consumer and
most commercial commitments expire unfunded, and therefore cash requirements
are substantially less than the total commitment.
SECURITIES
<TABLE>
<CAPTION>
--------------------------------------
1996 1995
--------------------------------------
December 31 - in Amortized Fair Amortized Fair
millions Cost Value Cost Value
- --------------------------------------------------------------
<S> <C> <C> <C> <C>
Debt securities
U.S. Treasury and
government agencies $3,238 $3,237 $4,241 $4,314
Mortgage-backed 6,301 6,176 8,631 8,566
Asset-backed 1,609 1,615 2,023 2,032
State and municipal 218 227 343 367
Other debt 100 105 99 97
Corporate stocks and other 554 557 455 457
Associated derivatives 6
- --------------------------------------------------------------
Total $12,020 $11,917 $15,792 $15,839
- --------------------------------------------------------------
</TABLE>
The securities portfolio declined $3.9 billion from year-end 1995 to $11.9
billion at December 31, 1996, reflecting the impact of management's actions to
reduce reliance on investment activities and related wholesale funding. The
expected weighted-average life of the securities portfolio was 2 years and 11
months at December 31, 1996 compared with 2 years and 8 months at year-end
1995.
Securities classified as available for sale may be sold as part of the overall
asset/liability management process. Realized gains and losses resulting from
such sales would be reflected in the results of operations and would include
gains or losses on associated financial derivatives. During 1996, $6.8 billion
of securities were sold, primarily U.S. Treasury, mortgage-backed and
asset-backed private placement securities. Including the effect of terminated
associated financial derivatives, the transactions resulted in a net gain of
$22 million. In 1995, $8.0 billion of securities were sold and associated
financial derivatives were terminated at a combined net loss of $280 million.
The securities portfolio included collateralized mortgage obligations and
mortgage-backed securities with a fair value of $5.0 billion and $1.2 billion,
respectively, at December 31, 1996. The characteristics of these securities
include principal guarantees, primarily by U.S. Government agencies, and
marketability. Expected lives of such securities can vary as interest rates
change. In a rising interest rate environment, prepayments on the underlying
mortgage securities may slow and lengthen the expected lives. Conversely,
expected lives would shorten in a declining interest rate environment. The
Corporation monitors the impact of this risk through the use of an income
simulation model as part of the asset/liability management process.
At December 31, 1996 and 1995, $5.5 billion and $6.1 billion, respectively,
notional value of financial derivatives were associated with securities
available for sale.
FUNDING SOURCES
<TABLE>
<CAPTION>
-----------------------
December 31 - in millions 1996 1995
- ---------------------------------------------------------------
<S> <C> <C>
Deposits
Demand, savings and money market $27,027 $27,145
Time 17,803 18,661
Foreign 846 1,093
-----------------------
Total deposits 45,676 46,899
Borrowed funds
Federal funds purchased 2,797 3,817
Treasury, tax and loan 2,288 567
Commercial paper 976 753
Repurchase agreements 645 2,851
Other 1,154 677
-----------------------
Total borrowed funds 7,860 8,665
Notes and debentures
Bank notes 7,905 6,256
Federal Home Loan Bank 2,192 2,393
Other 1,647 1,749
-----------------------
Total notes and debentures 11,744 10,398
-----------------------
Total $65,280 $65,962
- ---------------------------------------------------------------
</TABLE>
Total deposits decreased 2.6% to $45.7 billion at December 31, 1996 compared
with $46.9 billion at year-end 1995. Time deposits declined $858 million as
consumers sought more attractive yields from alternative investments.
Total borrowed funds declined $805 million while notes and debentures increased
$1.3 billion in the comparison reflecting initiatives to reposition the balance
sheet. The change in composition of these categories reflects actions to
utilize the most cost-effective alternatives.
38
<PAGE> 14
CAPITAL
RISK-BASED CAPITAL
<TABLE>
<CAPTION>
-----------------------
December 31 - dollars in millions 1996 1995
- -------------------------------------------------------------
<S> <C> <C>
Capital components
Shareholders' equity
Common $5,553 $5,751
Preferred 316 17
Trust preferred securities 350
Goodwill and other (1,003) (980)
Net unrealized securities (gains)
losses 67 (26)
-----------------------
Tier I risk-based capital 5,283 4,762
Subordinated debt 1,343 1,370
Eligible allowance for credit losses 801 750
-----------------------
Total risk-based capital $7,427 $6,882
-----------------------
Assets
Risk-weighted assets and
off-balance-sheet instruments $63,761 $59,539
Average tangible assets 68,597 74,756
-----------------------
Capital ratios
Tier I risk-based 8.29% 8.00%
Total risk-based 11.65 11.56
Leverage 7.70 6.37
- -------------------------------------------------------------
</TABLE>
The access to and cost of funding new business initiatives including
acquisitions, deposit insurance costs, and the level and nature of expanded
regulatory oversight depend, in large part, on a financial institution's
capital strength. The minimum regulatory capital ratios are 4% for Tier I, 8%
for total risk-based and 3% 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 at least
6% for Tier I, 10% for total risk-based and 5% for leverage. At December 31,
1996, the Corporation and each bank subsidiary were classified as well
capitalized.
The Corporation manages the capital position through balance sheet size and
composition, issuance of debt and equity instruments, treasury stock
activities, dividend policies and retained earnings. During 1996, the capital
position of the Corporation was aggressively managed to redeploy excess capital
generated from business operations and reduce the cost of regulatory capital.
PNC Bank repurchased 22.7 million shares of common stock during 1996. In August
1996, the board of directors authorized the purchase of up to 10 million common
shares before the end of 1996. That program was completed. In October 1996 and
December 1996, the Corporation issued $300 million of nonconvertible preferred
stock and $350 million of 7.95% mandatorily redeemable capital securities,
respectively. These issuances qualify as Tier I capital and reduce the overall
cost of equity. The proceeds of these issuances are being used for additional
common stock purchases.
All purchases under the January 1995 board authorized 24 million share
repurchase program were discontinued with the initiation of the Midlantic
merger in July 1995. During the second quarter of 1996, the board of directors
formally rescinded that plan.
RISK MANAGEMENT
The Corporation's ordinary course of business involves varying degrees of risk
taking, the most significant of which are credit, liquidity and interest rate
risk. To manage these risks, PNC Bank has risk management processes designed to
provide for risk identification, measurement, monitoring and control.
CREDIT RISK MANAGEMENT Credit risk represents the possibility a customer or
counterparty may not perform in accordance with contractual terms. Credit risk
is inherent in the financial services business and results from extending
credit to customers, purchasing securities and entering into certain
off-balance-sheet financial derivative transactions. The Corporation seeks to
manage credit risk through diversification, limiting exposure to any single
industry or customer, requiring collateral and selling participations to
third parties.
Credit Administration, which includes credit policy, loan review and loan
workout, manages and monitors credit risk by establishing and enforcing uniform
credit policies and exercising centralized oversight, review and approval
procedures. Credit Policy, at the direction of the board of directors,
establishes uniform underwriting standards that set forth the criteria used in
extending credit.
To support consistent application of underwriting standards, credit officers
work with lending officers in evaluating the creditworthiness of borrowers and
structuring transactions. Credit decisions are made at the specific affiliate
or market level. However, credit requests above certain limits or that involve
exceptions to credit policies require additional corporate approvals.
NONPERFORMING ASSETS
<TABLE>
<CAPTION>
-------------------
December 31 - dollars in millions 1996 1995
- -------------------------------------------------------------
<S> <C> <C>
Nonaccrual loans
Commercial $156 $118
Commercial real estate
Mortgage 109 108
Project 25 45
Consumer 6 10
Residential mortgage 51 54
-------------------
Total nonaccrual loans 347 335
Restructured loans 2 23
-------------------
Total nonperforming loans 349 358
Foreclosed assets
Commercial real estate 71 105
Residential mortgage 22 24
Other 17 49
-------------------
Total foreclosed assets 110 178
-------------------
Total nonperforming assets $459 $536
-------------------
Nonperforming loans to loans .67% .74%
Nonperforming assets to loans and
foreclosed assets .88 1.10
Nonperforming assets to assets .63 .73
- -------------------------------------------------------------
</TABLE>
39
<PAGE> 15
Corporate
FINANCIAL REVIEW 1996 versus 1995
Nonperforming assets declined $77 million since year-end 1995 to $459 million
at December 31, 1996. Lower foreclosed assets and restructured loans were
partially offset by an increase in nonaccrual loans. At December 31, 1996,
$80 million of nonperforming loans were current as to principal and interest
compared with $89 million at December 31, 1995.
CHANGE IN NONPERFORMING ASSETS
<TABLE>
<CAPTION>
--------------------
In millions 1996 1995
- -------------------------------------------------------------
<S> <C> <C>
January 1 $536 $757
Transferred from accrual 447 399
Acquisitions 14
Returned to performing (40) (97)
Principal reductions (277) (315)
Sales (134) (111)
Charge-offs and valuation adjustments (73) (111)
--------------------
December 31 $459 $536
- -------------------------------------------------------------
</TABLE>
ACCRUING LOANS PAST DUE 90 DAYS OR MORE
<TABLE>
<CAPTION>
---------------------------------------
Amount Percent of Loans
December 31 - ---------------------------------------
dollars in millions 1996 1995 1996 1995
- -------------------------------------------------------------
<S> <C> <C> <C> <C>
Consumer
Guaranteed
student $51 $44 2.95% 2.90%
Credit cards 43 8 1.56 .83
Other 46 43 .45 .40
---------------------
Total consumer 140 95 .96 .72
Residential mortgage 58 63 .46 .54
Commercial 34 22 .19 .13
Commercial real estate 12 45 .26 .92
---------------------
Total $244 $225 .47 .46
- -------------------------------------------------------------
</TABLE>
Loans not included in past due, nonaccrual or restructured categories, but
where known information about possible credit problems causes management to be
uncertain of the borrower's ability to comply with existing repayment terms
over the next six months totaled $151 million at December 31, 1996.
ALLOWANCE FOR CREDIT LOSSES In determining the adequacy of the allowance for
credit losses, the Corporation makes allocations to specific problem loans
based on discounted cash flow analyses or collateral valuations for impaired
loans and to pools of watchlist and nonwatchlist loans for various credit risk
factors. Allocations to loan pools are developed by risk rating and industry
classifications and based on management's judgment concerning historical loss
trends and other relevant factors. These factors may include, among others,
local, regional and national economic conditions, portfolio concentrations,
industry competition and consolidation, and the impact of government
regulation. Consumer and residential mortgage loan allocations are based on
historical loss experience adjusted for portfolio activity and current economic
conditions.
ALLOWANCE FOR CREDIT LOSSES
<TABLE>
<CAPTION>
------------------
In millions 1996 1995
- -------------------------------------------------------------
<S> <C> <C>
January 1 $1,259 $1,352
Charge-offs (247) (240)
Recoveries 83 107
------------------
Net charge-offs (164) (133)
Provision for credit losses 6
Acquisitions 71 34
------------------
December 31 $1,166 $1,259
- -------------------------------------------------------------
</TABLE>
The 1996 allowance added from acquisitions relates to AAA-affinity credit card
portfolio purchases. The allowance as a percent of nonperforming loans and
period-end loans was 334% and 2.25%, respectively, at December 31, 1996. The
comparable 1995 amounts were 352% and 2.59%, respectively.
CHARGE-OFFS AND RECOVERIES
<TABLE>
<CAPTION>
----------------------------------------
Net Percent of
Year ended December 31- Charge- Charge- Average
dollars in millions offs Recoveries offs Loans
- -----------------------------------------------------------------
<S> <C> <C> <C> <C>
1996
Consumer
Credit card $66 $7 $59 5.06%
Other 101 35 66 .54
------------------------------
Total consumer 167 42 125 .94
Residential mortgage 9 2 7 .06
Commercial 53 29 24 .14
Commercial real estate 18 10 8 .17
------------------------------
Total $247 $83 $164 .33
- -----------------------------------------------------------------
1995
Consumer
Credit card $31 $6 $25 2.87%
Other 78 35 43 .39
------------------------------
Total consumer 109 41 68 .57
Residential mortgage 10 2 8 .07
Commercial 84 49 35 .22
Commercial real estate 37 15 22 .44
------------------------------
Total $240 $107 $133 .29
- -----------------------------------------------------------------
</TABLE>
Consumer net charge-offs increased $57 million in the comparison primarily due
to an increase in credit card charge-offs and the Chemical acquisition. The
credit card portfolio increased $1.8 billion during the year to $2.8 billion at
December 31, 1996 in connection with AAA-related and other Consumer Banking
initiatives.
40
<PAGE> 16
PROVISION FOR CREDIT LOSSES Favorable economic conditions during 1996 and 1995,
combined with management's ongoing attention to asset quality, resulted in
lower nonperforming assets and strong coverage ratios. The Corporation did not
record a provision for credit losses in 1996. Credit card growth and portfolio
acquisitions are expected to increase consumer charge-offs and are likely to
result in provisions for credit losses in 1997.
LIQUIDITY Liquidity represents an institution's ability to generate cash or
otherwise obtain funds at reasonable rates to satisfy commitments to borrowers,
demands of depositors and debtholders, and invest in strategic initiatives.
Liquidity risk represents the likelihood the Corporation would be unable to
generate cash or otherwise obtain funds at reasonable rates to satisfy
commitments to borrowers or obligations to depositors and debtholders.
Liquidity is managed through the coordination of the relative maturities of
assets, liabilities and off-balance-sheet positions and is enhanced by the
ability to raise funds in capital markets through direct borrowing or
securitization of assets such as mortgage, automobile and credit card loans.
The ability to raise funds in the capital markets depends on market conditions,
capital considerations, credit ratings and investor demand, among other
factors.
Liquid assets consist of cash and due from banks, short-term investments, loans
held for sale and securities available for sale. At December 31, 1996, such
assets totaled $17.6 billion, of which $7.5 billion was pledged as collateral.
Liquidity is also provided by residential mortgages which may be used as
collateral for funds obtained through the Federal Home Loan Bank ("FHLB")
system. At December 31, 1996, approximately $6.5 billion of residential
mortgages were available as collateral for borrowings from the FHLB.
During 1996, cash and due from banks increased $337 million to $4.0 billion
compared with an increase of $267 million during 1995. Net cash provided by
operating activities decreased $910 million in the comparison. Cash provided by
investing activities decreased to $1.6 billion compared with $7.0 billion
provided a year ago. Net cash used by financing activities totaled $1.4 billion
in 1996 compared with $7.9 billion used a year earlier.
The principal source of parent company revenue and cash flow is dividends from
subsidiary banks. PNC Bancorp, Inc. is a wholly-owned subsidiary of the parent
company and is the holding company for all bank subsidiaries. There are legal
limitations on the ability of bank subsidiaries to pay dividends and make other
distributions to PNC Bancorp, Inc. and in turn the parent company. Without
regulatory approval, the amount available for dividend payments to PNC Bancorp,
Inc. by all bank subsidiaries was $512 million at December 31, 1996. Dividends
may also be impacted by capital needs, regulatory requirements and policies,
and other factors.
Liquidity for the parent company and subsidiaries is also generated through the
issuance of securities in public or private markets and lines of credit. The
Corporation had available $140 million of debt and $350 million that may be
issued as either debt or preferred stock under effective shelf registration
statements at December 31, 1996. In addition, the Corporation had a $500
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 current
obligations to borrowers, depositors, 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.
INTEREST RATE RISK Interest rate risk arises primarily through the
Corporation's normal business activities of extending loans and taking
deposits. Many factors, including economic and financial conditions, general
movements in market interest rates, and consumer preferences, affect the spread
between interest earned on assets and interest paid on liabilities. Financial
derivatives, primarily interest rate swaps and purchased interest rate caps and
floors, are used to alter the interest rate characteristics of assets and
liabilities. For example, receive-fixed interest rate swaps effectively convert
variable-rate assets to fixed-rate assets.
In managing interest rate risk, the Corporation seeks to minimize the reliance
on a particular interest rate scenario as a source of earnings. Accordingly,
wholesale activities including securities, funding, financial derivatives and
capital markets activities are used in managing core business exposures within
specified guidelines. Interest rate risk is centrally managed by asset and
liability ("A&L") management. Senior management and Board of Directors'
committees oversee A&L management and periodically review interest rate risk
exposures.
41
<PAGE> 17
Corporate
FINANCIAL REVIEW 1996 versus 1995
A number of measures are used to monitor and manage interest rate risk,
including income simulation and interest sensitivity (gap) analyses. In
addition, the Corporation supplements these models with longer-term measures of
interest rate sensitivity including duration of equity and equity at risk. Such
models are designed to estimate the impact on the value of equity resulting
from changes in interest rates and supplement the simulation model and gap
analyses.
An income simulation model is the primary tool used to assess the direction and
magnitude of changes in net interest income resulting from changes in interest
rates. Key assumptions employed in the model include prepayment speeds on
mortgage-related assets, cash flows and maturities of financial instruments,
changes in market conditions, loan volumes and pricing, deposit sensitivity,
customer preferences, and management's financial and capital plans. These
assumptions are inherently uncertain and, as a result, the model cannot
precisely estimate net interest income or precisely predict the impact of
higher or lower interest rates on net interest income. Actual results will
differ from simulated results due to timing, magnitude and frequency of
interest rate changes and changes in market conditions and management
strategies, among other factors.
The Corporation's guidelines provide that net interest income should not
decrease by more than 3% if interest rates gradually increase or decrease from
current rates by 100 basis points over a twelve-month period. Based on the
results of the simulation model, the Corporation was within these guidelines at
December 31, 1996.
Additional interest rate scenarios are modeled to address a wider range of rate
movement, yield curve, term structure and basis risk exposures. Depending on
market conditions and other inherent risks, these scenarios may be modeled more
or less frequently. Such analyses are used as supplemental measurements only
and limits have not been established.
A gap analysis represents a point-in-time net position of assets, liabilities
and off-balance-sheet financial derivatives used for interest rate risk
management subject to repricing in specified time periods. Gap analysis 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. A
cumulative asset-sensitive gap position indicates assets are expected to
reprice more quickly than liabilities. Alternatively, a cumulative
liability-sensitive gap position indicates liabilities are expected to reprice
more quickly than assets. The Corporation's limit for the cumulative one-year
gap position is 10%. At December 31, 1996, the cumulative liability sensitivity
of the one-year gap position was 2.1%.
INTEREST RATE SENSITIVITY (GAP) ANALYSIS
<TABLE>
<CAPTION>
--------------------------------------------
December 31, 1996 - 3 Months 4 to 12 1 to 2 2 to 5 After 5
in millions or Less Months Years Years Years
- ----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Loans $25,083 $6,968 $5,188 $8,628 $5,931
Securities 1,862 1,921 2,780 3,656 1,698
Other earning assets 1,714 3 2 4 1
Other assets 1,719 100 132 395 5,475
--------------------------------------------
Total assets $30,378 $8,992 $8,102 $12,683 $13,105
- ----------------------------------------------------------------
Noninterest-bearing
deposits $1,752 $9,185
Interest-bearing
deposits 11,924 $7,567 $2,378 $1,939 10,931
Borrowings 17,058 518 93 658 1,277
Other liabilities 469 1,292
Trust preferred
securities 350
Equity 5,869
--------------------------------------------
Total liabilities
and equity $31,203 $8,085 $2,471 $2,597 $28,904
Off-balance-sheet
items (978) (467) (1,011) 2,331 125
--------------------------------------------
Interest rate
sensitivity $(1,803) $440 $4,620 $12,417 $(15,674)
- ----------------------------------------------------------------
Cumulative gap $(1,803) $(1,363) $3,257 $15,674
- ----------------------------------------------------------------
</TABLE>
FINANCIAL DERIVATIVES
A variety of off-balance-sheet financial derivatives are used as part of the
overall interest rate risk management process to manage interest rate risk
inherent in the Corporation's line of business activities. Interest rate swaps
and purchased interest rate caps and floors are the primary instruments used
for these purposes. Interest rate swaps are agreements to exchange fixed and
floating interest rate payments calculated on a notional principal amount. The
floating rate is based on a money market index, primarily short-term LIBOR
indices. Purchased interest rate caps and floors are agreements where, for a
fee, the counterparty agrees to pay the Corporation the amount, if any, by
which a specified market interest rate exceeds or is less than a defined rate
applied to a notional amount, respectively. Forward contracts provide for the
delivery of financial instruments at a specified future date and at a specified
price or yield. Such contracts are used to manage risk positions associated
with certain mortgage banking activities.
Financial derivatives involve, to varying degrees, interest rate and credit
risk in excess of the amount recognized in the balance sheet, but less than the
notional amount of the contract. For interest rate swaps, caps and floors, only
periodic cash payments and, with respect to caps and floors, premiums, are
exchanged. Therefore, cash requirements and exposure to credit risk are
significantly less than the notional value.
The following table sets forth changes in off-balance-sheet financial
derivatives used for interest rate risk management and mortgage banking
activities during 1996. Weighted-average maturity is based on contractual terms.
42
<PAGE> 18
<TABLE>
<CAPTION>
FINANCIAL DERIVATIVES ACTIVITY
-----------------------------------------------------------------------------------
Weighted-
Avg.
1996-dollars in millions January 1 Additions Maturities Terminations December 31 Maturity
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest rate risk management
Interest rate swaps
Receive fixed $2,785 $7,802 $(1,890) $(1,750) $6,947 1 yr., 7 mo.
Receive-fixed index amortizing 3,211 (1,038) (2,117) 56 1 yr., 10 mo.
Pay fixed 2,629 409 (1,288) (1,148) 602 2 yr., 11 mo.
Basis swaps 765 335 (765) 335 10 mo.
Interest rate caps 5,510 315 (12) 5,813 11 mo.
Interest rate floors 2,500 2,500 1 yr., 11 mo.
-----------------------------------------------------------------------------------
Total interest rate risk management 14,900 11,361 (4,993) (5,015) 16,253 1 yr., 5 mo.
Mortgage banking activities
Forward contracts
Commitments to purchase loans 431 3,944 (3,980) 395 2 mo.
Commitments to sell loans 751 5,959 (5,816) 894 2 mo.
Interest rate floors - MSR 500 1,350 (800) 1,050 4 yr., 9 mo.
Receive-fixed interest rate swaps - MSR 125 (125)
-----------------------------------------------------------------------------------
Total mortgage banking activities 1,807 11,253 (9,796) (925) 2,339
-----------------------------------------------------------------------------------
Total $16,707 $22,614 $(14,789) $(5,940) $18,592
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table sets forth by designated assets and liabilities the
notional value and the estimated fair value of financial derivatives used for
interest rate risk management and mortgage banking activities. Weighted-average
interest rates presented are based on contractual rates at year-end 1996 and
rates expected to be in effect based on the implied forward yield curve.
FINANCIAL DERIVATIVES
<TABLE>
<CAPTION>
-------------------------------------------------------------------------
Notional Estimated Contractual Rate Forward Yield Curve
-------------------------------------------------------------------------
December 31, 1996 - dollars in millions Value Fair Value Paid Received Paid Received
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest rate risk management
Asset rate conversion
Interest rate swaps (1)
Receive fixed designated to loans $6,020 $100 5.56% 5.94% 5.88% 5.94%
Pay fixed designated to loans 552 (15) 7.36 5.54 7.36 6.17
Interest rate caps designated to (2)
Securities 5,500 NM NM NM NM
Loans 313 2 NM NM NM NM
Interest rate floors designated to loans (3) 2,500 3 NM NM NM NM
--------------------------
Total asset rate conversion 14,885 90
Liability rate conversion
Interest rate swaps (1)
Receive fixed designated to interest-bearing
liabilities 983 9 5.56 6.12 5.88 6.12
Pay fixed designated to notes and debentures 50 5.63 5.67 5.63 5.68
Basis swaps designated to notes and debentures 335 3 5.56 5.49 5.67 5.66
--------------------------
Total liability rate conversion 1,368 12
--------------------------
Total interest rate risk management 16,253 102
Mortgage banking activities
Forward contracts
Commitments to purchase loans 395 (1) NM NM NM NM
Commitments to sell loans 894 NM NM NM NM
Interest rate floors - MSR 1,050 10 NM NM NM NM
--------------------------
Total mortgage banking activities 2,339 9
--------------------------
Total financial derivatives $18,592 $111
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The floating rate portion of interest rate contracts is based on
money-market indices. As a percent of notional value, 51% were based on
3-month LIBOR, 45% on 1-month LIBOR and the remainder on other short-term
indices.
(2) Interest rate caps with notional values of $5.783 billion and $30 million
require the counterparty to pay the Corporation the excess, if any, of
3-month LIBOR over a weighted-average strike of 6.49% and 1-month LIBOR
over 6.75% , respectively. At December 31, 1996, 3-month LIBOR was 5.56%
and 1-month LIBOR was 5.50%.
(3) Interest rate floors with notional values of $2.5 billion and $1.1 billion
require the counterparty to pay the Corporation the excess, if any,
weighted-average strike of 4.92% over 3-month LIBOR and weighted-average
strike of 5.88% over 10-year CMT. At December 31, 1996, 3-month LIBOR was
5.56% and 10-year CMT was 6.43%.
NM - not meaningful
43
<PAGE> 19
Corporate
FINANCIAL REVIEW 1995 versus 1994
OVERVIEW
Net income for 1995 totaled $408 million, or $1.19 per fully diluted share,
compared with $884 million, or $2.52 per fully diluted share for 1994. Returns
on average common shareholders' equity and average assets for 1995 were 7.05%
and .54%, respectively, compared with 1.19% and 16.09%, respectively, in 1994.
The 1995 results include $380 million of after-tax charges recorded in
connection with the Midlantic merger and actions taken to reposition the
Corporation's balance sheet. Excluding these charges, 1995 earnings were $788
million, or $2.29 per fully diluted share. On this basis, returns on average
common shareholders' equity and average assets were 13.67% and 1.05%,
respectively.
On October 6, 1995, the Corporation acquired Chemical's franchise in southern
and central New Jersey with total assets of $3.2 billion and retail core
deposits of $2.7 billion. The Corporation paid $492 million in cash and the
transaction was accounted for under the purchase method.
In February 1995, the Corporation acquired BlackRock, a New York-based,
fixed-income investment management firm with approximately $25 billion in
assets under management at closing. The Corporation paid $71 million in cash
and issued $169 million of unsecured notes. The transaction was accounted for
under the purchase method.
INCOME STATEMENT REVIEW
<TABLE>
<CAPTION>
INCOME STATEMENT HIGHLIGHTS
- -------------------------------------------------------------
Year ended December 31 - in millions 1995 1994 Change
- -------------------------------------------------------------
<S> <C> <C> <C>
Net interest income $2,189 $2,530 $(341)
(taxable-equivalent basis)
Provision for credit losses 6 84 (78)
Noninterest income before net
securities losses 1,240 1,181 59
Net securities losses (280) (142) (138)
Noninterest expense before special
charges 2,209 2,190 19
Special charges 260 48 212
Income taxes 219 318 (99)
Net income 408 884 (476)
- -------------------------------------------------------------
</TABLE>
NET INTEREST INCOME Taxable-equivalent net interest income totaled $2.2 billion
in 1995 compared with $2.5 billion for 1994. The net interest margin narrowed
to 3.15% in 1995 compared with 3.64% in 1994. Interest income increased due to
higher loan volume and yields, partially offset by a reduction in the
securities portfolio. The growth in interest income was offset by higher
expense on deposits and borrowings in the comparison, which was primarily due
to higher interest rates. During 1995, net interest income and margin were
adversely impacted by interest rate swaps and caps.
PROVISION FOR CREDIT LOSSES The provision for credit losses was $6 million and
$84 million in 1995 and 1994, respectively. Continued improvement in economic
conditions, combined with management's ongoing efforts to improve asset
quality, resulted in lower nonperforming asset and charge-off levels, and a
higher reserve coverage of nonperforming loans in the year-to-year comparison.
NONINTEREST INCOME Noninterest income before securities transactions increased
$59 million to $1.2 billion in 1995. Asset management and trust revenue
increased $85 million or 25.4% due to the BlackRock acquisition, new business
and an increase in the value of administered assets.
Service fees increased $5 million in 1995 to $495 million, primarily reflecting
higher corporate finance fees and consumer fees partially offset by a decline
in credit card and merchant service fees. During 1995, mortgage banking revenue
decreased $12 million to $187 million primarily due to lower gains from
servicing sales.
Other noninterest income decreased $19 million to $138 million in 1995.
Nonrecurring gains in 1994 from Midlantic's sale of assets held for accelerated
disposition were partially offset in the comparison by a gain from instruments
used to hedge the economic value of MSR in 1995.
Net securities losses totaled $280 million in 1995 compared with $142 million
in 1994. Securities were sold and related financial derivatives were terminated
in connection with initiatives to downsize the securities portfolio and to
reduce interest rate sensitivity.
44
<PAGE> 20
NONINTEREST EXPENSE Noninterest expense before special charges increased less
than 1% in 1995 reflecting lower deposit insurance premiums, successful
acquisition integration and emphasis on developing alternative lower-cost
delivery systems and continued rationalization of the traditional branch
delivery system. Staff expense totaled $1.1 billion in 1995 compared with $1.0
billion in 1994. Amortization of intangible assets and MSR increased $29
million due to the BlackRock and Chemical acquisitions and MSR impairment. The
decline in federal deposit insurance reflects a reduction in the Bank Insurance
Fund premium.
In connection with the Midlantic merger, the Corporation recorded special
charges of $260 million in 1995 for elimination of duplicate operations and
facilities, employee severance, professional services, termination of an
interest rate cap position and various other costs. In 1994, the Corporation
recorded special charges totaling $48 million in connection with the
consolidation of seven telebanking centers and rationalization of retail
delivery systems.
INCOME TAX EXPENSE Income tax expense totaled $219 million in 1995 compared
with $318 million in 1994. The effective tax rates were 34.9% and 26.3% in 1995
and 1994, respectively. The lower effective tax rate in 1994 was primarily due
to a $107 million benefit from the realization of Midlantic's previously
unrecognized deferred tax assets. Income tax expense for 1995 included a $15
million write-down of state deferred tax assets related to the Midlantic
merger.
BALANCE SHEET REVIEW
Total assets and earning assets were $73.4 billion and $66.8 billion,
respectively, at December 31, 1995 compared with $77.5 billion and $69.8
billion at year-end 1994. In 1995, the Corporation substantially reduced the
securities portfolio and reliance on related wholesale funding and, with the
Midlantic and Chemical acquisitions, significantly increased retail core
deposit liabilities.
LOANS During 1995, loans increased $4.6 billion or 10.5% and the ratio of loans
to earning assets increased to 72.9% at year-end 1995 compared with 63.1% at
December 31, 1994. Excluding purchase acquisitions, average loans increased
4.8% primarily due to consumer and residential mortgage loan growth. Consumer
loan outstandings increased 14.2% due to initiatives to increase the
Corporation's credit card business and the impact of acquisitions. Residential
mortgages increased 19.9% during 1995 as the Corporation retained for portfolio
certain originated mortgages, generally adjustable rate mortgages with fixed
initial terms of three, five, seven or ten years. Commercial loans outstanding
were $16.8 billion at December 31, 1995 and $15.5 billion at December 31, 1994.
Total commercial real estate loans were $4.9 billion and $5.1 billion at
December 31, 1995 and 1994, respectively.
SECURITIES During 1995, the Corporation reduced the size of the securities
portfolio relative to earning assets. The securities portfolio was reduced by
$7.8 billion to $15.8 billion at December 31, 1995 and represented 23.7% of
earning assets compared with 33.9% at the prior year-end.
The following table presents carrying values of securities at year-end 1995 and
1994. Securities available for sale are presented at fair value and investment
securities are reported at amortized cost.
SECURITIES
<TABLE>
<CAPTION>
---------------------------------
Available Investment
December 31 - in millions for Sale Securities Total
- -------------------------------------------------------------
<S> <C> <C> <C>
1995
U.S. Treasury and
government agencies $4,314 $4,314
Mortgage-backed securities 8,566 8,566
Asset-backed securities 2,032 2,032
State and municipal 367 367
Other debt 97 97
Corporate stocks and other 457 457
Associated derivatives 6 6
---------------------------------
Total $15,839 $15,839
---------------------------------
1994
U.S. Treasury and
government agencies $684 $4,317 $5,001
Mortgage-backed securities 2,824 12,521 15,345
Asset-backed securities 1,597 1,597
State and municipal 7 360 367
Other debt 146 775 921
Corporate stocks and other 129 310 439
---------------------------------
Total $3,790 $19,880 $23,670
- -------------------------------------------------------------
</TABLE>
45
<PAGE> 21
Corporate
FINANCIAL REVIEW 1995 versus 1994
The following table sets forth by designated assets and liabilities the notional
value and the estimated fair value of financial derivatives used for interest
rate risk management and mortgage banking activities. Weighted-average interest
rates presented are based on contractual rates at year-end 1995.
FINANCIAL DERIVATIVES
<TABLE>
<CAPTION>
----------------------------------------------
Notional Estimated Contractual Rates
----------------------------------------------
December 31, 1995 - dollars in millions Value Fair Value Paid Received
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest rate risk management
Asset rate conversion
Interest rate swaps
Receive-fixed index amortizing designated to commercial loans $2,471 $(14) 5.90% 5.23%
Receive fixed designated to commercial loans and short-term investments 1,175 28 5.88 6.47
Pay fixed designated to securities and commercial loans 889 (18) 5.77 5.87
Basis swaps designated to commercial loans 300 5.96 5.85
Interest rate caps designated to securities and mortgage loans 5,510 6 NM NM
---------------------------
Total asset rate conversion 10,345 2
Liability rate conversion
Interest rate swaps
Pay fixed designated to interest-bearing liabilities 1,740 (5) 5.58 5.67
Receive fixed designated to interest-bearing liabilities 1,610 34 5.88 5.95
Receive-fixed index amortizing designated to deposits 740 (4) 5.93 5.32
Basis swaps designated to bank notes 465 8 5.76 5.49
---------------------------
Total liability rate conversion 4,555 33
---------------------------
Total interest rate risk management 14,900 35
Mortgage banking activities
Forward contracts
Commitments to purchase loans 431 NM NM
Commitments to sell loans 751 (4) NM NM
Interest rate floors - MSR 500 9 NM NM
Receive-fixed interest rate swaps - MSR 125 7 NM NM
---------------------------
Total mortgage banking 1,807 12
---------------------------
Total financial derivatives $16,707 $47
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
NM - not meaningful
FUNDING SOURCES Deposits increased $1.1 billion to $46.9 billion in the
year-to-year comparison as an increase in time deposits was partially offset by
a decrease in foreign deposits. Borrowed funds totaled $8.7 billion at December
31, 1995 compared with $12.2 billion at the end of 1994 reflecting the balance
sheet repositioning.
ASSET QUALITY During 1995, asset quality continued to improve. Nonperforming
assets totaled $536 million at December 31, 1995 compared with $767 million at
year-end 1994. Accruing loans contractually past due 90 days or more as to the
payment of principal or interest totaled $225 million at December 31, 1995
compared with $175 million at December 31, 1994. Other consumer loans,
residential mortgage and commercial real estate of $51 million, $63 million and
$45 million, respectively, were included in the total at December 31, 1995
compared with $31 million, $52 million and $34 million, respectively, at
year-end 1994.
The allowance for credit losses totaled $1.3 billion at December 31, 1995
compared with $1.4 billion at December 31, 1994. The allowance as a percentage
of period-end loans and nonperforming loans was 2.59% and 352%, respectively,
at the end of 1995. The comparable year-end 1994 amounts were 3.07% and 239%,
respectively.
CAPITAL Shareholders' equity totaled $5.8 billion and $5.7 billion at December
31, 1995 and 1994, respectively, and the leverage ratio was 6.37% and 7.10% in
the comparison. Tier I and total risk-based capital ratios were 8.00% and
11.56%, respectively, at December 31, 1995. The comparable December 31, 1994
ratios were 9.36% and 12.41%.
46
<PAGE> 22
Reports on
CONSOLIDATED FINANCIAL STATEMENTS
MANAGEMENT'S REPORT ON THE FINANCIAL
REPORTING INTERNAL CONTROL STRUCTURE
PNC Bank Corp. is responsible for the preparation, integrity and fair
presentation of its published financial statements. The accompanying
consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and, as such, include judgments and
estimates of management. PNC Bank Corp. also prepared the other information
included in the annual report and is responsible for its accuracy and
consistency with the consolidated financial statements.
Management is responsible for establishing and maintaining an effective
internal control structure over financial reporting. The internal control
system is augmented by written policies and procedures and by audits performed
by an internal audit staff which reports to the Audit Committee of the Board of
Directors. Internal auditors monitor the operation of the internal control
system and report findings to management and the Audit Committee, and
corrective actions are taken to address identified control deficiencies and
other opportunities for improving the system. The Audit Committee, composed
solely of outside directors, provides oversight to the financial reporting
process.
There are inherent limitations in the effectiveness of any system of internal
control, including the possibility of human error and circumvention or
overriding of controls. Accordingly, even an effective internal control system
can provide only reasonable assurance with respect to financial statement
preparation. Further, because of changes in conditions, the effectiveness of an
internal control system may vary over time.
Management assessed PNC Bank Corp.'s internal control structure over financial
reporting as of December 31, 1996. This assessment was based on criteria for
effective internal control over financial reporting described in "Internal
Control-Integrated Framework" issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this assessment, management
believes that PNC Bank Corp. maintained an effective internal control system
over financial reporting as of December 31, 1996.
/s/ THOMAS H. O'BRIEN /s/ ROBERT L. HAUNSCHILD
- ------------------------- ---------------------------
Thomas H. O'Brien Robert L. Haunschild
Chairman and Senior Vice President and
Chief Executive Officer Chief Financial Officer
REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS
Shareholders and Board of Directors
PNC Bank Corp.
We have audited the accompanying consolidated balance sheet of PNC Bank Corp.
and subsidiaries as of December 31, 1996 and 1995, and the related consolidated
statements of income, changes in shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of PNC Bank Corp.'s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of PNC Bank Corp.
and subsidiaries at December 31, 1996 and 1995, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
As discussed in Notes to Consolidated Financial Statements, PNC Bank Corp.
changed its method of accounting for mortgage servicing rights in 1995 and
postemployment benefits in 1994.
/s/ ERNST & YOUNG LLP
- -------------------------
Pittsburgh, Pennsylvania
January 24, 1997
47
<PAGE> 23
Consolidated
STATEMENT OF INCOME
<TABLE>
<CAPTION>
-------------------------------------------------------
Year ended December 31- dollars in millions, except per share data 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Loans and fees on loans $3,943 $3,743 $3,189
Securities 859 1,283 1,407
Other 136 123 128
-------------------------------------------------------
Total interest income 4,938 5,149 4,724
INTEREST EXPENSE
Deposits 1,428 1,552 1,160
Borrowed funds 381 834 514
Notes and debentures 685 621 558
-------------------------------------------------------
Total interest expense 2,494 3,007 2,232
-------------------------------------------------------
Net interest income 2,444 2,142 2,492
Provision for credit losses 6 84
-------------------------------------------------------
Net interest income less provision for credit losses 2,444 2,136 2,408
NONINTEREST INCOME
Asset management and trust 497 420 335
Service fees 566 495 490
Mortgage banking 154 187 199
Net securities gains (losses) 22 (280) (142)
Other 156 138 157
-------------------------------------------------------
Total noninterest income 1,395 960 1,039
NONINTEREST EXPENSE
Staff expense 1,110 1,065 1,041
Net occupancy and equipment 369 346 334
Intangible asset and MSR amortization 117 115 86
Federal deposit insurance 41 58 102
Other 675 625 627
Special charges 260 48
-------------------------------------------------------
Total noninterest expense 2,312 2,469 2,238
-------------------------------------------------------
Income before income taxes and cumulative effect of change in
accounting principle 1,527 627 1,209
Applicable income taxes 535 219 318
-------------------------------------------------------
Income before cumulative effect of change in accounting
principle 992 408 891
Cumulative effect of change in accounting principle, net of
tax benefits of $5 (7)
-------------------------------------------------------
Net income $992 $408 $884
- ----------------------------------------------------------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE
Primary before cumulative effect of change in accounting principle $2.90 $1.19 $2.56
Cumulative effect of change in accounting principle (.02)
-------------------------------------------------------
Primary $2.90 $1.19 $2.54
-------------------------------------------------------
Fully diluted before cumulative effect of change in accounting principle $2.87 $1.19 $2.54
Cumulative effect of change in accounting principle (.02)
-------------------------------------------------------
Fully diluted $2.87 $1.19 $2.52
- ----------------------------------------------------------------------------------------------------------------------------------
CASH DIVIDENDS DECLARED PER COMMON SHARE $1.42 $1.40 $1.31
- ----------------------------------------------------------------------------------------------------------------------------------
AVERAGE COMMON SHARES OUTSTANDING
Primary 340,245,928 339,134,028 345,214,539
Fully diluted 345,354,469 344,921,810 350,218,169
- ----------------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
48
<PAGE> 24
Consolidated
BALANCE SHEET
<TABLE>
<CAPTION>
-------------------------
December 31 - dollars in millions, except par values 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $4,016 $3,679
Short-term investments 774 1,611
Loans held for sale 941 659
Securities available for sale 11,917 15,839
Loans, net of unearned income of $385 and $403 51,798 48,653
Allowance for credit losses (1,166) (1,259)
-------------------------
Net loans 50,632 47,394
Other 4,980 4,222
-------------------------
Total assets $73,260 $73,404
- ---------------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Deposits
Noninterest-bearing $10,937 $10,707
Interest-bearing 34,739 36,192
-------------------------
Total deposits 45,676 46,899
Borrowed funds
Federal funds purchased 2,797 3,817
Repurchase agreements 645 2,851
Commercial paper 976 753
Other 3,442 1,244
-------------------------
Total borrowed funds 7,860 8,665
Notes and debentures 11,744 10,398
Other 1,761 1,674
-------------------------
Total liabilities 67,041 67,636
-------------------------
Mandatorily redeemable capital securities of subsidiary trust 350
SHAREHOLDERS' EQUITY
Preferred stock 7 1
Common stock - $5 par value
Authorized: 450,000,000 shares
Issued: 345,154,238 and 340,863,348 shares 1,726 1,704
Capital surplus 939 545
Retained earnings 4,075 3,571
Deferred benefit expense (60) (79)
Net unrealized securities gains (losses) (67) 26
Common stock held in treasury at cost: 21,036,195 shares (751)
-------------------------
Total shareholders' equity 5,869 5,768
-------------------------
Total liabilities and shareholders' equity $73,260 $73,404
- ---------------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
49
<PAGE> 25
Consolidated
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------
Preferred Common Capital Retained
Dollars in million, except per share data Stock Stock Surplus Earnings Other Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994 $51 $1,710 $676 $2,983 $(16) $5,404
Net income 884 884
Cash dividends declared
Common (PNC-$1.31, Midlantic-$.62 per share) (327) (327)
Preferred (6) (6)
Common stock issued (1,796,092 shares) 9 12 21
Common stock issued for preferred stock dividends
(73,341 shares) 1 (1)
Tax benefit of ESOP and stock option plans 3 2 5
Deferred benefit expense 12 12
Treasury stock activity (56) (56)
Net unrealized securities losses (210) (210)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 51 1,719 692 3,535 (270) 5,727
Net income 408 408
Cash dividends declared
Common (PNC-$1.40, Midlantic-$.96 per share) (383) (383)
Preferred (3) (3)
Common stock issued (4,532,108 shares) 23 (8) 15
Preferred stock redeemed (50) (50)
Treasury stock activity 5 (119) (114)
Midlantic merger - treasury stock issued (38) (146) 184
Tax benefit of ESOP and stock option plans 2 14 16
Deferred benefit expense 4 4
Net unrealized securities gains 148 148
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 1 1,704 545 3,571 (53) 5,768
Net income 992 992
Cash dividends declared
Common ($1.42 per share) (482) (482)
Preferred (6) (6)
Common stock issued (4,290,890 shares) 22 74 96
Preferred stock issued (6,000,000 shares) 6 290 296
Treasury stock activity 1 (1) (751) (751)
Tax benefit of ESOP and stock option plans 29 1 30
Deferred benefit expense 19 19
Net unrealized securities losses (93) (93)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 $7 $1,726 $939 $4,075 $(878) $5,869
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
50
<PAGE> 26
Consolidated
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
----------------------------------------------
Year ended December 31- in millions 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $992 $408 $884
Adjustments to reconcile net income to net cash provided by operating activities
Provision for credit losses 6 84
Net securities (gains) losses (22) 280 142
Depreciation, amortization and accretion 290 296 252
Net gain on sales of assets (89) (77) (104)
Valuation adjustments (9) (15) (13)
Deferred income taxes 190 128 6
Cumulative effect of change in accounting principle 7
Change in
Loans held for sale (282) (172) 957
Other (860) 266 (377)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 210 1,120 1,838
INVESTING ACTIVITIES
Purchases of securities available for sale (9,063) (3,409) (11,116)
Sales of securities available for sale 6,789 7,983 12,318
Repayment of securities available for sale 6,045 1,791 2,746
Purchases of investment securities (161) (8,754)
Repayment of investment securities 1,944 3,478
Net change in loans (1,657) (2,021) (1,279)
Purchases of
Credit card portfolios (1,822)
Other loans (683) (702) (29)
Sales of
Loans 671 160 575
Foreclosed assets 151 125 178
Bulk sales of loans and OREO 6 235
Net cash received (paid) for acquisitions/divestitures 460 49 (475)
Other 664 1,270 856
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities 1,555 7,035 (1,267)
FINANCING ACTIVITIES
Net change in
Noninterest-bearing deposits 221 272 (385)
Interest-bearing deposits (1,919) (2,134) (851)
Federal funds purchased (1,020) 1,595 114
Issuance (repayment) of
Repurchase agreements 70,626 74,102 125,322
Repurchase agreements (72,832) (75,553) (126,624)
Commercial paper 3,439 4,376 5,621
Commercial paper (3,216) (4,849) (4,909)
Other borrowed funds 88,842 99,245 110,292
Other borrowed funds (86,644) (102,446) (109,957)
Notes and debentures 12,180 11,990 9,627
Notes and debentures (10,814) (13,901) (7,569)
Issuance of
Capital securities 350
Preferred stock 296
Common stock 120 88 53
Redemption of preferred stock (50)
Acquisition of treasury stock (569) (236) (90)
Cash dividends paid (488) (387) (333)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities (1,428) (7,888) 311
----------------------------------------------
INCREASE IN CASH AND DUE FROM BANKS 337 267 882
Cash and due from banks at beginning of year 3,679 3,412 2,530
----------------------------------------------
Cash and due from banks at end of year $4,016 $3,679 $3,412
- ------------------------------------------------------------------------------------------------------------------------------------
CASH PAID FOR
Interest $2,636 $3,102 $2,201
Income taxes 193 122 403
NONCASH ITEMS
Increase (decrease) in securities available for sale 18,078 (2,745)
Increase (decrease) in investment securities (18,078) 2,745
Transfers from loans to other assets 76 99 151
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
51
<PAGE> 27
Notes to
CONSOLIDATED FINANCIAL STATEMENTS
BUSINESS PNC Bank Corp. is one of the largest financial services organizations
in the United States with banking subsidiaries in Pennsylvania, New Jersey,
Delaware, Ohio, Kentucky, Indiana, Massachusetts and Florida. The Corporation's
major businesses include consumer banking, corporate banking, mortgage banking,
real estate banking and asset management. PNC Bank Corp. is subject to intense
competition from other financial services companies with respect to these
businesses and is subject to the regulations of certain federal and state
agencies and undergoes periodic examinations by certain regulatory authorities.
NOTE 1 ACCOUNTING POLICIES
BASIS OF FINANCIAL STATEMENT PRESENTATION The consolidated financial statements
include the accounts of PNC Bank Corp. and its subsidiaries ("Corporation" or
"PNC Bank"), substantially all of which are wholly owned. Such statements have
been prepared in accordance with generally accepted accounting principles. All
significant intercompany accounts and transactions have been eliminated.
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the amounts reported. Actual results
will differ from such estimates and such differences may be material to the
financial statements.
LOANS HELD FOR SALE Loans held for sale primarily consist of residential
mortgages and are carried at the lower of cost or aggregate market value. Gains
and losses on sales of loans held for sale are included in the results of
operations.
SECURITIES Securities are classified as investments and carried at amortized
cost if management has the positive intent and ability to hold the securities
to maturity. Securities purchased with the intention of recognizing short-term
profits are placed in the trading account, carried at market value and
classified as short-term investments. Gains and losses on trading securities
are included in other income. Securities not classified as investments or
trading are designated as securities available for sale and carried at fair
value with unrealized gains and losses, net of income taxes, reflected in
shareholders' equity. Gains and losses on sales of securities available for
sale are computed on a specific security basis and recognized in the results of
operations.
LOANS Loans are stated at the principal amounts outstanding, net of unearned
income. Interest income with respect to loans is accrued on the principal
amount outstanding, except for lease financing income and interest on certain
consumer loans which are recognized over their respective terms using methods
which approximate the level yield method. Significant loan fees are deferred
and accreted to interest income over the respective lives of the loans.
NONPERFORMING ASSETS Nonperforming assets are comprised of nonaccrual and
restructured loans and foreclosed assets. Generally, loans other than consumer
are classified as nonaccrual and the accrual of interest is discontinued when
it is determined the collection of interest or principal is doubtful or when a
default of interest or principal has existed for 90 days or more, unless the
loan is well secured and in the process of collection. When interest accrual is
discontinued, accrued but uncollected interest credited to income in the
current year is reversed and unpaid interest accrued in the prior year, if any,
is charged against the allowance for credit losses. Consumer loans are
generally charged off when payments are past due 180 days.
A loan is categorized as restructured if the original interest rate, repayment
terms, or both, are restructured due to a deterioration in the financial
condition of the borrower and the loan was not previously classified as
nonaccrual. Nonperforming loans are generally not returned to performing status
until the obligation is brought current, has performed in accordance with the
contractual terms for a reasonable period of time and ultimate collection of
the total contractual principal and interest is no longer in doubt.
Foreclosed assets are comprised of property acquired through a foreclosure
proceeding or acceptance of a deed-in-lieu of foreclosure. These assets are
recorded at the lower of the related loan balance or market value of the
collateral less estimated disposition costs at the date acquired. Market values
are estimated primarily based upon appraisals. Subsequently, foreclosed assets
are valued at the lower of the amount recorded at acquisition date or the then
current market value less estimated disposition costs. Gains or losses realized
upon disposition of such property are reflected in the results of operations.
Interest collected on impaired loans is recognized on the cash basis or cost
recovery method.
ALLOWANCE FOR CREDIT LOSSES The allowance for credit losses is a reserve for
estimated credit losses established through provisions charged against income.
Loans deemed to be uncollectible are charged against the allowance account.
The allowance is maintained at a level believed by management to be sufficient
to absorb estimated potential credit losses. Management's determination of the
adequacy of the allowance is based on periodic evaluations of the credit
portfolio and other relevant factors. This evaluation is inherently subjective
as it requires material estimates, including, among others, the amounts and
timing
52
<PAGE> 28
of expected future cash flows on impaired loans, estimated losses on consumer
loans and residential mortgages, and general amounts for historical loss
experience, economic conditions, uncertainties in estimating losses and inherent
risks in the various credit portfolios, all of which may be susceptible to
significant change. Pursuant to Statement of Financial Accounting Standard
("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan," as
amended, impaired loans, consisting of nonaccrual and restructured commercial
and commercial real estate loans, are considered in the methodology for
determining the allowance for credit losses. Impaired loans are generally
evaluated based on the present value of expected future cash flows or the fair
value of the underlying collateral if principal repayment is expected to come
from the sale or operation of such collateral.
ASSET TRANSFERS AND SERVICING OF FINANCIAL ASSETS In 1995, the Corporation
adopted SFAS No. 122, "Accounting for Mortgage Servicing Rights," on a
prospective basis as required by the Standard. SFAS No. 122 provides for the
recognition of originated mortgage servicing rights ("OMSR") for loans sold by
allocating total costs incurred between the loan and the servicing rights based
on their relative fair values. Previously, the value of OMSR was not recognized
as an asset when the related loan was sold. Mortgage servicing rights ("MSR")
are amortized in proportion to estimated net servicing income. To determine the
fair value of MSR, the Corporation estimates the present value of future cash
flows incorporating numerous assumptions including servicing income, cost of
servicing, discount rates, prepayment speeds and default rates.
A valuation allowance is maintained for the excess, if any, of the carrying
amount of capitalized MSR over estimated fair value. For purposes of measuring
impairment, MSR are disaggregated and stratified on predominant risk
characteristics, primarily loan type, interest rate and investor type.
In June 1996, SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities," was issued, effective for
transactions entered into after December 31, 1996. This Standard establishes
rules distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings. SFAS No. 125 expands the treatment of
MSR to all servicing assets. Management does not expect this Standard to have a
material impact on the Corporation's financial position or results of
operations.
GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill is amortized on a straight-line
basis over periods ranging from 15 to 25 years. Other intangible assets are
amortized using accelerated and straight-line methods over their respective
estimated useful lives. On a periodic basis, management reviews goodwill and
other intangible assets and evaluates events or changes in circumstances that
may indicate impairment in the carrying amount of such assets. In such
instances, the Corporation measures impairment on a discounted future cash flow
basis.
DEPRECIATION AND AMORTIZATION For financial reporting purposes, premises and
equipment are depreciated principally using the straight-line method over the
estimated useful lives of the assets ranging from 5 to 40 years. Accelerated
methods are used for federal income tax purposes. Leasehold improvements are
amortized over their estimated useful lives or their respective lease terms,
whichever is shorter.
FINANCIAL DERIVATIVES The Corporation uses off-balance-sheet financial
derivatives as part of the overall asset/liability management process and in
mortgage banking activities. Substantially all such instruments are used to
manage risk related to changes in interest rates. Financial derivatives
primarily consist of interest rate swaps, purchased interest rate caps and
floors, and forward contracts.
Interest rate swaps are agreements with a counterparty to exchange periodic
interest payments calculated on a notional principal amount. Purchased interest
rate caps and floors are agreements where, for a fee, the counterparty agrees
to pay the Corporation the amount, if any, by which a specified market interest
rate is higher or lower than a defined rate applied to a notional amount,
respectively.
Interest rate swaps, caps and floors that modify the interest rate
characteristics (such as from fixed to variable, variable to fixed, or one
variable index to another) of designated interest-bearing assets or liabilities
are accounted for under the accrual method. Under this method, the net amount
payable or receivable from the derivative contract is accrued as an adjustment
to interest income or expense of the designated instrument. Premiums on
contracts 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.
Changes in fair value of financial derivatives accounted for under the accrual
method are not reflected in the financial results. Realized gains and losses,
except losses on terminated interest rate caps and floors, are deferred as an
adjustment to the carrying amount of the designated instruments and amortized
over the shorter of the remaining original life of the agreements or the
designated instruments. Losses on terminated interest rate caps and floors are
recognized immediately in the results of operations. If the designated
instruments are disposed of, the fair value of the associated derivative
contract and any unamortized deferred gains or losses are
53
<PAGE> 29
Notes to
CONSOLIDATED FINANCIAL STATEMENTS
included in the determination of gain or loss on the disposition of such
instruments. Contracts not qualifying for accrual accounting are marked to
market in the financial statements.
Forward contracts provide for the delivery of financial instruments at a
specified future date and at a specified price or yield. The Corporation uses
forward contracts primarily to manage risk associated with its mortgage banking
activities. Realized gains and losses on mandatory and optional delivery
forward commitments are recorded in mortgage banking income in the period
settlement occurs. Unrealized gains or losses are considered in the lower of
cost or market valuation of loans held for sale.
PNC Bank also enters into financial derivative transactions to facilitate
customer needs primarily consisting of interest rate swaps, caps and foreign
exchange contracts. The Corporation mitigates the interest rate risk of
customer derivatives by entering into offsetting positions with third parties.
Customer derivative positions and offsetting positions with third parties are
recorded at their estimated fair values, and adjustments to fair values are
included in the results of operations.
INCOME TAXES Income taxes are accounted for under the liability method.
Deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
POSTEMPLOYMENT BENEFITS Effective January 1, 1994, the Corporation adopted SFAS
No. 112, "Employers' Accounting for Postemployment Benefits," which requires
accrual of a liability for benefits to be paid to former or inactive employees
after employment, but before retirement. The cumulative effect of the change in
accounting decreased net income by $7 million, or $.02 per fully diluted share.
Prior to 1994, the Corporation accounted for postemployment benefits on a cash
basis.
STOCK-BASED COMPENSATION SFAS No. 123 "Accounting for Stock Based
Compensation," effective January 1, 1996, requires the Corporation to either
record compensation expense or provide additional disclosures with respect to
stock awards and stock option grants made after December 31, 1994. The
accompanying Notes to Consolidated Financial Statements include the disclosures
required by SFAS No. 123. No compensation expense is recognized pursuant to the
Corporation's stock option plans under SFAS No. 123 which is consistent with
prior treatment under APB No. 25.
TREASURY STOCK The Corporation records common stock purchased for treasury at
cost. At the date of subsequent reissue, the treasury stock account is reduced
by the cost of such stock on the first-in, first-out basis.
EARNINGS PER COMMON SHARE Primary earnings per common share is calculated by
dividing net income adjusted for preferred stock dividends declared by the sum
of the weighted-average number of shares of common stock outstanding and the
number of shares of common stock which would be issued assuming the exercise of
stock options during each period.
Fully diluted earnings per common share is based on net income adjusted for
interest expense, net of tax, on outstanding convertible debentures and
dividends declared on nonconvertible preferred stock. The weighted-average
number of shares of common stock outstanding is increased by the assumed
conversion of outstanding convertible preferred stock and convertible
debentures from the beginning of the year or date of issuance, if later, and
the number of shares of common stock which would be issued assuming the
exercise of stock options. Such adjustments to net income and the
weighted-average number of shares of common stock outstanding are made only
when such adjustments dilute earnings per common share.
NOTE 2 MERGERS AND ACQUISITIONS
On December 31, 1995, Midlantic Corporation ("Midlantic") merged with the
Corporation. Each share of Midlantic common stock outstanding was converted
into 2.05 shares of the Corporation's common stock. The Corporation issued
approximately 112 million shares of common stock and cash in lieu of fractional
shares in connection with the merger. The transaction was accounted for as a
pooling of interests and, accordingly, all financial data prior to January 1,
1996 has been restated as if the entities were combined for all such prior
periods.
On October 6, 1995, the Corporation acquired Chemical New Jersey Holdings,
Inc., and its wholly-owned subsidiary, Chemical Bank New Jersey, N.A.
("Chemical") consisting of 81 branches in southern and central New Jersey with
total assets of $3.2 billion and retail core deposits of $2.7 billion. The
Corporation paid $492 million in cash and the transaction was accounted for
under the purchase method.
In February 1995, the Corporation acquired BlackRock Financial Management L.P.,
a New York-based, fixed-income investment management firm with approximately
$25 billion in assets under management at closing. The Corporation paid $71
million in cash and issued $169 million of unsecured notes. The transaction was
accounted for under the purchase method.
54
<PAGE> 30
NOTE 3 CASH FLOWS
For the statement of cash flows, the Corporation defines cash and due from
banks as cash and cash equivalents.
The following table sets forth information pertaining to acquisitions and
divestitures which affect cash flows.
<TABLE>
<CAPTION>
-----------------------------
Year ended December 31 - in millions 1996 1995 1994
- --------------------------------------------------------------------
<S> <C> <C> <C>
Assets acquired $538 $3,932 $3,197
Liabilities assumed 501 3,230 2,594
Cash paid 37 661 603
Cash and due from banks received 497 710 128
- --------------------------------------------------------------------
</TABLE>
NOTE 4 SECURITIES
The following table sets forth information pertaining to the securities
portfolio:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
1996 1995
----------------------------------------------------------------------------------------------
Unrealized Unrealized
Amortized -------------------- Fair Amortized ---------------------- Fair
December 31 - in millions Cost Gains Losses Value Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Securities available for sale
Debt securities
U.S. Treasury, government
agencies and corporations $3,238 $20 $21 $3,237 $4,241 $74 $1 $4,314
Mortgage-backed 6,301 13 138 6,176 8,631 20 85 8,566
Asset-backed 1,609 7 1 1,615 2,023 9 2,032
State and municipal 218 9 227 343 25 1 367
Other debt 100 7 2 105 99 1 3 97
Associated derivatives 6 6
----------------------------------------------------------------------------------------------
Total debt securities 11,466 56 162 11,360 15,337 135 90 15,382
Corporate stocks and other 554 3 557 455 4 2 457
----------------------------------------------------------------------------------------------
Total securities available for
sale $12,020 $59 $162 $11,917 $15,792 $139 $92 $15,839
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1996 and 1995, $5.5 billion and $6.1 billion, respectively,
notional value of interest rate swaps and caps were associated with securities
available for sale. In connection with implementing accounting guidance issued
in November 1995, the Corporation reassessed its investment securities'
classifications. All securities previously classified as held to maturity were
reclassified to the available-for-sale portfolio. The reclassifications were
accounted for at fair value and included the fair value of associated financial
derivatives. Subsequently, the Corporation sold $1.9 billion of U.S. Treasury
securities and $4.1 billion of collateralized mortgage obligations and
terminated associated pay-fixed interest rate swaps totaling $5.1 billion
notional value at a $289 million loss.
The following table presents the amortized cost, fair value and
weighted-average yield of debt securities at December 31, 1996 by remaining
contractual maturity.
CONTRACTUAL MATURITY OF DEBT SECURITIES
<TABLE>
<CAPTION>
------------------------------------------------------
December 31, 1996 - Within 1 to 5 to After 10
dollars in millions 1 Year 5 Years 10 Years Years Total
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. Treasury and
government agencies $835 $2,214 $186 $3 $3,238
Mortgage-backed 6 1 119 6,175 6,301
Asset-backed 78 293 1,238 1,609
State and municipal 25 44 74 75 218
Other debt 1 7 7 85 100
------------------------------------------------------
Total $867 $2,344 $679 $7,576 $11,466
- -----------------------------------------------------------------------------
Fair value $865 $2,355 $675 $7,465 $11,360
Weighted-average yield 5.14% 5.70% 7.00% 6.63% 6.35%
- -----------------------------------------------------------------------------
</TABLE>
55
<PAGE> 31
Notes to
CONSOLIDATED FINANCIAL STATEMENTS
Based on current interest rates and expected prepayment speeds, the
weighted-average expected maturity of mortgage-backed and asset-backed
securities was approximately 3 years and 3 months at December 31, 1996.
Weighted-average yields are based on historical cost with effective yields
weighted for the contractual maturity of each security. At December 31, 1996,
$5.5 billion notional value of interest rate caps designated to the securities
portfolio altered the contractual weighted-average yield from 6.35% to 6.32%.
The carrying value of securities pledged to secure public and trust deposits,
repurchase agreements and for other purposes at December 31, 1996 was $7.5
billion.
Information relating to security sales, including the effects of related
financial derivatives, is set forth in the following table:
<TABLE>
<CAPTION>
------------------------------------
Year ended December 31 - Gross Gross
in millions Proceeds Gains Losses
- ---------------------------------------------------------------
<S> <C> <C> <C>
1996 $6,789 $39 $17
1995 8,125 12 292
1994 14,147 65 207
- ---------------------------------------------------------------
</TABLE>
NOTE 5 LOANS AND COMMITMENTS TO EXTEND CREDIT
Loans outstanding were as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------
December 31 - in millions 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Consumer $14,868 $13,539 $11,851 $10,940 $9,585
Residential mortgage 12,703 11,689 9,746 8,611 3,577
Commercial 18,062 16,812 15,545 15,521 14,766
Commercial real estate 4,624 4,914 5,063 5,169 6,503
Other 1,926 2,102 2,223 2,231 1,900
-------------------------------------------------------------
Total loans 52,183 49,056 44,428 42,472 36,331
Unearned income (385) (403) (385) (359) (388)
-------------------------------------------------------------
Total loans, net of unearned income $51,798 $48,653 $44,043 $42,113 $35,943
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
During the fourth quarter of 1996, the Corporation acquired AAA-affinity credit
card portfolios totaling $1.6 billion for a premium of $249 million. Loan
outstandings and unfunded commitments are concentrated in PNC Bank's primary
geographic markets, which include Pennsylvania, New Jersey, Delaware, Ohio,
Kentucky, Indiana, Massachusetts and Florida. At December 31, 1996, no specific
industry concentration exceeded 3% of total outstandings and unfunded
commitments.
NET UNFUNDED COMMITMENTS
<TABLE>
<CAPTION>
---------------------
December 31 - in millions 1996 1995
- ----------------------------------------------------------------
<S> <C> <C>
Consumer $22,045 $7,335
Residential mortgage 511 554
Commercial 27,087 24,282
Commercial real estate
Commercial mortgage 11 9
Real estate project 753 742
Other 849 892
---------------------
Total $51,256 $33,814
- ----------------------------------------------------------------
</TABLE>
Commitments to extend credit represent arrangements to lend funds provided
there is no violation of specified contractual conditions. Commitments are
reported net of participations, assignments and syndications, primarily to
financial institutions, totaling $4.4 billion and $4.2 billion at December 31,
1996 and 1995, respectively. Consumer commitments are primarily for home equity
and credit card lines. Commercial commitments generally have fixed expiration
dates, may require payment of a fee, and contain termination clauses in the
event the customer's credit quality deteriorates. Based on the Corporation's
historical experience, approximately 50% to 75% of consumer and most commercial
commitments expire unfunded, and therefore cash requirements are substantially
less than the total commitment.
Net outstanding letters of credit totaled $4.5 billion and $4.0 billion at
December 31, 1996 and 1995, respectively, and consist primarily of standby
letters of credit which commit the Corporation to make payments on behalf of
customers when certain specified future events occur. Such instruments are
typically issued to support industrial revenue bonds, commercial paper, and bid
or performance related contracts. At year-end 1996, the largest industry
concentration within standby letters of credit was health care, which accounted
for approximately 15% of the total. Maturities for standby letters of credit
ranged from 1997 to 2011.
At December 31, 1996, $421 million of loans were pledged to secure borrowings
and for other purposes.
56
<PAGE> 32
Certain directors and executive officers of the Corporation and its significant
subsidiaries, as well as certain affiliated companies of these directors and
officers, were customers of and had loans with subsidiary banks in the ordinary
course of business. All such loans were on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with other customers and did not involve more than a
normal risk of collectibility. The aggregate dollar amounts of these loans were
$265 million and $379 million at December 31, 1996 and 1995, respectively.
During 1996, new loans of $144 million were funded, and repayments totaled $258
million.
NOTE 6 NONPERFORMING ASSETS
The following table sets forth nonperforming assets and related information:
<TABLE>
<CAPTION>
-------------------------------------------------
December 31 - dollars in millions 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $347 $335 $496 $656 $1,620
Restructured loans 2 23 69 200 185
-------------------------------------------------
Total nonperforming loans 349 358 565 856 1,805
-------------------------------------------------
Foreclosed assets 110 178 192 268 436
Assets held for accelerated disposition 10 158
-------------------------------------------------
Total nonperforming assets $459 $536 $767 $1,282 $2,241
-------------------------------------------------
Nonperforming loans to period-end loans .67% .74% 1.28% 2.03% 5.02%
Nonperforming assets to period-end loans, foreclosed assets and
assets held for accelerated disposition .88 1.10 1.73 3.01 6.16
Nonperforming assets to total assets .63 .73 .99 1.69 3.41
-------------------------------------------------
Interest on nonperforming loans
Computed on original terms $35 $36 $54 $74 $150
Recognized 10 10 14 19 19
-------------------------------------------------
Past due loans
Accruing loans past due 90 days and more $244 $225 $175 $171 $237
As a percentage of total loans, net of unearned income .47% .46% .40% .41% .66%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Corporation has no material commitments as of December 31, 1996 to extend
credit to customers whose outstanding loans are nonperforming.
At December 31, 1996 and 1995, foreclosed assets are reported net of valuation
allowances of $19 million and $37 million, respectively. Gains on sales of
foreclosed assets resulted in net foreclosed asset income of $9 million, $11
million and $15 million in 1996, 1995 and 1994, respectively. Net foreclosed
asset income or expense is included in other noninterest expense.
NOTE 7 ALLOWANCE FOR CREDIT LOSSES
Changes in the allowance for credit losses were as follows:
<TABLE>
<CAPTION>
-------------------------------
In millions 1996 1995 1994
- -----------------------------------------------------------------
<S> <C> <C> <C>
January 1 $1,259 $1,352 $1,372
Charge-offs (247) (240) (289)
Recoveries 83 107 120
-------------------------------
Net charge-offs (164) (133) (169)
Provision for credit losses 6 84
Acquisitions 71 34 65
-------------------------------
December 31 $1,166 $1,259 $1,352
- -----------------------------------------------------------------
</TABLE>
Impaired loans totaled $292 million and $297 million at December 31, 1996 and
1995, respectively. Impaired loans totaling $190 million and $154 million at
the end of 1996 and 1995, respectively, had a corresponding specific allowance
for credit losses of $53 million and $29 million. The average balance of
impaired loans was $313 million in 1996 and $365 million in 1995. Interest
income recognized on impaired loans totaled $5 million and $6 million in 1996
and 1995, respectively.
NOTE 8 PREMISES, EQUIPMENT AND
LEASEHOLD IMPROVEMENTS
Premises, equipment and leasehold improvements, stated at cost less accumulated
depreciation and amortization, were as follows:
<TABLE>
<CAPTION>
--------------------
December 31 - in millions 1996 1995
- ----------------------------------------------------------------
<S> <C> <C>
Land $95 $101
Buildings 518 553
Equipment 996 1,069
Leasehold improvements 172 186
--------------------
1,781 1,909
Accumulated depreciation and amortization (916) (1,002)
--------------------
Net book value $865 $907
- ----------------------------------------------------------------
</TABLE>
57
<PAGE> 33
Notes to
CONSOLIDATED FINANCIAL STATEMENTS
Depreciation and amortization expense on premises, equipment and leasehold
improvements totaled $143 million in 1996, $135 million in 1995 and $124
million in 1994.
Certain facilities and equipment are leased under agreements expiring at
various dates until the year 2025. Substantially all such leases are accounted
for as operating leases. Rental expense on such leases amounted to $90 million
in 1996, $95 million in 1995 and $97 million in 1994.
At December 31, 1996 and 1995, required minimum annual rentals due on
noncancelable leases having terms in excess of one year aggregated $436 million
and $478 million, respectively. Minimum annual rentals for each of the years
1997 through 2001 are $69 million, $57 million, $49 million, $39 million and
$35 million, respectively.
NOTE 9 GOODWILL AND OTHER
Goodwill and other amortizable assets consisted of the following:
<TABLE>
<CAPTION>
-----------------
December 31 - in millions 1996 1995
- -------------------------------------------------------------
<S> <C> <C>
Goodwill $953 $960
Mortgage servicing rights 313 268
Purchased credit cards 322
Other 34 37
-----------------
Total $1,622 $1,265
- -------------------------------------------------------------
</TABLE>
At December 31, 1996, the fair value of capitalized MSR was $398 million.
Amortization of goodwill and other assets was as follows:
<TABLE>
<CAPTION>
-----------------------
Year ended December 31 - in millions 1996 1995 1994
- --------------------------------------------------------------
<S> <C> <C> <C>
Goodwill $54 $39 $21
Mortgage servicing rights 56 71 63
Purchased credit cards 3
Other 4 5 2
-----------------------
Total $117 $115 $86
- --------------------------------------------------------------
</TABLE>
NOTE 10 DEPOSITS
The aggregate amount of time deposits with a denomination greater than $100,000
was $4.9 billion and $3.9 billion at December 31, 1996 and 1995, respectively.
Remaining contractual maturities of time deposits are $13.3 billion, $2.3
billion, $1.0 billion, $1.0 billion and $1.0 billion for the years 1997 through
2001 and thereafter, respectively.
NOTE 11 NOTES AND DEBENTURES
Notes and debentures consisted of the following:
<TABLE>
<CAPTION>
-------------------
December 31 - in millions 1996 1995
- ---------------------------------------------------------------
<S> <C> <C>
Bank notes $7,905 $6,256
Federal Home Loan Bank 2,192 2,393
Senior notes 100 100
Subordinated notes 1,357 1,361
ESOP 88 101
Other 102 187
-------------------
Total $11,744 $10,398
- ---------------------------------------------------------------
</TABLE>
Substantially all bank notes mature in 1997 and have various interest rates
that range from 4.88% to 5.90%. Obligations to the Federal Home Loan Bank have
various maturities ranging from 1997 to 2002 and interest rates that range from
1.25% to 8.76%. Senior and subordinated notes consisted of the following:
<TABLE>
<CAPTION>
December 31, 1996 -
dollars in millions Stated Rate Maturity Outstanding
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Senior 9.25% to 10.50% 1997 to 1999 $100
Subordinated
Nonconvertible 6.125% to 10.55% 1998 to 2005 1,294
Convertible 8.25% to 8.50% 2005 to 2010 63
---------
Total $1,357
- -----------------------------------------------------------------------
</TABLE>
Notes and debentures have scheduled repayments for the years 1997 through 2001
and thereafter of $8.0 billion, $1.7 billion, $292 million, $59 million and
$1.7 billion, respectively.
NOTE 12 CAPITAL SECURITIES OF SUBSIDIARY TRUST
Mandatorily Redeemable Capital Securities of Subsidiary Trust ("Capital
Securities") represent preferred beneficial interests in the assets of PNC
Institutional Capital Trust A ("Trust"). The Trust holds certain 7.95% junior
subordinated debentures due December 15, 2026 issued by a bank subsidiary of
the Corporation. Distributions on the Capital Securities will be payable at an
annual rate of 7.95% of the stated liquidation amount of $1,000 per Capital
Security, payable semiannually. Cash distributions on the Capital Securities
are made to the extent interest on the debentures is received by the Trust. In
the event of certain changes or amendments to regulatory requirements or
federal tax rules, the Capital Securities are redeemable in whole. Otherwise,
the Capital Securities are generally redeemable in whole or in part on or after
December 15, 2006, at a declining redemption price ranging from 103.975% to
100% of the liquidation amount. On or after December 15, 2016, the Capital
Securities may be redeemed at 100% of the liquidation amount.
58
<PAGE> 34
NOTE 13 SHAREHOLDERS' EQUITY
Information related to preferred stock is as follows:
<TABLE>
<CAPTION>
Liquidation
Value per Share Shares Outstanding
- -----------------------------------------------------------------
December 31 1996 1995
- -----------------------------------------------------------------
<S> <C> <C> <C>
Authorized
$1 par value 17,452,764 17,529,342
Issued and outstanding
Series A $40 16,479 17,846
Series B 40 4,667 4,752
Series C 20 327,013 356,347
Series D 20 441,805 469,839
Series F 50 6,000,000
--------------------------
Total 6,789,964 848,784
- -----------------------------------------------------------------
</TABLE>
Series A through D are cumulative and, except for Series B, are redeemable at
the option of the Corporation. Annual dividends on Series A, B and D preferred
stock total $1.80 per share and Series C total $1.60 per share. Holders of
Series A through D preferred stock are entitled to a number of votes equal to
the number of full shares of common stock into which such preferred stock is
convertible. Series A through D preferred stock have the following conversion
privileges: (i) one share of Series A or Series B is convertible into eight
shares of common stock; and (ii) 2.4 shares of Series C or Series D are
convertible into four shares of common stock.
On October 9, 1996, the Corporation issued 6 million shares of nonconvertible,
nonvoting Series F preferred stock totaling $300 million. Noncumulative
dividends are payable quarterly commencing December 31, 1996 through September
30, 2001 at 6.05%. Thereafter, the dividend rate will be indexed to certain
market indices; however, the rate paid will not be less than 6.55% or greater
than 12.55%. The Series F preferred stock is redeemable in whole until
September 29, 2001 in the event of certain amendments to the Internal Revenue
Code relating to the dividend received deduction at a declining redemption
price from $52.50 to $50.50 per share. After September 29, 2001, the Series F
preferred stock may be redeemed, in whole or in part, at $50 per share.
The Corporation has a dividend reinvestment and stock purchase plan. Holders of
preferred stock and common stock may participate in the plan which provides
that additional shares of common stock may be purchased at market value with
reinvested dividends and voluntary cash payments. Common stock purchased
pursuant to such plan were: 1,097,597 shares in 1996; 1,177,481 shares in 1995;
and 877,639 shares in 1994.
The Corporation had reserved approximately 28.7 million common shares to be
issued in connection with certain stock plans and the conversion of certain
debt and equity securities.
The following table sets forth purchases and issuances of common stock held in
treasury.
TREASURY STOCK ACTIVITY
<TABLE>
<CAPTION>
---------------------
Shares in thousands, dollars in millions Shares Amount
- -----------------------------------------------------------------
<S> <C> <C>
January 1, 1994 289 $9
Shares purchased 3,684 89
Shares issued (1,158) (33)
---------------------
December 31, 1994 2,815 65
Shares purchased 10,252 236
Shares issued (5,578) (117)
Midlantic merger (7,489) (184)
---------------------
December 31, 1995 --- ---
Shares purchased 22,731 802
Shares issued (1,695) (51)
---------------------
December 31, 1996 21,036 $751
- -----------------------------------------------------------------
</TABLE>
NOTE 14 FINANCIAL DERIVATIVES
FAIR VALUE OF FINANCIAL DERIVATIVES
<TABLE>
<CAPTION>
---------------------------------------------------------------
Positive Negative Total
Notional Fair Notional Fair Notional
December 31 - in millions Value Value Value Value Value
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996
Interest rate swaps $7,290 $112 $650 $(15) $7,940
Interest rate caps 5,813 2 5,813
Interest rate floors 2,500 3 2,500
Mortgage banking activities 1,853 10 486 (1) 2,339
---------------------------------------------------------------
Total $17,456 $127 $1,136 $(16) $18,592
- -----------------------------------------------------------------------------------------------------------------------------------
1995
Interest rate swaps $4,249 $77 $5,141 $(48) $9,390
Interest rate caps 5,510 6 5,510
Mortgage banking activities 769 16 1,038 (4) 1,807
---------------------------------------------------------------
Total $10,528 $99 $6,179 $(52) $16,707
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
59
<PAGE> 35
Notes to
CONSOLIDATED FINANCIAL STATEMENTS
The Corporation uses a variety of off-balance-sheet financial derivatives as
part of its overall interest rate risk management process and to manage risk
associated with mortgage banking activities. Financial derivatives involve, to
varying degrees, interest rate and credit risk in excess of the amount
recognized in the balance sheet but less than the notional amount of the
contract. For interest rate swaps and purchased interest rate caps and floors,
only periodic cash payments and, with respect to such caps and floors,
premiums, are exchanged. Therefore, cash requirements and exposure to credit
risk are significantly less than the notional value. The Corporation manages
these risks as part of its asset/liability management process and through
credit policies and procedures. The Corporation seeks to minimize the credit
risk by entering into transactions with only a select number of high-quality
institutions, establishing credit limits, requiring bilateral-netting
agreements, and, in certain instances, segregated collateral.
The Corporation uses interest rate swaps and purchased caps and floors to
modify the interest rate characteristics of designated interest-bearing assets
or liabilities from fixed to variable, variable to fixed, or one variable index
to another. At December 31, 1996, $9.4 billion of interest rate swaps, caps and
floors were designated to loans and $5.5 billion of interest rate caps were
designated to securities. During 1996, derivative contracts modified the
average effective yield on interest-earning assets from 7.69% to 7.68%. At
December 31, 1996, $1.4 billion of interest rate swaps were designated to
interest-bearing liabilities. The average rate on interest-bearing liabilities
was not effected by financial derivative contracts during 1996.
PNC Bank uses a combination of on-balance-sheet instruments and financial
derivatives to manage risk associated with its mortgage banking activities. The
inherent risk affecting the value of MSR is the potential for the related
mortgages to prepay, thereby eliminating the underlying servicing fee income
stream.
Forward contracts are used to manage risk positions associated with mortgage
origination activities. Substantially all forward contracts mature within 90
days of origination. Forward contracts are traded in over-the-counter markets
and do not have standardized terms. Counterparties to the Corporation's forward
contracts are primarily U.S. Government agencies and brokers and dealers in
mortgage-backed securities. In the event the counterparty is unable to meet its
contractual obligations, the Corporation may be exposed to selling or
purchasing mortgage loans at prevailing market prices.
At December 31, 1996, $19 million of net deferred losses on terminated
derivative contracts are being amortized as an adjustment to net interest
income over a weighted-average remaining period of 17 months. During 1996,
gains on terminated derivative contracts of $7 million were recognized in
connection with the sale of securities.
In connection with the Midlantic merger, $5.5 billion notional value of
interest rate caps that reduced exposure to higher interest rates within a
specified range were terminated at a loss of $80 million. The termination was
part of the realignment of the combined asset and liability position of the
Corporation taking into account the interest rate risk profile of Midlantic.
The loss is included as a component of special charges. Concurrently, the
Corporation purchased $5.5 billion notional value interest rate caps that
require the counterparty to pay the Corporation the excess, if any, of 3-month
LIBOR over a specified cap rate without limitation, currently 6.50%, computed
quarterly based on the notional value of the contracts. At December 31, 1996,
3-month LIBOR was 5.56%. The contracts expire during the third and fourth
quarters of 1997.
At December 31, 1996 and 1995, the Corporation's exposure to credit losses with
respect to financial derivatives was not material.
NOTE 15 SPECIAL CHARGES
In connection with the Midlantic merger, the Corporation recorded special
charges totaling $260 million in 1995. These charges represented estimated
costs of integrating and consolidating branch networks, back office and
administrative facilities, professional services and the cost to terminate an
interest rate cap position as part of realigning the interest rate risk profile
of the combined companies.
<TABLE>
<CAPTION>
---------------------------------------
Balance at Balance at
1996 - in millions January 1 Incurred December 31
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Staff related $42 $40 $2
Net occupancy 72 63 9
Equipment 17 17
Professional services 31 31
Other 18 18
Interest rate cap termination 80 80
-------------------------------------
Total $260 $249 $11
- -----------------------------------------------------------------------
</TABLE>
Special charges in 1994 were for costs to consolidate the Corporation's
telebanking centers and rationalization of the retail branch networks.
60
<PAGE> 36
NOTE 16 EMPLOYEE BENEFIT PLANS
INCENTIVE SAVINGS PLANS The Corporation sponsors incentive saving plans
covering substantially all employees. Under the plans, employee contributions
up to 3% or 6% of base pay, subject to Internal Revenue Code limitations, are
matched with cash or shares of PNC Bank common stock. Contributions for one of
the plans are matched primarily by shares of PNC Bank common stock held by the
Corporation's ESOP.
The Corporation makes annual contributions to the ESOP equal to the debt
service requirements on the ESOP borrowing less dividends received by the ESOP.
All dividends received by the ESOP are used to pay debt service. Dividends used
for debt service totaled $10 million in each of the years 1996, 1995 and 1994.
To satisfy additional debt service requirements, PNC Bank contributed $11
million in 1996, $9 million in 1995 and $8 million in 1994.
As the ESOP borrowing is repaid, shares are allocated to employees who made
contributions during the year based on the proportion of annual debt service to
total debt service. The Corporation includes all ESOP shares as common shares
outstanding in the earnings per share computation. Components of ESOP shares
are:
<TABLE>
<CAPTION>
As of or for the year ended ---------------------
December 31 - in thousands 1996 1995
- -------------------------------------------------------------
<S> <C> <C>
Shares
Unallocated 3,184 3,825
Allocated shares 3,057 2,503
Shares released for allocation 851 792
Shares retired (495) (238)
---------------------
Total 6,597 6,882
- -------------------------------------------------------------
</TABLE>
Compensation expense related to the portion of contributions matched with ESOP
shares is determined based on the number of ESOP shares allocated. Compensation
expense related to these plans was $9 million for 1996, $18 million for 1995
and $13 million for 1994.
PENSION PLANS The Corporation sponsors defined benefit pension plans covering
substantially all employees. The plans provide pension benefits that are based
on the average base salary for specified years of service prior to retirement.
Pension contributions are made to the extent deductible under existing federal
tax rules. The Corporation also has unfunded nonqualified supplemental defined
benefit retirement plans covering certain employees as defined in the plans.
The following table sets forth the estimated status of defined benefit plans:
<TABLE>
<CAPTION>
------------------
December 31 - in millions 1996 1995
- --------------------------------------------------------------------
<S> <C> <C>
Benefit obligation
Vested $580 $550
Nonvested 25 35
------------------
Accumulated benefit obligation 605 585
Effect of future compensation levels 123 149
------------------
Projected benefit obligation for services
rendered to date 728 734
Plan assets at fair value, primarily
listed common stocks, U.S. Government
and agency securities, and collective funds 713 644
------------------
Plan assets less than projected benefit
obligation 15 90
Unrecognized net gain (loss) due to
experience different from assumptions
and the effects of changes in assumptions 10 (62)
Unrecognized net asset 20 26
Unrecognized prior service cost (12) (19)
------------------
Accrued pension cost $33 $35
- --------------------------------------------------------------------
</TABLE>
The components of pension expense were as follows:
<TABLE>
<CAPTION>
-----------------------------
Year ended December 31 - in millions 1996 1995 1994
- --------------------------------------------------------------------
<S> <C> <C> <C>
Service cost for benefits earned
during the period $32 $24 $29
Interest cost on projected
benefit obligations 50 49 44
Actual return on plan assets (93) (112) (9)
Net amortization and deferral 29 60 (42)
-----------------------------
Net periodic pension costs $18 $21 $22
- --------------------------------------------------------------------
</TABLE>
Assumptions used to measure the projected benefit obligation and the expected
return on assets included in net periodic pension costs are set forth in the
following table.
<TABLE>
<CAPTION>
------------------------------
December 31 1996 1995 1994
- --------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate 7.70% 7.15% 8.75/8.50%
Increase in compensation levels 4.75 4.75 5.00/5.00
Expected long-term return on assets 9.50 9.50 10.00/8.50
- --------------------------------------------------------------------
</TABLE>
61
<PAGE> 37
Notes to
CONSOLIDATED FINANCIAL STATEMENTS
POSTRETIREMENT BENEFIT PLANS PNC Bank also provides certain health care and
life insurance benefits for retired employees ("postretirement benefits")
through various plans. A reconciliation of the accrued postretirement benefit
obligation is as follows:
<TABLE>
<CAPTION>
-------------------
December 31 - in millions 1996 1995
- ----------------------------------------------------------------
<S> <C> <C>
Accumulated postretirement benefit
Retirees $160 $156
Active employees 6 8
Other active plan participants 45 59
-------------------
Total accumulated postretirement
obligation 211 223
Unrecognized prior service cost credit 56 56
Unrecognized net loss (16) (27)
-------------------
Accrued postretirement benefit
obligation $251 $252
- ----------------------------------------------------------------
</TABLE>
The components of postretirement benefit expense are as follows:
<TABLE>
<CAPTION>
---------------------------
Year ended December 31 - in millions 1996 1995 1994
- --------------------------------------------------------------------
<S> <C> <C> <C>
Service cost for benefits earned
during the period $3 $3 $3
Interest cost on projected
benefit obligations 14 15 15
Amortization of prior service cost (4) (4) (3)
----------------------------
Net postretirement benefit expense $13 $14 $15
- --------------------------------------------------------------------
</TABLE>
Assumptions used in accounting for the plans were:
<TABLE>
<CAPTION>
----------------------------------
December 31 1996 1995 1994
- ----------------------------------------------------------------
<S> <C> <C> <C>
Discount rate 7.70% 7.15% 8.75/8.00%
Expected health care cost
trend rate
Medical 7.00 7.50 9.10/5.00
Dental 6.60 7.00 7.40
- ----------------------------------------------------------------
</TABLE>
The health care cost trend rate declines until it stabilizes at 5.2% beginning
in 2001. A one percent increase in the health care cost trend rate from that
assumed would not have a material impact on projected service and interest rate
costs or the accumulated postretirement obligation.
NOTE 17 STOCK-BASED COMPENSATION PLANS
The Corporation has a senior executive long-term incentive award plan
("Incentive Plan") that provides for the granting of incentive stock options,
nonqualified options, stock appreciation rights ("SAR"), performance units and
incentive shares. In any given year, the number of shares of common stock
available for grant under the Incentive Plan may range from 1.5% to 3% of total
issued shares of common stock determined at the end of the preceding calendar
year.
STOCK OPTIONS Options are granted at exercise prices not less than the market
value of common stock on the date of grant and are exercisable twelve months
after the grant date. Payment of the option price may be in cash or shares of
common stock at market value on the exercise date. The following table presents
stock option data related to the Incentive Plan, a similar predecessor plan and
other plans assumed in certain mergers.
<TABLE>
<CAPTION>
-------------------------------
Per Option
-------------------------------------------
Weighted-Average
Shares in thousands Exercise Price Exercise Price Shares
- -------------------------------------------------------------------
<S> <C> <C> <C>
January 1, 1994 $1.59 - $30.13 $17.96 13,504
Granted 13.81 - 29.75 17.79 4,454
SAR exercised 13.57 (73)
Options exercised 1.59 - 27.56 14.39 (1,127)
Terminated 8.70 - 24.24 21.60 (172)
--------
December 31, 1994 1.59 - 30.13 18.14 16,586
Granted 16.46 - 29.06 25.25 127
Options exercised 1.59 - 29.25 13.20 (2,996)
Terminated 6.10 - 30.13 20.97 (420)
Options exchanged
for PNC stock
in connection
with Midlantic
merger 8.33 (3,457)
---------
December 31, 1995 11.38 - 29.88 23.00 9,840
Granted 31.13 - 37.31 31.23 2,697
SAR exercised 19.13 (7)
Options exercised 11.38 - 29.25 21.05 (3,258)
Terminated 21.75 - 31.13 27.75 (242)
---------
December 31, 1996 $11.38 - $37.31 $26.03 9,030
- -------------------------------------------------------------------
</TABLE>
At December 31, 1996, the weighted-average remaining contractual life of
outstanding options was 6 years, 11 months and options for 6,393,402 shares of
common stock were exercisable at a weighted-average price of $23.90 per share.
The grant-date fair value of options granted in 1996 was $7.32 per option.
Shares of common stock available for the granting of options under the
Incentive Plan and the predecessor plans were: 10,225,900 at December 31, 1996,
10,314,610 at December 31, 1995, and 13,094,887 at December 31, 1994.
INCENTIVE SHARE AWARDS In 1995, 323,000 incentive shares of common stock were
awarded to certain senior executives pursuant to the Incentive Plan. Issuance
of such incentive shares was subject to the market price of PNC Bank's common
stock equaling or exceeding specified levels for defined periods. These
requirements
62
<PAGE> 38
were met on September 16, 1996 and November 1, 1996, and 151,350 shares of
restricted common stock were issued on both dates. The restricted period ends
two years after the issue date. During the restricted period the recipient
receives dividends and can vote the shares. If the recipient leaves the
Corporation's employ within the restricted period, the shares will be forfeited.
Net forfeitures totaled 20,300 shares. Compensation expense recognized for
incentive share awards was $3 million and $1 million in 1996 and 1995,
respectively.
EMPLOYEE STOCK PURCHASE PLAN The Corporation's employee stock purchase plan
("ESPP") covers a maximum of 5.2 million shares of common stock, of which 614
thousand shares were available to be issued. Persons who have been continuously
employed for at least one year are eligible to participate. Participants
purchase the Corporation's common stock at 85% of the lesser of fair market
value on the first or last day of each offering period. No charge to earnings
is recorded with respect to the ESPP. Shares issued pursuant to the ESPP were
as follows:
<TABLE>
<CAPTION>
----------------------------------
Year ended December 31 Shares Price Per Share
- ------------------------------------------------------------------
<S> <C> <C>
1996 389,738 $25.29 and $25.82
1995 463,907 17.32 and 22.95
1994 403,692 17.64 and 24.76
- ------------------------------------------------------------------
</TABLE>
The following table sets forth pro forma net income and earnings per share as
if compensation expense was recognized for stock options and the ESPP in
accordance with SFAS No. 123.
PRO FORMA NET INCOME AND EPS
<TABLE>
<CAPTION>
-----------------------
Reported Pro forma
- ----------------------------------------------------------------
<S> <C> <C>
Net income (in millions)
1996 $992 $980
1995 408 407
Fully diluted earnings per share
1996 $2.87 $2.84
1995 1.19 1.19
- ----------------------------------------------------------------
</TABLE>
For purposes of computing pro forma results PNC Bank estimated the fair value
of stock options and ESPP using the Black-Scholes option pricing model.
Black-Scholes is predominantly used to value traded options which differ from
PNC Bank's options. The model requires the use of numerous assumptions, many of
which are highly subjective in nature. Therefore, the pro forma results are, of
a necessity, estimates of results of operations as if compensation expense had
been recognized for all stock-based compensation plans and are not indicative of
the impact on future periods. The following assumptions were used in the option
pricing model for purposes of estimating pro forma results. The dividend yield
represents average yields over the previous three-year period.
<TABLE>
<CAPTION>
-----------------------
Year ended December 31 1996 1995
- ---------------------------------------------------------------
<S> <C> <C>
Risk free interest rate 5.3% 6.4%
Dividend yield 4.7 4.3
Volatility 32.1 32.3
Expected life 6 yrs. 6 yrs.
- ---------------------------------------------------------------
</TABLE>
NOTE 18 INCOME TAXES
The components of income taxes were as follows:
<TABLE>
<CAPTION>
Year ended December 31 - ---------------------------------
in millions 1996 1995 1994
- ----------------------------------------------------------------
<S> <C> <C> <C>
Current
Federal $297 $77 $293
State 48 14 19
---------------------------------
Total current 345 91 312
Deferred
Federal 172 84 44
State 18 44 (38)
---------------------------------
Total deferred 190 128 6
---------------------------------
Total $535 $219 $318
- ----------------------------------------------------------------
</TABLE>
Significant components of deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
-------------------
December 31 - in millions 1996 1995
- ---------------------------------------------------------------
<S> <C> <C>
Deferred tax assets
Allowance for credit losses $382 $413
Compensation and benefits 120 113
Net unrealized securities losses 38
Net operating loss and AMT
carryforwards 23
Purchase accounting - deposits and
other borrowings 27 32
Purchase accounting - other 27
Foreclosed assets 10 12
Other 51 120
-------------------
Total deferred tax assets 628 740
Deferred tax liabilities
Leasing 247 218
Depreciation 45 37
Purchase accounting - loans and leases 28 45
Net unrealized securities gains 19
Other 72 47
-------------------
Total deferred tax liabilities 392 366
-------------------
Net deferred tax asset $236 $374
- ---------------------------------------------------------------
</TABLE>
63
<PAGE> 39
Notes to
CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation between the statutory and effective tax rates follows:
<TABLE>
<CAPTION>
-----------------------------
Year ended December 31 1996 1995 1994
- -------------------------------------------------------------------
<S> <C> <C> <C>
Statutory tax rate 35.0% 35.0% 35.0%
Increases (decreases) resulting from
State taxes 2.8 6.0 2.2
Tax-exempt interest (1.7) (4.5) (2.2)
Goodwill .9 1.7 1.8
Valuation allowance reduction (8.8)
Other, net (2.0) (3.3) (1.7)
-----------------------------
Effective tax rate 35.0% 34.9% 26.3%
- -------------------------------------------------------------------
</TABLE>
NOTE 19 REGULATORY MATTERS
The Corporation is subject to the regulations of certain federal and state
agencies and undergoes periodic examinations by such regulatory authorities.
Neither the Corporation nor any of its subsidiaries is subject to written
regulatory agreements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Corporation must meet specific capital guidelines that
involve quantitative measures of assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices.
Failure to meet minimum capital requirements can initiate certain mandatory and
possibly additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on PNC Bank's financial statements. The
Corporation's capital amounts and classification are also subject to
qualitative judgments by regulatory agencies about components, risk weightings,
and other factors.
The following table sets forth regulatory capital ratios for the Corporation
and PNC Bank, N.A., an indirect wholly-owned subsidiary.
REGULATORY CAPITAL
<TABLE>
<CAPTION>
-------------------------------------
Amount Ratios
As of December 31 - -------------------------------------
dollars in millions 1996 1995 1996 1995
- ---------------------------------------------------------------
<S> <C> <C> <C> <C>
Risk-based capital
Tier I
PNC Bank Corp. $5,283 $4,762 8.29% 8.00%
PNC Bank, N.A. 3,848 3,899 7.52 8.60
Total
PNC Bank Corp. 7,427 6,882 11.65 11.56
PNC Bank, N.A. 5,343 4,966 10.44 10.94
Leverage
PNC Bank Corp. 5,283 4,762 7.70 6.37
PNC Bank, N.A. 3,848 3,899 7.09 6.88
- ---------------------------------------------------------------
</TABLE>
Regulatory quantitative measures to ensure capital adequacy require the
Corporation to maintain minimum ratios of Tier I and total capital to
risk-weighted assets of 4% and 8%, respectively, and Tier I capital to average
assets (leverage) of 3%. To be classified as well capitalized, regulators
require capital ratios of 6% for Tier I, 10% for total risk-based and 5% for
leverage. As of the most recent notification from federal regulators, the
Corporation and each of its subsidiaries were categorized as well capitalized
under the regulatory framework for prompt corrective action. There are no
conditions or events since that notification that management believes would
change the Corporation's category.
Dividends that may be paid by subsidiary banks to the parent company are
subject to certain legal limitations and also may be impacted by capital needs,
regulatory requirements and policies, and other factors deemed relevant.
Without regulatory approval, the amount available for payment of dividends by
all subsidiary banks was $512 million at December 31, 1996.
Under federal law, generally no bank subsidiary may extend credit to the parent
company or its nonbank subsidiaries on terms and under circumstances which are
not substantially the same as comparable extensions of credit to nonaffiliates.
No extension of credit may be made to the parent company or a nonbank
subsidiary which is in excess of 10% of the capital stock and surplus of such
bank subsidiary or in excess of 20% of the capital and surplus of such bank
subsidiary as to aggregate extensions of credit to the parent company and its
subsidiaries. In certain circumstances, federal regulatory authorities may
impose more restrictive limitations. Such extensions of credit, with limited
exceptions, must be fully collateralized. The maximum amount available under
statutory limitations for transfer from subsidiary banks to the parent company
in the form of loans and dividends approximated 20% of consolidated net assets
at December 31, 1996.
Federal Reserve Board regulations require depository institutions to maintain
cash reserves with the Federal Reserve Bank. During 1996, subsidiary banks
maintained reserves which averaged $741 million.
64
<PAGE> 40
NOTE 20 LITIGATION
A consolidated class action complaint is pending against the Corporation and
certain officers, alleging violations of federal securities laws and common law
relating to disclosures and seeking, among other things, unquantified damages
on behalf of purchasers of the Corporation's securities during specified
portions of 1994. Management believes that there are meritorious defenses to
this consolidated lawsuit and intends to defend it vigorously. Management
believes that the final disposition will not be material to the Corporation's
financial position.
The Corporation, in the normal course of business, is subject to various other
pending and threatened lawsuits in which claims for monetary damages are
asserted. Management, after consultation with legal counsel, does not
anticipate the ultimate aggregate liability, if any, arising out of such other
lawsuits will have a material adverse effect on the Corporation's financial
position.
At the present time, management is not in a position to determine whether any
pending or threatened litigation will have a material adverse effect on the
Corporation's results of operations in any future reporting period.
NOTE 21 OTHER FINANCIAL INFORMATION
Summarized financial information of the parent company is as follows:
PARENT COMPANY ONLY
BALANCE SHEET
<TABLE>
<CAPTION>
---------------------
December 31 - in millions 1996 1995
- ---------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $4 $2
Securities available for sale 602 48
Investments in
Bank subsidiaries 6,078 6,735
Nonbank subsidiaries 276 240
Advances to subsidiary banks 9 8
Other assets 118 115
----------------------
Total assets $7,087 $7,148
----------------------
LIABILITIES
Notes and debentures $363 $368
Nonbank affiliate borrowings 332 701
Accrued expenses and other liabilities 523 311
----------------------
Total liabilities 1,218 1,380
SHAREHOLDERS' EQUITY 5,869 5,768
----------------------
Total liabilities and
shareholders' equity $7,087 $7,148
- ---------------------------------------------------------------
</TABLE>
Notes and debentures have scheduled repayments of $200 million in 1999, $100
million in 2001 and $63 million thereafter.
Commercial paper and all other debt issued by PNC Funding Corp., a wholly-owned
subsidiary, is guaranteed by the parent company. In addition, in connection
with certain affiliates' mortgage servicing operations, the parent company has
committed to maintain such affiliates' net worth above minimum requirements.
PARENT COMPANY ONLY
STATEMENT OF INCOME
<TABLE>
<CAPTION>
-------------------------------
Year ended December 31 - in millions 1996 1995 1994
- ---------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING REVENUE
Dividends from
Bank subsidiaries $924 $447 $379
Nonbank subsidiaries 32 25 55
Interest income 7 4 9
Other income 1 1
-------------------------------
Total operating revenue 964 476 444
OPERATING EXPENSE
Interest expense 56 73 65
Other expense 38 33 28
-------------------------------
Total operating expense 94 106 93
Income before income taxes and
equity in undistributed net
income of subsidiaries 870 370 351
Applicable income tax benefits (30) (35) (48)
-------------------------------
Income before equity in
undistributed net income of
subsidiaries 900 405 399
Net equity in undistributed
net income (excess
dividends)*
Bank subsidiaries 63 (19) 479
Nonbank subsidiaries 29 22 6
-------------------------------
Net income $992 $408 $884
- ---------------------------------------------------------------------
</TABLE>
* Amounts for 1994 include the cumulative effect of changes in accounting
principles at the respective subsidiaries.
65
<PAGE> 41
Notes to
CONSOLIDATED FINANCIAL STATEMENTS
PARENT COMPANY ONLY
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31 - in millions 1996 1995 1994
- ------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $992 $408 $884
Adjustments to reconcile
net income to net cash
provided by operating
activities
Equity in
undistributed net
earnings of
subsidiaries (92) (3) (485)
Other (6) 10 (4)
------------------------------------
Net cash provided by
operating activities 894 415 395
INVESTING ACTIVITIES
Net change in
interest-earning deposits
with subsidiary bank (1) 4 (8)
Net capital returned from
subsidiaries 657 594 25
Securities available for sale
Sales 1,296 646 2,158
Purchases (1,850) (586) (2,005)
Cash paid in acquisitions (527) (503)
Other (2) (2)
-----------------------------------
Net cash provided (used)
by investing activities 102 129 (335)
FINANCING ACTIVITIES
Borrowings from nonbank
subsidiary 275 330
Repayments on borrowings
from nonbank subsidiary (353) (239)
Redemption of preferred stock (50)
Acquisition of treasury stock (569) (236) (90)
Cash dividends paid to
shareholders (488) (387) (333)
Issuance of stock 416 88 53
Repayment of notes and
debentures (14)
------------------------------------
Net cash used by
financing activities (994) (549) (54)
------------------------------------
Increase (decrease) in cash
and due from banks 2 (5) 6
Cash and due from banks at
beginning of year 2 7 1
------------------------------------
Cash and due from banks at
end of year $4 $2 $7
- ------------------------------------------------------------------------
</TABLE>
During 1996, 1995 and 1994, the parent company received income tax refunds of
$3 million, $20 million and $23 million, respectively. Such refunds represent
the parent company's portion of consolidated income taxes. During 1996, 1995
and 1994, the parent company paid interest expense of $60 million, $68 million
and $63 million, respectively.
In connection with the Midlantic merger, notes and debentures of Midlantic in
the aggregate principal amount of $362 million have been jointly and severally
assumed by the parent company and its wholly-owned subsidiary, PNC Bancorp,
Inc.
Summarized financial information for PNC Bancorp, Inc. and subsidiaries is as
follows:
PNC BANCORP, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
----------------------
December 31 - in millions 1996 1995
- ----------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $4,022 $3,678
Securities 11,210 15,683
Loans, net of unearned income 51,736 48,583
Allowance for credit losses (1,166) (1,259)
----------------------
Net loans 50,570 47,324
Other assets 5,988 6,053
----------------------
Total assets $71,790 $72,738
----------------------
LIABILITIES
Deposits $46,290 $47,024
Borrowed funds 6,951 8,093
Notes and debentures 11,126 9,726
Other liabilities 1,364 1,167
----------------------
Total liabilities 65,731 66,010
----------------------
SHAREHOLDER'S EQUITY 6,059 6,728
----------------------
Total liabilities and shareholder's
equity $71,790 $72,738
- ----------------------------------------------------------------
</TABLE>
PNC BANCORP, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
---------------------------------
Year ended December 31 - in millions 1996 1995 1994
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income $4,903 $5,117 $4,687
Interest expense 2,404 2,941 2,173
---------------------------------
Net interest income 2,499 2,176 2,514
Provision for credit losses 20 84
---------------------------------
Net interest income less
provision for credit losses 2,499 2,156 2,430
Noninterest income 1,249 871 921
Noninterest expense 2,230 2,409 2,184
---------------------------------
Income before income taxes
and cumulative effect of
change in accounting
principle 1,518 618 1,167
Applicable income taxes 539 217 320
---------------------------------
Income before cumulative
effect of change in
accounting principle 979 401 847
Cumulative effect of change
in accounting principle (7)
---------------------------------
Net income $979 $401 $840
- -------------------------------------------------------------------------
</TABLE>
66
<PAGE> 42
NOTE 22 UNUSED LINE OF CREDIT
At December 31, 1996, the Corporation maintained a line of credit in the amount
of $500 million, none of which was drawn. This line is available for general
corporate purposes and expires in 2000.
NOTE 23 FAIR VALUE OF FINANCIAL INSTRUMENTS
<TABLE>
<CAPTION>
----------------------------------------
1996 1995
----------------------------------------
Carrying Fair Carrying Fair
In millions Amount Value Amount Value
- -----------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Cash and short-term assets $5,412 $5,412 $5,826 $5,826
Securities 11,917 11,917 15,839 15,839
Loans held for sale 941 941 659 659
Net loans (excludes leases) 49,281 50,212 46,372 46,384
LIABILITIES
Demand deposits 27,030 27,030 27,145 27,145
Time deposits 18,646 18,654 19,754 20,025
Borrowed funds 8,168 8,168 9,125 9,133
Notes and debentures 11,744 11,802 10,398 10,574
OFF-BALANCE-SHEET
Commitments to extend
credit (14) (14) (32) (48)
Letters of credit (4) (4) (12) (14)
Financial derivatives used for
Interest rate risk
management 81 102 (6) 35
Mortgage banking
activities 11 9 16 12
- -----------------------------------------------------------------------
</TABLE>
Real and personal property, lease financings, loan customer relationships,
deposit customer intangibles, retail branch networks, fee-based businesses,
such as asset management, mortgage banking and brokerage, trademarks and brand
names are excluded from the amounts set forth above. Accordingly, the aggregate
fair value amounts presented do not represent the underlying value of the
Corporation.
Fair value is defined as the estimated amount at which the financial instrument
could be exchanged in a current transaction between willing parties, or other
than in a forced or liquidation sale. However, it is not management's intention
to immediately dispose of a significant portion of such financial instruments,
and unrealized gains or losses should not be interpreted as a forecast of
future earnings and cash flows.
The fair value of securities is based primarily on quoted market prices. For
substantially all other financial instruments, fair values were estimated using
discounted cash flow analyses, pricing models and other valuation techniques.
These derived fair values are subjective in nature, involve uncertainties and
matters of significant judgment and, therefore, cannot be determined with
precision. Changes in assumptions could significantly impact the derived fair
value estimates.
The following methods and assumptions were used in estimating fair value
amounts for financial instruments.
GENERAL For short-term financial instruments realizable in three months or
less, the carrying amount reported in the consolidated balance sheet
approximates fair value. Unless otherwise stated, the rates used in discounted
cash flow analyses are based on market yield curves.
CASH AND SHORT-TERM ASSETS The carrying amounts reported in the consolidated
balance sheet for cash and short-term investments approximate those assets'
fair values primarily due to their short-term nature. For purposes of this
disclosure only, short-term assets include due from banks, interest-earning
deposits with banks, federal funds sold and resale agreements, trading
securities, customer's acceptance liability and accrued interest receivable.
SECURITIES The fair value of investment securities and securities available for
sale are based on quoted market prices, where available. If quoted market
prices are not available, fair value is estimated using the quoted market
prices of comparable instruments.
NET LOANS AND LOANS HELD FOR SALE For demand and variable-rate commercial and
certain consumer loans that reprice at least quarterly, fair values are
estimated by reducing carrying amounts by estimated credit loss factors. For
other commercial loans, including nonaccrual loans, fair values are estimated
using discounted cash flow analyses, with cash flows reduced by estimated
credit loss factors and discount rates equal to rates currently charged by the
Corporation for similar loans. In the case of nonaccrual loans, scheduled cash
flows exclude interest payments.
67
<PAGE> 43
Notes to
CONSOLIDATED FINANCIAL STATEMENTS
For automobile, home equity, student and credit card loans, fair values are
determined by using internal pricing models incorporating assumptions about
prepayment rates, credit losses and servicing fees and costs and discounting
the future net revenues at an appropriate risk-weighted rate of return. For
credit cards and revolving home equity loans, this fair value does not include
any amount for new loans or the related fees that will be generated from the
existing customer relationships. The fair value of residential mortgages was
estimated based on quoted market prices of similar loans sold in conjunction
with securitization transactions, adjusted for differences in loan
characteristics. Loans held for sale are reported at the lower of cost or
market value in the consolidated balance sheet. For purposes of this disclosure
only, the carrying value approximates fair value.
DEPOSITS The carrying amounts of noninterest-bearing demand and
interest-bearing, money market and savings deposits approximate fair values.
For time deposits, fair values are based on the discounted value of scheduled
cash flows. The discount rates used vary by instrument and are based on dealer
quotes or rates currently offered for deposits with similar maturities.
BORROWED FUNDS The carrying amounts of federal funds purchased, commercial
paper, acceptances outstanding and accrued interest payable are considered fair
value because of their short-term nature. Repurchase agreements and term
federal funds purchased are valued using discounted cash flow analyses.
NOTES AND DEBENTURES The fair value of variable-rate notes and debentures is
equivalent to carrying value. For fixed-rate notes and debentures, scheduled
cash flows are discounted using rates for similar debt with the same
maturities.
UNFUNDED LOAN COMMITMENTS AND LETTERS OF CREDIT Fair values for commitments to
extend credit and letters of credit are estimated based upon the amount of
deferred fees and the creditworthiness of the counterparties.
FINANCIAL DERIVATIVES The fair value of interest rate swaps are estimated based
on the discounted value of the expected net cash flows. The fair value of other
derivative instruments is based on dealer quotes. These fair values represent
the estimated amounts the Corporation would receive or pay to terminate the
contracts, taking into account current interest rates.
68
<PAGE> 44
Statistical
INFORMATION
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
Year ended December 31 - dollars in millions, except
per share data 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Interest income $4,938 $5,149 $4,724 $4,023 $4,281
Interest expense 2,494 3,007 2,232 1,683 2,103
-----------------------------------------------------------------------
Net interest income 2,444 2,142 2,492 2,340 2,178
Provision for credit losses 6 84 350 494
Noninterest income before net securities gains/losses 1,373 1,240 1,181 941 931
Net securities gains (losses) 22 (280) (142) 195 246
Noninterest expense 2,312 2,469 2,238 1,985 2,073
-----------------------------------------------------------------------
Income before income taxes and cumulative effect of
changes in accounting principles 1,527 627 1,209 1,141 788
Applicable income taxes 535 219 318 262 252
-----------------------------------------------------------------------
Income before cumulative effect of changes in
accounting principles 992 408 891 879 536
Cumulative effect of changes in accounting principles,
net of tax benefits of $5, $5 and $77 (7) 20 (148)
-----------------------------------------------------------------------
Net income $992 $408 $884 $899 $388
- ------------------------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE DATA
Book value
As reported $17.13 $16.87 $16.59 $15.61 $13.63
Excluding net unrealized securities gains/losses 17.34 16.79 16.95 15.35 13.63
Cash dividends declared 1.42 1.40 1.31 1.175 1.08
Earnings
Primary before cumulative effect of changes in
accounting principles $2.90 $1.19 $2.56 $2.56 $1.72
Cumulative effect of changes in accounting principles (.02) .06 (.48)
-----------------------------------------------------------------------
Primary $2.90 $1.19 $2.54 $2.62 $1.24
-----------------------------------------------------------------------
Fully diluted before cumulative effect of changes in
accounting principles $2.87 $1.19 $2.54 $2.54 $1.70
Cumulative effect of changes in accounting principles (.02) .06 (.47)
-----------------------------------------------------------------------
Fully diluted $2.87 $1.19 $2.52 $2.60 $1.23
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET HIGHLIGHTS (At December 31)
Total assets $73,260 $73,404 $77,461 $76,012 $65,802
Securities 11,917 15,839 23,670 25,496 22,849
Loans, net of unearned income 51,798 48,653 44,043 42,113 35,943
Deposits 45,676 46,899 45,818 44,703 42,030
Borrowed funds 7,860 8,665 12,193 12,336 12,182
Notes and debentures 11,744 10,398 12,127 9,972 4,734
Shareholders' equity 5,869 5,768 5,727 5,404 4,543
SELECTED RATIOS
Return on
Average common shareholders' equity 17.18% 7.05% 16.09% 18.55% 9.38%
Average assets 1.40 .54 1.19 1.40 .64
Average common shareholders' equity to average assets 8.11 7.64 7.34 7.52 6.67
Dividend payout 48.89 94.76 37.42 30.79 61.72
Efficiency 59.68 78.42 62.69 56.28 60.66
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
69
<PAGE> 45
Statistical
INFORMATION
SELECTED QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
1996 1995
---------------------------------------------------------------------------------------------------
Quarter - dollars in millions, Fourth Third Second First Fourth Third Second First
except per share data
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Interest income $1,223 $1,217 $1,243 $1,255 $1,300 $1,293 $1,295 $1,261
Interest expense 605 608 633 648 747 766 772 722
---------------------------------------------------------------------------------------------------
Net interest income 618 609 610 607 553 527 523 539
Provision for credit losses 1 2 1 2
Noninterest income before net
securities gains/losses 381 341 333 318 312 338 305 285
Net securities gains (losses) 7 8 4 3 (289) 8 1
Noninterest expense 586 596 564 566 826 547 543 553
---------------------------------------------------------------------------------------------------
Income (loss) before income
taxes 420 362 383 362 (251) 316 292 270
Applicable income taxes 148 128 135 124 (75) 105 98 91
---------------------------------------------------------------------------------------------------
Net income (loss) $272 $234 $248 $238 $(176) $211 $194 $179
- ------------------------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE DATA
Book value
As reported $17.13 $17.23 $17.07 $16.88 $16.87 $17.55 $17.24 $16.90
Excluding net unrealized
securities gains/losses 17.34 17.58 17.49 17.16 16.79 17.67 17.35 17.10
Earnings (losses)
Primary .80 .69 .72 .69 (.52) .62 .57 .52
Fully diluted .79 .68 .72 .69 (.52) .62 .56 .52
- ------------------------------------------------------------------------------------------------------------------------------------
AVERAGE BALANCE SHEET
HIGHLIGHTS
Total assets $69,536 $69,546 $72,440 $71,733 $75,707 $75,266 $75,343 $74,841
Securities 11,569 13,097 14,740 14,818 19,450 22,045 23,137 23,984
Loans, net of unearned income 49,973 48,713 49,191 48,625 48,304 45,646 44,765 43,710
Deposits 44,832 44,716 45,379 45,553 46,216 45,077 44,365 43,667
Borrowed funds 5,493 5,510 7,816 7,823 11,511 14,016 14,140 13,902
Notes and debentures 11,617 12,048 11,904 11,068 10,637 8,829 9,586 10,109
Shareholders' equity 6,017 5,766 5,767 5,764 5,893 5,802 5,727 5,710
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
70
<PAGE> 46
ANALYSIS OF YEAR-TO-YEAR CHANGES IN NET INTEREST INCOME
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------
1996/1995 1995/1994
---------------------------------------------------------------------------------
Increase/(Decrease) in Income/Expense Increase/(Decrease) in Income/Expense
Due to Changes in: Due to Changes in:
----------------------------------------- ---------------------------------------
Taxable-equivalent basis - in millions Volume Rate Total Volume Rate Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
Loans held for sale $27 $(3) $24 $(2) $4 $2
Securities
U.S. Treasury, government agencies and
corporations (453) 106 (347) (179) (39) (218)
Other debt (70) (5) (75) 67 29 96
Other (6) (4) (10) (1) 1
---------------------------------------------------------------------------------
Total securities (541) 109 (432) (131) 9 (122)
Loans, net of unearned income
Credit card 41 2 43 21 2 23
Other consumer 89 (19) 70 55 70 125
Total consumer 121 (8) 113 70 78 148
Residential mortgage 92 (2) 90 147 58 205
Commercial 103 (50) 53 51 109 160
Commercial real estate (23) (26) (49) (14) 55 41
Other (9) (2) (11) (18) 24 6
---------------------------------------------------------------------------------
Total loans, net of unearned income 284 (88) 196 237 323 560
Other interest-earning assets (6) (5) (11) (36) 30 (6)
---------------------------------------------------------------------------------
Total interest-earning assets $(366) $143 $(223) $7 $427 $434
---------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES
Interest-bearing deposits
Demand and money market $10 $(35) $(25) $(27) $103 $76
Savings (7) (14) (21) (6) 25 19
Other time 30 (33) (3) 69 158 227
Deposits in foreign offices (63) (12) (75) 51 19 70
---------------------------------------------------------------------------------
Total interest-bearing deposits (22) (102) (124) 24 368 392
Borrowed funds
Federal funds purchased (34) (18) (52) 14 50 64
Repurchase agreements (247) (41) (288) 43 127 170
Commercial paper (11) (3) (14) (17) 12 (5)
Other (98) (1) (99) 27 64 91
---------------------------------------------------------------------------------
Total borrowed funds (390) (63) (453) 67 253 320
Notes and debentures 112 (48) 64 (99) 162 63
---------------------------------------------------------------------------------
Total interest-bearing liabilities (263) (250) (513) 10 765 775
---------------------------------------------------------------------------------
Change in net interest income $(159) $449 $290 $4 $(345) $(341)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Changes attributable to rate/volume are prorated into rate and volume
components.
71
<PAGE> 47
Statistical
INFORMATION
AVERAGE CONSOLIDATED BALANCE SHEET AND NET INTEREST ANALYSIS
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
Year ended December 31 - 1996 1995
-------------------------------------------------------------------------------
Taxable-equivalent basis Average Average Average Average
Dollars in millions Balances Interest Yields/Rates Balances Interest Yields/Rates
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets
Loans held for sale $1,095 $78 7.09% $725 $54 7.50%
Securities
U.S. Treasury, government agencies and
corporations 10,225 635 6.21 17,706 982 5.55
Other debt 2,719 184 6.78 3,757 259 6.90
Other 606 48 7.91 677 58 8.46
----------------------- ----------------------
Total securities 13,550 867 6.40 22,140 1,299 5.87
Loans, net of unearned income
Consumer
Credit card 1,165 163 13.94 871 120 13.76
Other consumer 12,192 1,028 8.43 11,142 958 8.60
----------------------- ----------------------
Total consumer 13,357 1,191 8.91 12,013 1,078 8.98
Residential mortgage 12,049 898 7.45 10,812 808 7.47
Commercial 17,150 1,338 7.80 15,852 1,285 8.11
Commercial real estate 4,763 423 8.88 5,014 472 9.42
Other 1,797 119 6.63 1,933 130 6.70
----------------------- ----------------------
Total loans, net of unearned income 49,116 3,969 8.08 45,624 3,773 8.27
Other interest-earning assets 964 59 6.12 1,046 70 6.64
----------------------- ----------------------
Total interest-earning assets/interest income 64,725 4,973 7.68 69,535 5,196 7.47
Noninterest-earning assets
Allowance for credit losses (1,197) (1,319)
Cash and due from banks 3,163 3,044
Other assets 4,116 3,871
---------- ---------
Total assets $70,807 $75,131
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities
Interest-bearing deposits
Demand and money market $12,619 332 2.63 $12,254 357 2.91
Savings 3,445 69 2.02 3,732 90 2.40
Other time 18,307 981 5.36 17,758 984 5.54
Deposits in foreign offices 846 46 5.44 1,974 121 6.13
----------------------- ----------------------
Total interest-bearing deposits 35,217 1,428 4.06 35,718 1,552 4.34
Borrowed funds
Federal funds purchased 2,530 136 5.40 3,142 188 5.99
Repurchase agreements 2,030 110 5.41 6,514 398 6.11
Commercial paper 550 30 5.49 737 44 5.94
Other 1,544 105 6.77 2,993 204 6.84
----------------------- -----------------------
Total borrowed funds 6,654 381 5.73 13,386 834 6.24
Notes and debentures 11,660 685 5.87 9,790 621 6.34
----------------------- -----------------------
Total interest-bearing liabilities/interest expense 53,531 2,494 4.66 58,894 3,007 5.10
Noninterest-bearing liabilities and shareholders'
equity
Demand and other noninterest-bearing deposits 9,900 9,112
Accrued expenses and other liabilities 1,529 1,341
Minority interest-capital securities of subsidiary 19
Shareholders' equity 5,828 5,784
---------- ----------
Total liabilities and shareholders' equity $70,807 $75,131
------------------------------------------------------------------------------
Interest rate spread 3.02 2.37
Impact of noninterest-bearing liabilities .81 .78
------------------------- --------------------------
Net interest income/margin on earning assets $2,479 3.83% $2,189 3.15%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Nonaccrual loans are included in loans, net of unearned income. The impact of
financial derivatives used in interest rate risk management is included in the
interest income/expense and average yields/rates of the related assets and
liabilities. Average balances are based on amortized historical cost (excluding
SFAS No. 115 adjustments to fair value).
72
<PAGE> 48
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------------
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>
$749 $52 6.84% $402 $25 6.10% $258 $19 7.33%
20,915 1,200 5.74 19,885 1,165 5.86 17,595 1,270 7.22
2,742 163 5.94 1,818 90 4.93 976 62 6.31
698 58 8.30 631 58 9.14 824 76 9.27
- -------------------------- -------------------------- --------------------------
24,355 1,421 5.83 22,334 1,313 5.88 19,395 1,408 7.26
720 97 13.50 682 94 13.74 670 115 17.21
10,472 833 7.95 9,242 765 8.28 8,916 792 8.88
- -------------------------- -------------------------- --------------------------
11,192 930 8.31 9,924 859 8.66 9,586 907 9.46
8,806 603 6.85 3,834 309 8.07 3,182 311 9.78
15,185 1,125 7.41 14,257 1,000 7.02 15,035 1,054 7.01
5,171 431 8.33 5,838 423 7.24 7,263 509 7.01
2,245 124 5.52 1,688 84 4.97 1,207 76 6.34
- -------------------------- -------------------------- --------------------------
42,599 3,213 7.54 35,541 2,675 7.53 36,273 2,857 7.88
1,724 76 4.42 1,710 61 3.59 1,500 59 3.94
- -------------------------- -------------------------- --------------------------
69,427 4,762 6.86 59,987 4,074 6.79 57,426 4,343 7.56
(1,391) (1,510) (1,663)
2,951 2,757 2,637
3,375 2,819 2,613
- ----------- ------------ ------------
$74,362 $64,053 $61,013
- ----------- ------------ ------------
$13,481 281 2.08 $12,685 213 1.68 $12,545 371 2.96
4,081 71 1.75 3,760 56 1.49 3,434 96 2.80
16,353 757 4.63 15,571 730 4.69 18,578 1,051 5.66
1,083 51 4.69 222 7 3.03 676 28 4.15
- -------------------------- -------------------------- ---------------------------
34,998 1,160 3.31 32,238 1,006 3.12 35,233 1,546 4.39
2,850 124 4.35 1,686 51 3.04 1,917 68 3.57
5,576 228 4.09 7,263 252 3.47 5,606 210 3.74
1,072 49 4.61 691 23 3.30 576 21 3.62
2,462 113 4.57 1,128 34 3.01 1,494 55 3.68
- -------------------------- -------------------------- ---------------------------
11,960 514 4.30 10,768 360 3.35 9,593 354 3.69
11,662 558 4.78 6,882 317 4.61 3,391 203 5.98
- -------------------------- -------------------------- ---------------------------
58,620 2,232 3.81 49,888 1,683 3.37 48,217 2,103 4.36
8,939 7,986 7,539
1,272 1,293 1,104
5,531 4,886 4,153
- ----------- ----------- ------------
$74,362 $64,053 $61,013
- -----------------------------------------------------------------------------------------------------------------------------------
3.05 3.42 3.20
.59 .57 .70
------------------------- -------------------------- ----------------------------
$2,530 3.64% $2,391 3.99% $2,240 3.90%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
73
<PAGE> 49
Statistical
INFORMATION
LOANS
LOAN MATURITIES AND INTEREST SENSITIVITY
<TABLE>
<CAPTION>
------------------------------------------
December 31, 1996 - 1 Year 1 Through After 5 Gross
in millions or Less 5 Years Years Loans
- -----------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial $7,216 $7,280 $3,566 $18,062
Real estate project 953 858 346 2,157
------------------------------------------
Total $8,169 $8,138 $3,912 $20,219
- -----------------------------------------------------------------
Loans with
predetermined rate $1,804 $1,922 $785 $4,511
Loans with floating
rate 6,365 6,216 3,127 15,708
------------------------------------------
Total $8,169 $8,138 $3,912 $20,219
- -----------------------------------------------------------------
</TABLE>
At December 31, 1996, $9.4 billion of interest rate swaps, caps and floors
designated to commercial and commercial real estate loans altered the interest
rate characteristics of such loans. The impact of the interest rate swaps is
not reflected in the table above.
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses is based on periodic evaluations of the credit
portfolio by management. These evaluations consider, among other factors,
historic losses within specific industries, current economic conditions, loan
portfolio trends, specific credit reviews and estimates based on subjective
factors. During 1996, 1995 and 1994, stronger economic conditions combined with
management's ongoing efforts to improve asset quality resulted in lower
nonperforming assets and a higher reserve coverage of nonperforming loans.
SUMMARY OF LOAN LOSS EXPERIENCE
<TABLE>
<CAPTION>
---------------------------------------------------------------------
Year ended December 31 - dollars in millions 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance at beginning of year $1,259 $1,352 $1,372 $1,568 $1,645
Charge-offs
Consumer 166 107 92 102 111
Residential mortgage 9 10 16 8 4
Commercial 52 84 116 168 339
Commercial real estate
Commercial mortgage 10 23 15 49 23
Real estate project 8 14 37 186 210
Other 2 2 1 1 8
---------------------------------------------------------------------
Total loans charged off 247 240 277 514 695
Recoveries
Consumer 41 39 40 36 31
Residential mortgage 2 2 1 1
Commercial 28 49 59 56 66
Commercial real estate
Commercial mortgage 6 9 5 4 1
Real estate project 4 6 10 8 7
Other 2 2 1 3 2
---------------------------------------------------------------------
Total recoveries 83 107 116 108 107
---------------------------------------------------------------------
Net charge-offs 164 133 161 406 588
Net charge-offs on bulk loan sales and assets held for
accelerated disposition (8) (182)
Provision for credit losses 6 84 350 495
Acquisitions/divestitures 71 34 65 42 16
---------------------------------------------------------------------
Allowance at end of year $1,166 $1,259 $1,352 $1,372 $1,568
---------------------------------------------------------------------
Allowance as a percent of period-end
Loans 2.25% 2.59% 3.07% 3.26% 4.36%
Nonperforming loans 334.40 351.68 239.29 160.28 86.87
As a percent of average loans
Net charge-offs including bulk loan sales and assets
held for accelerated disposition .33 .29 .40 1.65 1.62
Net charge-offs excluding bulk loan sales and assets
held for accelerated disposition .33 .29 .38 1.14 1.62
Provision for credit losses .01 .20 .99 1.36
Allowance for credit losses 2.37 2.76 3.17 3.86 4.32
Allowance as a multiple of net charge-offs including bulk
loan sales and assets held for accelerated disposition 7.11x 9.47x 8.00x 2.33x 2.67x
Allowance as a multiple of net charge-offs excluding bulk
loan sales and assets held for accelerated disposition 7.11 9.47 8.40 3.38 2.67
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
74
<PAGE> 50
ALLOCATION OF ALLOWANCE FOR CREDIT LOSSES *
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------
December 31 - 1996 1995 1994 1993 1992
------------------------------------------------------------------------------------------------------------
dollars in millions Allowance Loans Allowance Loans Allowance Loans Allowance Loans Allowance Loans
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $606 34.9% $585 34.3% $603 35.0% $572 36.5% $643 40.7%
Commercial real estate 173 8.9 332 10.0 419 11.4 498 12.2 746 17.9
Consumer 280 28.7 203 27.6 184 26.7 202 25.7 153 26.4
Residential mortgage 80 24.5 112 23.8 116 21.9 86 20.3 8 9.8
Other 27 3.0 27 4.3 30 5.0 14 5.3 18 5.2
------------------------------------------------------------------------------------------------------------
Total $1,166 100.0% $1,259 100.0% $1,352 100.0% $1,372 100.0% $1,568 100.0%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* For purposes of this presentation, unallocated reserves have been assigned to
loan categories based on the relative specific allocation amounts.
TIME DEPOSITS OF $100,000 OR MORE
Time deposits in foreign offices totaled $843 million, substantially all of
which are in denominations of $100,000 or more. The following table sets forth
remaining maturities of domestic time deposits of $100,000 or more.
DOMESTIC TIME DEPOSITS OF $100,000 OR MORE
<TABLE>
<CAPTION>
------------------------------------
Certificates Other Time
December 31, 1996 - in millions of Deposit Deposits Total
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Three months or less $1,473 $1 $1,474
Over three through six months 491 491
Over six through twelve months 617 1 618
Over twelve months 1,427 66 1,493
------------------------------------
Total $4,008 $68 $4,076
- ----------------------------------------------------------------------
</TABLE>
BORROWED FUNDS
Federal funds purchased represent overnight borrowings. Repurchase agreements
generally have maturities of 18 months or less. At December 31, 1996, 1995, and
1994, $58 million, $361 million and $51 million, respectively, of repurchase
agreements had original maturities which exceeded one year. Commercial paper is
issued in maturities not to exceed nine months and is stated net of discount.
Other borrowed funds consist primarily of term federal funds purchased and U.S.
Treasury, tax and loan borrowings which are payable on demand. At December 31,
1996 and 1995, $11 million and $1.5 billion, respectively, notional value of
interest rate swaps were designated to borrowed funds. The effect of these
swaps is not included in the rates set forth in the table.
BORROWED FUNDS
<TABLE>
<CAPTION>
---------------------------------------------------------------------
1996 1995 1994
---------------------------------------------------------------------
Dollars in millions Amount Rate Amount Rate Amount Rate
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Federal funds purchased
Year-end balance $2,797 6.25% $3,817 5.29% $2,219 5.88%
Average during year 2,530 5.36 3,142 5.96 2,850 4.35
Maximum month-end balance during year 4,468 6,446 4,706
Repurchase agreements
Year-end balance 645 5.54 2,851 5.89 4,302 5.59
Average during year 2,030 5.44 6,514 6.12 5,576 4.09
Maximum month-end balance during year 3,363 7,981 6,971
Commercial paper
Year-end balance 976 5.34 753 5.74 1,226 5.71
Average during year 550 5.49 737 5.94 1,072 4.61
Maximum month-end balance during year 976 1,207 1,861
Other
Year-end balance 3,442 5.21 1,244 5.63 4,446 5.46
Average during year 1,544 6.77 2,993 6.83 2,462 4.57
Maximum month-end balance during year 3,558 4,134 5,601
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
75
<PAGE> 51
Corporate
INFORMATION
CORPORATE HEADQUARTERS
PNC Bank Corp.
One PNC Plaza
249 Fifth Avenue
Pittsburgh, Pennsylvania 15222-2707
STOCK LISTING
PNC Bank Corp. common stock is traded on the New York Stock Exchange ("NYSE")
under the symbol PNC. At the close of business on February 10, 1997, there were
65,857 common shareholders of record.
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-K
The Annual Report on Form 10-K is filed with the Securities and Exchange
Commission. Copies, excluding certain exhibits, may be obtained without charge
by writing to Glenn Davies, Vice President, Financial Reporting, at corporate
headquarters or to [email protected] on the Internet. Requests may also be
directed to (412) 762-1553.
TRUST PROXY VOTING
Reports of 1996 nonroutine proxy voting by the trust divisions of PNC Bank
Corp. are available by writing to Thomas R. Moore, Vice President and
Assistant Corporate Secretary, at corporate headquarters.
ANNUAL SHAREHOLDERS MEETING
All shareholders are invited to attend the PNC Bank Corp. annual meeting on
Tuesday, April 22, 1997, at 11 a.m., Eastern Standard Time, on the 15th floor
of One PNC Plaza, 249 Fifth Avenue, Pittsburgh, Pennsylvania.
COMMON STOCK PRICES/DIVIDENDS DECLARED
The table below sets forth by quarter the range of high, low and quarter-end
closing sale prices for PNC Bank Corp. common stock and the cash dividends
declared per common share.
<TABLE>
<CAPTION>
Cash
Dividends
1996 Quarter High Low Close Declared
- ---------------------------------------------------------------
<S> <C> <C> <C> <C>
First $32.625 $28.375 $30.750 $.35
Second 31.500 28.375 29.750 .35
Third 33.875 27.500 33.375 .35
Fourth 39.750 33.125 37.625 .37
-------
Total $1.42
- ---------------------------------------------------------------
1995 Quarter
- ---------------------------------------------------------------
First $25.750 $21.125 $24.375 $.35
Second 28.125 24.250 26.375 .35
Third 28.625 23.625 27.875 .35
Fourth 32.375 26.125 32.250 .35
-------
Total $1.40
- ---------------------------------------------------------------
</TABLE>
REGISTRAR AND TRANSFER AGENT
The Chase Manhattan Bank
P.O. Box 590
Ridgefield Park, New Jersey 07660
800-982-7652
DIVIDEND POLICY
Holders of PNC Bank Corp. common stock are entitled to receive dividends when
declared by the board of directors out of funds legally available. The board
presently intends to continue the policy of paying quarterly cash dividends.
However, future dividends will depend upon earnings, the financial condition of
PNC Bank Corp. and other factors including applicable government regulations
and policies.
DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN
The PNC Bank Corp. dividend reinvestment and stock purchase plan enables
holders of common and preferred stock to purchase additional shares of common
stock conveniently and without paying brokerage commissions or service charges.
A prospectus and enrollment card may be obtained by writing to Shareholder
Relations at corporate headquarters.
76
<PAGE> 1
EXHIBIT 21
PNC BANK CORP.
SCHEDULE OF CERTAIN SUBSIDIARIES
(AS OF FEBRUARY 28, 1997)
<TABLE>
<CAPTION>
STATE OR OTHER JURISDICTION OF
NAME (1) INCORPORATION OR ORGANIZATION
- ----------------------------------------------------------------- -----------------------------------------------------
<S> <C>
PNC Bancorp, Inc. Delaware
PNC Bank, Delaware (2) Delaware
PNC Bank, FSB (2) United States
PNC Bank, Indiana, Inc. (2) Indiana
PNC Bank, Kentucky, Inc. (2) Kentucky
PNC Bank, National Association (2) United States
PNC Bank, New England (2) Massachusetts
PNC Bank, Ohio, National Association (2) United States
PNC Mortgage Bank, National Association (2) United States
PNC National Bank of Delaware (2) United States
PNC Holding Corp. Delaware
Alpine Indemnity Limited Grand Cayman, B.W.I.
CastleInternational Asset Management Limited United Kingdom
Midlantic Commercial Leasing Corp. New York
Midlantic Funding Corp. New Jersey
Parkway Management Inc. New Jersey
PFPC International (Cayman) Ltd Grand Cayman, B.W.I.
PFPC International Ltd Dublin, Ireland
PFPC Trustee and Custodial Services Ltd Dublin, Ireland
PNC Alliance Inc. Delaware
PNC Capital Corp. Delaware
PNC Capital Markets, Inc. Pennsylvania
PNC Capital Recovery Corp. Pennsylvania
PNC Commercial Corp Florida
PNC Equity Management Corp Pennsylvania
PNC ESOP Funding Corporation Delaware
PNC Financial Services, Inc. Kentucky
PNC Funding Corp Pennsylvania
PNC Insurance Corp. Arizona
PNC Investment Corp. (2) Delaware
PNC Management Services Corp Delaware
PNC Network Holdings Corp. (2) Delaware
PNC Realty Company, Ohio Ohio
PNC Realty Holding Corp (2) Pennsylvania
PNC Trust Company of New York New York
PNC Venture Corp Delaware
</TABLE>
(1) All active first tier subsidiaries of the Corporation's two primary
subsidiary holding companies, PNC Bancorp, Inc. and PNC Holding Corp.,
have been listed. Not all of such subsidiaries are "significant
subsidiaries" within the meaning of Rule 1-02(v) of Regulation S-X.
(2) The names of the subsidiaries of the indicated entities are omitted
because such subsidiaries, considered in the aggregate as a single
subsidiary, would not constitute a significant subsidiary.
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference, in the Registration Statements
listed below, of our report dated January 24, 1997, with respect to the
consolidated financial statements of PNC Bank Corp. and subsidiaries
incorporated by reference in this Annual Report on Form 10-K of PNC Bank Corp.
for the year ended December 31, 1996.
Form S-3 relating to the Dividend Reinvestment and Stock Purchase
Plan (No. 333-19003)
Form S-8 relating to the PNC Bank Corp. Supplemental Incentive Savings Plan and
PNC Bank Corp. and Affiliates Deferred Compensation Plan (No. 333-18069)
Form S-8 relating to the PNC Retirement Savings Plan (No. 333-03901)
Form S-8 relating the PNC Bank Corp. Employee Stock Purchase Plan (No. 33-62311)
Form S-3 relating to the Dividend Reinvestment and Stock Purchase Plan of PNC
Bank Corp. (No. 33-61083)
Form S-3 relating to the shelf registration of $1 billion of debt securities of
PNC Funding Corp., unconditionally guaranteed by PNC Bank Corp., and/or
preferred stock of PNC Bank Corp. (No. 33-55114)
Form S-8 relating to the PNC Bank Corp. 1992 Long-Term Incentive Award Plan
(No. 33-54960)
Post-Effective Amendment No. 1 on Form S-3 relating to the shelf registration
of $500 million of debt securities of PNC Funding Corp., unconditionally
guaranteed by PNC Bank Corp. (No. 33-42803)
Form S-8 relating to the 1987 Senior Executive Long-Term Award Plan of PNC Bank
Corp. (now known as the PNC Bank Corp. 1992 Long-Term Incentive Award Plan)
(No. 33-28828)
Post-Effective Amendment No. 1 (on Form S-8) to Form S-4 relating to the
exercise of stock options assumed by PNC Bank Corp. in connection with the
merger of a wholly-owned subsidiary of PNC Bank Corp. with and into Bank of
Delaware Corporation (No. 33-25642)
Post-Effective Amendment No. 1 to Form S-8 relating to the PNC Bank Corp.
Incentive Savings Plan (No. 33-25140)
Post-Effective Amendment No. 1 (on Form S-3) to Form S-4 relating to the
conversion of outstanding debentures assumed in connection with the merger of
PNC Bank Corp., Kentucky, Inc., with and into a wholly-owned subsidiary of
PNC Bank Corp. (No. 33-10016)
Post-Effective Amendment No. 1 on Form S-8 relating to the Stock Option Plan of
PNC Bank Corp. (No. 2-92181)
Post-Effective Amendment No. 2 on Form S-8 relating to the PNC Bank Corp.
Employee Stock Purchase Plan (No. 2-83510)
Pittsburgh, Pennsylvania ERNST & YOUNG LLP
March 21, 1997
<PAGE> 1
EXHIBIT 24.1
POWER OF ATTORNEY
PNC BANK CORP.
ANNUAL REPORT ON FORM 10-K FOR YEAR ENDED DECEMBER 31, 1996
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned Directors and/or
Officers of PNC Bank Corp. (the "Corporation"), a Pennsylvania corporation,
hereby names, constitutes and appoints Walter E. Gregg, Jr., Melanie S. Cibik
and Steven L. Kaplan, or any of them, with full power of substitution, such
person's true and lawful attorney-in-fact and agent to execute in such person's
name, place and stead, in any and all capacities, the Corporation's Annual
Report on Form 10-K for the year ended December 31, 1996.
And such persons hereby ratify and confirm all that said attorneys or attorney,
or any substitute, shall lawfully do or cause to be done by virtue hereof.
Witness the due execution hereof by the following persons in the capacities
indicated as of this February 20, 1997.
<TABLE>
<CAPTION>
Name/Signature
- ---------------------------------------
<S> <C>
/s/ THOMAS H. O'BRIEN /s/ CRAIG MCCLELLAND
- --------------------------------------- ---------------------------------------
Thomas H. O'Brien, Chairman, Chief W. Craig McClelland, Director
Executive Officer and Director
/s/ PAUL W. CHELLGREN /s/ DONALD I. MORITZ
- --------------------------------------- ---------------------------------------
Paul W. Chellgren, Director Donald I. Moritz, Director
- --------------------------------------- ---------------------------------------
Robert N. Clay, Director Jackson H. Randolph, Director
/s/ GEORGE A. DAVIDSON, JR. /s/ JAMES E. ROHR
- --------------------------------------- ---------------------------------------
George A. Davidson, Jr., Director James E. Rohr, President and Director
/s/ DAVID F. GIRARD-DICARLO /s/ RODERIC H. ROSS
- --------------------------------------- ---------------------------------------
David F. Girard-diCarlo, Director Roderic H. Ross, Director
/s/ DIANNA L. GREEN
- --------------------------------------- ---------------------------------------
Dianna L. Green, Director Vincent A. Sarni, Director
/s/ C. G. GREFENSTETTE /s/ GARRY J. SCHEURING
- --------------------------------------- ---------------------------------------
C. G. Grefenstette, Director Garry J. Scheuring, Director
/s/ ARTHUR J. KANIA /s/ RICHARD P. SIMMONS
- --------------------------------------- ---------------------------------------
Arthur Kania, Director Richard P. Simmons, Director
/s/ BRUCE LINDSAY /s/ THOMAS J. USHER
- --------------------------------------- ---------------------------------------
Bruce Lindsay, Director Thomas J. Usher, Director
/s/ THOMAS MARSHALL /s/ MILTON A. WASHINGTON
- --------------------------------------- ---------------------------------------
Thomas Marshall, Director Milton A. Washington, Director
/s/ HELGE H. WEHMEIER
---------------------------------------
Helge H. Wehmeier, Director
</TABLE>
<PAGE> 1
EXHIBIT 24.2
POWER OF ATTORNEY
PNC BANK CORP.
ANNUAL REPORT ON FORM 10-K FOR YEAR ENDED DECEMBER 31, 1996
KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director of PNC Bank Corp.
(the "Corporation"), a Pennsylvania corporation, hereby names, constitutes and
appoints Walter E. Gregg, Jr., Melanie S. Cibik and Steven L. Kaplan, or each of
them, with full power of substitution, such person's true and lawful
attorney-in-fact and agent to execute in such person's name, place and stead,
in the undersigned capacity as a Director, the Corporation's Annual Report on
Form 10-K for the year ended December 31, 1996.
And the undersigned Director hereby ratifies and confirms all that said attorney
or attorney-in-fact, or any substitute, shall lawfully do or cause to be done by
virtue hereof.
Witness the due execution hereof by the undersigned Director as of this
March 20, 1997.
/s/ ROBERT N. CLAY
- ------------------------------
Robert N. Clay
<PAGE> 1
EXHIBIT 24.3
POWER OF ATTORNEY
PNC BANK CORP.
ANNUAL REPORT ON FORM 10-K FOR YEAR ENDED DECEMBER 31, 1996
KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director of PNC Bank Corp.
(the "Corporation"), a Pennsylvania corporation, hereby names, constitutes and
appoints Walter E. Gregg, Jr., Melanie S. Cibik and Steven L. Kaplan, or each of
them, with full power of substitution, such person's true and lawful
attorney-in-fact and agent to execute in such person's name, place and stead,
in the undersigned capacity as a Director, the Corporation's Annual Report on
Form 10-K for the year ended December 31, 1996.
And the undersigned Director hereby ratifies and confirms all that said attorney
or attorney-in-fact, or any substitute, shall lawfully do or cause to be done by
virtue hereof.
Witness the due execution hereof by the undersigned Director as of this
March 21, 1997.
/s/ JACKSON H. RANDOLPH
- ------------------------------
Jackson H. Randolph
<PAGE> 1
EXHIBIT 24.4
POWER OF ATTORNEY
PNC BANK CORP.
ANNUAL REPORT ON FORM 10-K FOR YEAR ENDED DECEMBER 31, 1996
KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director of PNC Bank Corp.
(the "Corporation"), a Pennsylvania corporation, hereby names, constitutes and
appoints Walter E. Gregg, Jr., Melanie S. Cibik and Steven L. Kaplan, or each of
them, with full power of substitution, such person's true and lawful
attorney-in-fact and agent to execute in such person's name, place and stead,
in the undersigned capacity as a Director, the Corporation's Annual Report on
Form 10-K for the year ended December 31, 1996.
And the undersigned Director hereby ratifies and confirms all that said attorney
or attorney-in-fact, or any substitute, shall lawfully do or cause to be done by
virtue hereof.
Witness the due execution hereof by the undersigned Director as of this
March 20, 1997.
/s/ VINCENT A. SARNI
- ------------------------------
Vincent A. Sarni
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial information incorporated by reference to the 1996 Annual
Report on Form 10-K and is qualified in its entirety by reference to such
financial information.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 4,016
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 11,917
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 51,798
<ALLOWANCE> (1,166)
<TOTAL-ASSETS> 73,260
<DEPOSITS> 45,676
<SHORT-TERM> 7,860
<LIABILITIES-OTHER> 1,761
<LONG-TERM> 11,744
0
7
<COMMON> 1,726
<OTHER-SE> 4,136
<TOTAL-LIABILITIES-AND-EQUITY> 73,260
<INTEREST-LOAN> 3,944
<INTEREST-INVEST> 859
<INTEREST-OTHER> 136
<INTEREST-TOTAL> 4,939
<INTEREST-DEPOSIT> 1,429
<INTEREST-EXPENSE> 2,495
<INTEREST-INCOME-NET> 2,444
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 22
<EXPENSE-OTHER> 2,312
<INCOME-PRETAX> 1,527
<INCOME-PRE-EXTRAORDINARY> 992
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 992
<EPS-PRIMARY> 2.90
<EPS-DILUTED> 2.87
<YIELD-ACTUAL> 3.83
<LOANS-NON> 347
<LOANS-PAST> 244
<LOANS-TROUBLED> 2
<LOANS-PROBLEM> 151
<ALLOWANCE-OPEN> 1,259
<CHARGE-OFFS> (247)
<RECOVERIES> 83
<ALLOWANCE-CLOSE> 1,166
<ALLOWANCE-DOMESTIC> 1,166
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
