<PAGE> 1
PNC BANK CORP.
Quarterly Report on Form 10-Q
For the quarterly period ended June 30, 1998
Page 1 represents a portion of the second quarter 1998 Financial Review which is
not required by the Form 10-Q report and is not "filed" as part of the Form
10-Q.
The Quarterly Report on Form 10-Q and cross reference index is on page 32.
<PAGE> 2
Financial Highlights
<TABLE>
<CAPTION>
Three months ended June 30 Six months ended June 30
---------------------------- --------------------------------
1998 1997 1998 1997
- ---------------------------------------------------------------------- ------------- -------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
FINANCIAL PERFORMANCE (in thousands, except per share data)
Revenue
Net interest income (taxable-equivalent basis) $636,986 $620,581 $1,281,216 $1,257,864
Noninterest income 611,203 444,367 1,150,118 877,670
Total revenue 1,248,189 1,064,948 2,431,334 2,135,534
Net income 280,411 259,075 549,671 525,384
Per common share
Basic earnings .92 .82 1.80 1.63
Diluted earnings .90 .81 1.77 1.61
Cash dividends declared .39 .37 .78 .74
SELECTED RATIOS
Return on
Average common shareholders' equity 21.42% 20.21% 21.26% 19.84%
Average assets 1.53 1.47 1.52 1.50
Net interest margin 3.81 3.84 3.88 3.92
Noninterest income to total revenue 48.97 41.73 47.30 41.10
After-tax profit margin 22.47 24.33 22.61 24.60
Efficiency ratio (excluding distributions on capital securities) 61.43 60.09 61.48 59.81
Net charge-offs to average loans .64 .44 .66 .46
</TABLE>
<TABLE>
<CAPTION>
June 30 March 31 December 31 September 30 June 30
1998 1998 1997 1997 1997
- ------------------------------------------------------- -------------- ------------- -------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (in millions)
Assets $75,873 $72,355 $75,120 $71,828 $71,973
Earning assets 68,353 65,210 66,688 64,208 64,297
Loans, net of unearned income 56,237 54,511 54,245 53,651 53,497
Securities available for sale 7,540 7,511 8,522 8,000 8,396
Deposits 47,096 46,068 47,649 44,788 45,216
Borrowed funds 20,488 18,375 19,622 19,052 19,066
Shareholders' equity 5,633 5,487 5,384 5,476 5,384
Common shareholders' equity 5,318 5,173 5,069 5,161 5,068
CAPITAL RATIOS
Leverage 7.18% 7.36% 7.30% 7.43% 7.35%
Common shareholders' equity to assets 7.01 7.15 6.75 7.18 7.04
ASSET QUALITY RATIOS
Nonperforming assets to loans and foreclosed assets .57% .61% .61% .73% .83%
Allowance for credit losses to loans 1.53 1.67 1.79 1.91 2.01
Allowance for credit losses to nonperforming loans 315.09 320.96 351.79 324.25 310.34
Book value per common share $17.64 $17.20 $16.87 $16.92 $16.51
======================================================= ============== ============= ============== ================ ===============
</TABLE>
PNC BANK CORP.
1
<PAGE> 3
Financial Review
This Financial Review should be read in conjunction with the PNC Bank Corp. and
subsidiaries' ("Corporation" or "PNC Bank") unaudited Consolidated Financial
Statements and the Financial Review and audited Consolidated Financial
Statements included in the Corporation's 1997 Annual Report.
OVERVIEW
PNC BANK CORP. The Corporation is one of the largest diversified financial
services companies in the United States and operates eight lines of business:
Regional Community Banking, Corporate Banking, National Consumer Banking,
Private Banking, Mortgage Banking, Secured Lending, Asset Management and Mutual
Fund Servicing. Financial products and services are tailored to specific
customer segments and offered nationally and in PNC Bank's primary geographic
markets in Pennsylvania, New Jersey, Delaware, Ohio and Kentucky.
SUMMARY FINANCIAL RESULTS Net income for the first six months of 1998 was $550
million compared with $525 million a year ago. Earnings per diluted share
increased 10% to $1.77 for the first six months of 1998 from $1.61 in 1997.
Returns on average common shareholders' equity and average assets were 21.26%
and 1.52% for the first six months of 1998 compared with 19.84% and 1.50%,
respectively, a year ago.
As a result of purchase acquisitions, earnings are reduced by goodwill and other
intangible amortization. Excluding these charges, diluted earnings per share
for the first six months of 1998 and 1997 were $1.90 and $1.72, respectively.
Total revenue increased $296 million or 14% in the first six months of 1998
driven by growth in noninterest income which represented 47% of total revenue
compared with 41% in the prior-year period. Taxable-equivalent net interest
income increased $23 million from the first six months of 1997. The net interest
margin was 3.88% compared with 3.92% in the prior year. Noninterest income
increased 31% to $1.2 billion in the first six months of 1998 reflecting
significant growth in asset management, mutual fund servicing, consumer
services, corporate finance and capital markets and mortgage banking revenue.
The provision for credit losses was $65 million for the first six months of 1998
compared with $25 million in the prior year.
Noninterest expense increased $228 million or 18% in the first six months of
1998 commensurate with revenue growth and the impact of investments in the
consumer banking franchise. The efficiency ratio, computed excluding
distributions on capital securities, was 61.5% for the first six months of 1998
compared with 59.8% a year ago.
Average earning assets increased $1.9 billion from the prior year to $65.9
billion as higher loans and loans held for sale more than offset reductions in
the securities portfolio. Loans represented 83.0% of average earning assets
compared with 81.8% a year ago.
Shareholders' equity totaled $5.6 billion at June 30, 1998. The leverage ratio
was 7.18% and Tier I and total risk-based capital ratios were 7.24% and 10.79%,
respectively.
The ratio of nonperforming assets to loans and foreclosed assets was .57% at
June 30, 1998 and .61% at December 31, 1997. The allowance for credit losses was
315% of nonperforming loans and 1.53% of total loans at June 30, 1998 compared
with 352% and 1.79%, respectively, at December 31, 1997. Net charge-offs were
.66% of average loans for the first six months of 1998 compared with .46% for
the first six months of 1997. The increase was primarily associated with higher
credit card outstandings and lower collections.
ACQUISITIONS AND DIVESTITURES On April 3, 1998, PNC Bank completed the
acquisition of Midland Loan Services, L.P. ("Midland"), one of the nation's
largest servicers of commercial mortgages with a total servicing portfolio of
approximately $28 billion. This transaction greatly expands PNC Bank's
commercial real estate financial services capabilities, which now include
origination, securitization, servicing, investment advisory and risk management.
On April 15, 1998, the Corporation completed the acquisition of the asset-based
finance business of BTM Capital Corp. ("BTM"). The purchase included a $600
million portfolio of asset-based loans and loan commitments and regional sales
offices. This transaction is consistent with the strategy of growing this
business on a national basis.
On July 31, 1998, PNC Bank completed the acquisition of The Arcand Company,
subsequently renamed the Columbia Housing Corporation ("Columbia"). Columbia is
a leading tax credit syndicator, principally engaged in the origination and
distribution of affordable housing limited partnerships. Investment funds
syndicated and managed by Columbia include properties in 43 states comprising
more than 22,000 units with a value in excess of $1 billion.
On August 4, 1998, the Corporation entered into a definitive agreement to sell
its corporate trust and escrow business, which includes serving as indenture
trustee for municipal and corporate debt and as agent for escrow arrangements,
to Chase Manhattan Trust Company, N.A. The transaction is expected to close in
the fourth quarter of 1998, subject to regulatory approvals.
PNC BANK CORP.
2
<PAGE> 4
BUSINESS STRATEGIES Financial services providers today are challenged by intense
competition, changing customer demands, increased pricing pressures and the
ongoing impact of deregulation. Traditional loan and deposit activities face
particularly challenging competitive pressures as both banks and nonbanks
compete for customers with access to a broad array of banking, investment and
capital markets products. Many of these traditional businesses have moderate
growth expectations and require significant capital to support balance sheet
leverage that entails credit and interest rate risk.
PNC Bank has responded to these challenges by transitioning to an organization
comprised of distinct lines of business with highly focused customer segments.
This approach provides the basis for differentiated businesses capable of
competing in today's environment where banks and other financial service
providers seek the same customers.
The Corporation has focused on altering the business mix by investing in
specialized financial services businesses including asset management, mutual
fund servicing, private banking, mortgage banking, treasury management and
capital markets. These businesses are largely fee-based, less capital intensive
and have superior growth outlooks on a national scale. More meaningful
contributions from these businesses, coupled with disciplined management of
traditional banking activities, expansion of national distribution capabilities
and reduction of wholesale leverage activities have allowed PNC Bank to
significantly improve the composition of the earnings stream.
REGIONAL COMMUNITY BANKING provides financial products and services to small
business and retail customers within PNC Bank's geographic footprint. Regional
Community Banking employs information and customer knowledge to identify and
meet consumer preferences for traditional and technology-based products and
services that are distributed through retail branches and alternative
distribution channels.
CORPORATE BANKING provides credit, capital markets and treasury management
products and services to large and mid-size businesses, institutions and
government entities. Teams of specialists focus on specific industry segments,
including communications, health care, public finance, large corporate,
financial institutions, energy, metals and mining and emerging growth.
NATIONAL CONSUMER BANKING provides consumer products and services through
technologically advanced cost efficient channels. National Consumer Banking
focuses on nationwide distribution of products and services through affinity
relationships.
PRIVATE BANKING offers personalized investment management, brokerage, personal
trust, estate planning and traditional banking services for the affluent;
investment management services for the ultra-affluent through Hawthorn; and PNC
Bank's institutional trust businesses.
MORTGAGE BANKING originates and services residential mortgages. Mortgage Banking
focuses on expanding retail distribution channels, increasing the mortgage
servicing portfolio and expanding sales of related products including second
mortgages, home equity lines of credit, credit cards and insurance.
SECURED LENDING is engaged in commercial real estate finance, including loan
origination, securitization, and servicing through Midland, asset-based
financing through PNC Business Credit and equipment leasing within PNC Bank's
primary geographic markets and nationally.
ASSET MANAGEMENT offers fixed income, domestic and international equity and
liquidity products. BlackRock, Inc. ("BlackRock") represents the recent
combination of PNC Bank's investment advisory and asset management capabilities
under a single organization and brand. This integration created one of the
largest asset managers in the country, leveraging the BlackRock Financial
Management reputation as an established fixed income manager. BlackRock is
focused on expanding marketing and delivery channels for a wide range of
institutional and retail investment products.
MUTUAL FUND SERVICING provides institutional money managers, brokerage firms,
pension managers and insurance companies custom products, including accounting
and administration, transfer agency, custody, securities lending and central
asset account services. PFPC Inc. ("PFPC") is the second largest mutual fund
accounting agent and the fourth largest mutual fund transfer agent in the United
States. This business is focused on domestic, off-shore and alternative pooled
investment servicing capabilities.
PNC BANK CORP.
3
<PAGE> 5
Financial Review
FORWARD-LOOKING STATEMENTS
PNC Bank has made, and may continue to make, various forward-looking statements
with respect to financial performance 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 change over time and
the Corporation assumes no duty to update forward-looking statements. Actual
results could differ materially from forward-looking statements.
In addition to factors previously disclosed by the Corporation and those
identified elsewhere in this Financial Review, the following factors, among
others, could cause actual results to differ materially from forward-looking
statements: the inability of the Corporation or others to remediate Year 2000
concerns in a timely fashion; continued pricing pressures on loan and deposit
products; increased credit risk; the success and timing of AAA and other
business initiatives and strategies, several of which are in early stages and
therefore susceptible to greater uncertainty than more mature businesses;
competition; the ability to realize cost savings or revenues and implement
integration plans associated with acquisitions and divestitures at the levels
and within the time periods contemplated; changes in economic conditions; market
volatility; customer borrowing, repayment, investment and deposit practices;
continued customer disintermediation; customers' acceptance of PNC Bank's
products and services; and the extent and timing of technological advancement,
capital management activities, actions of the Federal Reserve Board and
legislative and regulatory actions and reforms.
PNC BANK CORP.
4
<PAGE> 6
LINE OF BUSINESS REVIEW
Financial results for PNC Bank's lines of business are derived from the
Corporation's management accounting system. Line of business information is
based on management accounting practices which conform to and support PNC Bank's
current management structure and is not necessarily comparable with similar
information for any other financial services institution.
In the second quarter of 1998, Asset Management and Mutual Fund Servicing was
segregated into two distinct lines of business and the institutional trust
business and Hawthorn were realigned with Private Banking. Results for the first
six months of 1998 and 1997 are presented consistent with this new structure.
The benefit from the sale of an equity interest to BlackRock management is
included in corporate administration and other unassigned.
The management accounting process uses various balance sheet and income
statement assignments and transfers to measure business unit performance.
Assignments and transfers change from time to time as the management accounting
system is enhanced and business or product lines change. There is no
comprehensive, authoritative body of guidance for management accounting
equivalent to generally accepted accounting principles.
Financial statements for the lines of business do not necessarily use the
same classifications as the consolidated financial statements. The financial
results presented herein reflect each line of business as if it operated on a
stand-alone basis. Securities or borrowings and related interest rate spreads
have been assigned to the lines of business based on their net asset or
liability positions.
Total line of business financial results differ from consolidated financial
results primarily due to eliminations, different provision for credit loss
methodologies and corporate administration and other unassigned items.
Eliminations offset transactions between the lines of business which primarily
relate to assigned securities or borrowings. Corporate administration and other
unassigned includes holding company revenue, expenses and other items not
assigned in the management accounting process.
Capital is assigned to each business unit based on management's assessment of
inherent risks and equity levels at independent companies providing similar
products and services. As a result, total capital assigned will differ from
consolidated shareholders' equity.
<TABLE>
<CAPTION>
Return on
Revenue Earnings (Loss) Assigned Capital Average Assets
Six months ended June 30 - ----------------------- ----------------------- ------------------------ ---------------------
dollars in millions 1998 1997 1998 1997 1998 1997 1998 1997
- ------------------------------------- ----------- ----------- ----------- ----------- ----------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Regional Community Banking $855 $809 $222 $205 31% 29% $35,020 $35,265
Corporate Banking 371 311 119 100 22 18 14,926 14,799
National Consumer Banking 346 354 (35) 29 (10) 9 11,468 11,228
Private Banking 252 222 61 46 31 27 2,724 2,443
Mortgage Banking 209 142 32 12 18 7 11,809 10,145
Secured Lending 141 135 62 67 22 26 7,986 6,176
Asset Management 114 74 18 10 23 17 267 258
Mutual Fund Servicing 91 72 19 16 46 45 198 156
----------- ----------- ----------- ----------- ---------- ----------
Total lines of business 2,379 2,119 498 485 21 22 84,398 80,470
Eliminations (71) (86) (51) (55) (15,103) (13,812)
Provision for credit losses 68 46
Corporate administration and other
unassigned 123 103 35 49 3,596 3,904
----------- ----------- ----------- ----------- ---------- ----------
Total consolidated $2,431 $2,136 $550 $525 21% 20% $72,891 $70,562
===================================== =========== =========== =========== =========== =========== ============ ========== ==========
</TABLE>
PNC BANK CORP.
5
<PAGE> 7
Financial Review
REGIONAL COMMUNITY BANKING
Six months ended June 30 - dollars in
millions 1998 1997
- ------------------------------------------ ---------- ----------
INCOME STATEMENT
Net interest income $657 $670
Noninterest income 198 139
---------- ----------
Total revenue 855 809
Provision for credit losses 16 13
Noninterest expense 471 461
---------- ----------
Pretax earnings 368 335
Income taxes 146 130
---------- ----------
Earnings $222 $205
---------- ----------
AVERAGE BALANCE SHEET
Loans
Consumer $5,098 $4,924
Commercial 2,597 2,014
Residential mortgage 1,255 1,250
Other 184 404
---------- ----------
Total loans 9,134 8,592
Assigned assets and other assets 25,886 26,673
---------- ----------
Total assets $35,020 $35,265
---------- ----------
Net deposits
Certificates $15,070 $15,738
Money market 6,993 6,186
Noninterest-bearing demand 4,845 4,818
Interest-bearing demand 3,957 4,024
Savings 2,598 2,931
---------- ----------
Total net deposits 33,463 33,697
Other liabilities 132 149
Assigned capital 1,425 1,419
---------- ----------
Total funds $35,020 $35,265
---------- ----------
PERFORMANCE RATIOS
Return on assigned capital 31% 29%
Noninterest income to total revenue 23 17
After-tax profit margin 26 25
Efficiency 55 57
========================================== ========== ==========
Regional Community Banking contributed 45% of total line of business earnings in
the first six months of 1998 compared with 42% for the first six months of 1997.
Earnings of $222 million included gains on the sales of 16 branches in Western
Pennsylvania that offset one-time costs primarily related to consumer delivery
initiatives. Excluding these items, earnings increased $8 million or 4% and
performance ratios improved due to strategies designed to respond to customer
behavior while improving the effectiveness and efficiency of the delivery
system. As a result of these strategies, noninterest expense before the one-time
costs in 1998 declined $30 million or 7% compared with the prior year. Net
interest income declined in the current period due to loan spread compression
and the impact of consumer migration to higher cost deposit products.
Regional Community Banking seeks to grow revenue through targeted marketing
efforts and will continue initiatives designed to leverage technology and reduce
the cost of the delivery system.
CORPORATE BANKING
Six months ended June 30 - dollars in
millions 1998 1997
- ------------------------------------------- --------- ---------
INCOME STATEMENT
Credit-related revenue $159 $157
Noncredit revenue
Treasury management 103 97
Venture capital 54 22
Capital markets 46 32
Other 9 3
--------- ---------
Total noncredit revenue 212 154
--------- ---------
Total revenue 371 311
Provision for credit losses 10 (18)
Noninterest expense 175 173
--------- ---------
Pretax earnings 186 156
Income taxes 67 56
--------- ---------
Earnings $119 $100
--------- ---------
AVERAGE BALANCE SHEET
Loans
Middle market $4,982 $4,996
Specialized 4,402 4,029
Large corporate 4,184 4,539
Other 392 311
--------- ---------
Total loans 13,960 13,875
Other assets 966 924
--------- ---------
Total assets $14,926 $14,799
--------- ---------
Net deposits $2,475 $2,097
Assigned funds and other liabilities 11,348 11,606
Assigned capital 1,103 1,096
--------- ---------
Total funds $14,926 $14,799
--------- ---------
PERFORMANCE RATIOS
Return on assigned capital 22% 18%
Noncredit revenue to total revenue 57 50
After-tax profit margin 32 32
Efficiency 47 56
=========================================== ========= =========
Corporate Banking contributed 24% of total line of business earnings in the
first six months of 1998 compared with 21% in the same period last year.
Earnings increased 19% in the first six months of 1998 and return on assigned
capital improved to 22% driven by strategies designed to expand revenue from
fee-based services while reducing reliance on balance sheet leverage.
PNC BANK CORP.
6
<PAGE> 8
Credit-related revenue primarily represents net interest income from loans and
remained flat in the comparison. Noncredit revenue which includes noninterest
income and the benefit of compensating balances in lieu of fees increased $58
million or 38% in the first six months of 1998 reflecting growth in treasury
management, capital markets and venture capital income. Expenses were stable
reflecting the continued focus on operating overhead as the efficiency ratio
declined to 47% in the first six months of 1998. The increase in the provision
for credit losses reflects the impact of net recoveries in the first six months
of 1997.
NATIONAL CONSUMER BANKING
Six months ended June 30 - dollars in
millions 1998 1997
- ------------------------------------------ ---------- ---------
INCOME STATEMENT
Net interest income $234 $197
Noninterest income 112 157
---------- ---------
Total revenue 346 354
Provision for credit losses 157 109
Noninterest expense 244 199
---------- ---------
Pretax earnings (loss) (55) 46
Income taxes (benefit) (20) 17
---------- ---------
Earnings (loss) $(35) $29
---------- ---------
AVERAGE BALANCE SHEET
Loans
Dealer finance $4,985 $5,394
Credit card 3,899 3,272
Education 1,197 1,481
Other 664 352
---------- ---------
Total loans 10,745 10,499
Other assets 723 729
---------- ---------
Total assets $11,468 $11,228
---------- ---------
Net deposits $141 $86
Assigned funds and other liabilities 10,630 10,480
Assigned capital 697 662
---------- ---------
Total funds $11,468 $11,228
---------- ---------
PERFORMANCE RATIOS
Return on assigned capital (10)% 9%
Noninterest income to total revenue 32 44
After-tax profit margin (10) 8
Efficiency 71 56
========================================== ========== =========
National Consumer Banking incurred a loss of $35 million in the first six months
of 1998 resulting from credit card and AAA which have been unfavorably impacted
primarily by intense competition and changing consumer credit conditions.
Earnings for 1997 included $61 million of nonrecurring gains. Excluding these
gains, earnings declined $26 million in the year-to-year comparison reflecting
higher credit costs.
The provision for credit losses increased $48 million as a result of higher
credit card outstandings and lower collections. Management has undertaken
enhanced collection efforts and a more focused marketing strategy directed at
PNC Bank's geographic footprint and affinity relationships. As a result, the
growth rate in credit card outstandings has declined and net charge-offs are
expected to remain relatively stable during the remainder of 1998.
The challenge in National Consumer Banking is to improve returns to appropriate
levels within a reasonable timeframe. Management is aggressively pursuing
actions designed to enhance returns on the capital invested in this line of
business.
PRIVATE BANKING
Six months ended June 30 - dollars in
millions 1998 1997
- ------------------------------------------- --------- ---------
INCOME STATEMENT
Net interest income $62 $56
Noninterest income
Investment management and trust 150 133
Brokerage 33 30
Other 7 3
--------- ---------
Total noninterest income 190 166
--------- ---------
Total revenue 252 222
Provision for credit losses 1 2
Noninterest expense 152 145
--------- ---------
Pretax earnings 99 75
Income taxes 38 29
--------- ---------
Earnings $61 $46
--------- ---------
AVERAGE BALANCE SHEET
Loans
Residential mortgage $985 $1,036
Consumer 926 801
Commercial 588 470
Other 28 74
--------- ---------
Total loans 2,527 2,381
Other assets 197 62
--------- ---------
Total assets $2,724 $2,443
--------- ---------
Net deposits $2,176 $1,864
Assigned funds and other liabilities 146 239
Assigned capital 402 340
--------- ---------
Total funds $2,724 $2,443
--------- ---------
PERFORMANCE RATIOS
Return on assigned capital 31% 27%
Noninterest income to total revenue 75 75
After-tax profit margin 24 21
Efficiency 60 65
=========================================== ========= =========
PNC BANK CORP.
7
<PAGE> 9
Financial Review
Private Banking contributed 12% of total line of business earnings in the first
six months of 1998 compared with 10% a year ago. Earnings increased $15 million
or 33% in the first six months of 1998 driven by revenue growth.
Net interest income increased 11% in the first six months of 1998 due to loan
and deposit growth. Noninterest income increased $24 million or 14% from the
prior year due to an increase in assets under management resulting from new
business and market value appreciation, and an increase in brokerage accounts.
Noninterest expense increased $7 million supporting revenue growth and
continuing investments in technology.
ASSETS UNDER MANAGEMENT
June 30 - In billions 1998 1997
- --------------------------------- --------------- -------------
Personal trust $37 $34
Institutional trust 6 6
Hawthorn 12 9
--------------- -------------
Total $55 $49
================================= =============== =============
Private Banking revenue is primarily affected by the volume of new business, the
value of assets managed, 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 have an adverse effect on revenue.
MORTGAGE BANKING
Six months ended June 30 - dollars in
millions 1998 1997
- ------------------------------------------- --------- ---------
INCOME STATEMENT
Servicing $86 $77
Origination and securitization 93 27
Sales of servicing and other 8 5
MSR amortization (71) (24)
Hedging activities 18 (4)
--------- ---------
Net mortgage banking revenue 134 81
Net interest income 75 61
--------- ---------
Total revenue 209 142
Operating expense 156 123
--------- ---------
Pretax earnings 53 19
Income taxes 21 7
--------- ---------
Earnings $32 $12
--------- ---------
AVERAGE BALANCE SHEET
Residential mortgage loans $7,237 $7,584
Mortgages held for sale 2,446 1,181
Other assets 2,126 1,380
--------- ---------
Total assets $11,809 $10,145
--------- ---------
Escrow deposits $802 $581
Assigned funds and other liabilities 10,655 9,230
Assigned capital 352 334
--------- ---------
Total funds $11,809 $10,145
--------- ---------
PERFORMANCE RATIOS
Return on assigned capital 18% 7%
Net mortgage banking revenue to total 64 57
revenue
After-tax profit margin 15 8
Efficiency 72 85
=========================================== ========= =========
Mortgage Banking contributed 6% of total line of business earnings in the first
six months of 1998 compared with 2% for the first six months of 1997. Earnings
increased $20 million to $32 million in the first six months of 1998 primarily
due to higher business volumes.
Revenue and expense growth in the first six months of 1998 resulted from higher
loan origination volume, reflecting significant mortgage refinance activity, new
business from an expanded national distribution network, and a larger servicing
portfolio.
During the first six months of 1998 Mortgage Banking funded $5.3 billion of
residential mortgages with 66% representing retail originations. The comparable
amounts were $2.4 billion and 71%, respectively, in the first six months of
1997. The year-to-year increase reflects the combination of higher refinance
activity and initiatives to expand retail origination capabilities.
PNC BANK CORP.
8
<PAGE> 10
MORTGAGE SERVICING PORTFOLIO
In millions 1998 1997
- ------------------------------------------ --------- ----------
January 1 $40,701 $39,543
Originations 5,278 2,398
Purchases 8,016 1,312
Repayments (6,303) (2,750)
Sales (1,064) (81)
--------- ----------
June 30 $46,628 $40,422
========================================== ========= ==========
At June 30, 1998 the mortgage servicing portfolio totaled $46.6 billion,
including $37.9 billion of loans serviced for others, with a weighted-average
coupon of 7.84% and an estimated fair value of $592 million. Capitalized
mortgage servicing rights ("MSR") totaled $509 million at June 30, 1998.
MSR value and amortization are affected by changes in interest rates. If
interest rates decline and the rate of prepayment increases, the underlying
servicing fees and related MSR value would also decline. Higher prepayment
activity resulted in higher amortization in 1998. In a period of rising interest
rates, a converse relationship would exist. The Corporation seeks to manage this
risk by using financial instruments with values that move in the opposite
direction of MSR value changes.
SECURED LENDING
Six months ended June 30 - dollars in
millions 1998 1997
- ------------------------------------------- --------- ---------
INCOME STATEMENT
Net interest income $108 $102
Noninterest income 33 33
--------- ---------
Total revenue 141 135
Provision for credit losses (12) (7)
Noninterest expense 61 36
--------- ---------
Pretax earnings 92 106
Income taxes 30 39
--------- ---------
Earnings $62 $67
--------- ---------
AVERAGE BALANCE SHEET
Loans
Real estate $4,923 $4,243
Business credit 1,170 940
Leasing 1,072 857
--------- ---------
Total loans 7,165 6,040
Other assets 821 136
--------- ---------
Total assets $7,986 $6,176
--------- ---------
Net deposits $962 $706
Assigned funds and other liabilities 6,456 4,947
Assigned capital 568 523
--------- ---------
Total funds $7,986 $6,176
--------- ---------
PERFORMANCE RATIOS
Return on assigned capital 22% 26%
Noninterest income to total revenue 23 24
After-tax profit margin 44 50
Efficiency 43 27
=========================================== ========= =========
Secured Lending contributed 12% of total line of business earnings in the first
six months of 1998 compared with 14% in the prior-year period. Excluding the
impact of the Midland integration and $11 million of nonrecurring gains in 1997,
earnings increased 14% driven by growth in loans and noninterest income.
Noninterest expense grew $25 million in the year-to-year comparison primarily
due to Midland. Continued improvement in credit quality also contributed to the
increase in earnings in the first six months of 1998.
The Corporation expects the acquisitions of Midland, BTM and Columbia to provide
additional revenue growth opportunities and be accretive to earnings in 1998.
These acquisitions reflect the strategy to reduce balance sheet leverage,
increase noninterest income and expand nationally.
ASSET MANAGEMENT
Six months ended June 30 - dollars in
millions 1998 1997
- ------------------------------------------ ---------- ---------
INCOME STATEMENT
Revenue $114 $74
Operating expense 80 55
---------- ---------
Pretax earnings 34 19
Income taxes 16 9
---------- ---------
Earnings $18 $10
---------- ---------
AVERAGE BALANCE SHEET
Total assets $267 $258
---------- ---------
Liabilities $112 $136
Assigned capital 155 122
---------- ---------
Total funds $267 $258
---------- ---------
PERFORMANCE RATIOS
Return on assigned capital 23% 17%
After-tax profit margin 16 14
Efficiency 70 74
========================================== ========== =========
Asset Management contributed 4% of total line of business earnings in the first
six months of 1998 compared with 2% for the first six months of 1997. Earnings
increased 80% in the first six months of 1998 driven by higher assets under
management reflecting new business generated by BlackRock as a result of strong
investment performance and technology-based risk management capabilities.
During the first six months of 1998 PNC Bank's fixed income, equity and
liquidity businesses were consolidated under BlackRock. This combination created
one of the largest asset managers in the United States focused on expanding
marketing and delivery channels for a wide range of institutional and retail
investment products.
PNC BANK CORP.
9
<PAGE> 11
Financial Review
ASSETS UNDER MANAGEMENT
June 30 - in billions 1998 1997
- ------------------------------------------- --------- ---------
Fixed income $62 $50
Liquidity 42 33
Equity and other 14 12
--------- ---------
Total assets under management $118 $95
--------- ---------
Proprietary mutual funds
BlackRock Funds $23 $13
Other 20 18
--------- ---------
Total proprietary mutual funds $43 $31
=========================================== ========= =========
Asset Management revenue is primarily affected by the volume of new business,
the value of assets managed, 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 have an adverse effect on revenue.
MUTUAL FUND SERVICING
Six months ended June 30 - dollars in
millions 1998 1997
- ------------------------------------------ ---------- ---------
INCOME STATEMENT
Revenue $91 $72
Operating expense 60 46
---------- ---------
Pretax earnings 31 26
Income taxes 12 10
---------- ---------
Earnings $19 $16
---------- ---------
AVERAGE BALANCE SHEET
Total assets $198 $156
---------- ---------
Net deposits $96 $68
Other liabilities 19 16
Assigned capital 83 72
---------- ---------
Total funds $198 $156
---------- ---------
PERFORMANCE RATIOS
Return on assigned capital 46% 45%
After-tax profit margin 21 22
Efficiency 66 64
========================================== ========== =========
Mutual Fund Servicing contributed 4% of total line of business earnings in the
first six months of 1998 compared with 3% in the year-earlier period. Earnings
increased $3 million or 19% in the year-to-year comparison as revenue grew 26%
driven by new business as PFPC capitalized on its strong capabilities as a
provider of customized products and services.
Assets and accounts serviced by PFPC were as follows:
June 30 1998 1997
- ------------------------------------------- --------- ---------
Assets (billions)
Custody $281 $208
Accounting/administration 226 148
- ------------------------------------------- --------- ---------
Accounts (millions)
Shareholder 4.7 4.0
Checking and credit/debit card 2.1 1.9
=========================================== ========= =========
CONSOLIDATED INCOME STATEMENT REVIEW
INCOME STATEMENT HIGHLIGHTS
Six months ended June 30 - in
millions 1998 1997 Change
- ---------------------------------------------------------------
Net interest income $1,281 $1,258 $23
(taxable-equivalent basis)
Provision for credit losses 65 25 40
Noninterest income before
net securities gains 1,124 848 276
Net securities gains 26 30 (4)
Noninterest expense 1,522 1,294 228
Income taxes 281 276 5
Net income 550 525 25
===============================================================
NET INTEREST INCOME Taxable-equivalent net interest income increased $23 million
from the first six months of 1997. The net interest margin was 3.88% compared
with 3.92% in the prior-year period. Changes in net interest income and margin
result from the interaction between the volume and composition of earning
assets, related yields and associated funding costs. Accordingly, portfolio
size, composition and related yields earned and rates paid can have a
significant impact on net interest income and margin.
The increase in net interest income was due to a $1.9 billion increase in
average earning assets which more than offset a narrower net interest margin.
Average loans grew 4.5% to $54.7 billion, a $2.3 billion increase from the prior
year. Growth in commercial loans and credit cards more than offset the impact of
loan securitizations and the downsizing of the indirect automobile lending
portfolio. The increase in average loans held for sale was $1.4 billion
reflecting higher residential mortgage originations and the commercial mortgage
inventory of Midland.
PNC BANK CORP.
10
<PAGE> 12
<TABLE>
<CAPTION>
NET INTEREST INCOME ANALYSIS
Taxable-equivalent basis Average Balances Interest Income/Expense Average Yields/Rates
Six months ended June 30 - dollars in ----------------------------- -------------------------- -----------------------------
millions 1998 1997 Change 1998 1997 Change 1998 1997 Change
- ---------------------------------------- --------- --------- --------- -------- -------- -------- --------- -------- ----------
Interest-earning assets
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans held for sale $2,657 $1,215 $1,442 $94 $44 $50 7.08% 7.22% (14) bp
Securities available for sale 7,552 9,569 (2,017) 224 298 (74) 5.94 6.25 (31)
Loans, net of unearned income
Consumer (excluding credit card) 11,090 11,531 (441) 470 483 (13) 8.56 8.45 11
Credit card 3,899 3,274 625 266 207 59 13.75 12.75 100
Residential mortgage 12,671 12,974 (303) 462 482 (20) 7.29 7.44 (15)
Commercial 21,550 18,686 2,864 852 733 119 7.86 7.81 5
Commercial real estate 3,414 4,080 (666) 145 178 (33) 8.46 8.66 (20)
Other 2,095 1,825 270 73 63 10 7.00 6.88 12
--------- --------- --------- -------- -------- --------
Total loans, net of unearned 54,719 52,370 2,349 2,268 2,146 122 8.29 8.20 9
income
Other 1,015 860 155 32 26 6 6.32 6.02 30
--------- --------- --------- -------- -------- --------
Total interest-earning assets/
interest income 65,943 64,014 1,929 2,618 2,514 104 7.94 7.86 8
Noninterest-earning assets 6,948 6,548 400
--------- --------- ---------
Total assets $72,891 $70,562 $2,329
========= ========= =========
Interest-bearing liabilities
Deposits
Demand and money market $14,249 $13,116 $1,133 209 182 27 2.96 2.80 16
Savings 2,661 2,993 (332) 26 29 (3) 1.99 1.97 2
Other time 17,046 17,689 (643) 461 472 (11) 5.44 5.38 6
Deposits in foreign offices 995 1,127 (132) 28 31 (3) 5.59 5.42 17
--------- --------- --------- -------- -------- --------
Total interest-bearing deposits 34,951 34,925 26 724 714 10 4.17 4.12 5
Borrowed funds 20,922 18,635 2,287 613 542 71 5.83 5.82 1
--------- --------- --------- -------- -------- --------
Total interest-bearing
liabilities/ interest expense 55,873 53,560 2,313 1,337 1,256 81 4.79 4.71 8
-------- -------- -------- --------- -------- ----------
Noninterest-bearing liabilities,
capital securities and
shareholders' equity 17,018 17,002 16
--------- --------- ---------
Total liabilities and
shareholders' equity $72,891 $70,562 $2,329
========= ========= =========
Interest rate spread 3.15 3.15
Impact of noninterest-bearing sources .73 .77 (4)
--------- -------- ----------
Net interest income/margin $1,281 $1,258 $23 3.88% 3.92% (4) bp
======================================== ========= ========= ========= ======== ======== ======== ========= ======== ==========
</TABLE>
The narrowing of the net interest margin was primarily due to an increase in
commercial loans and loans held for sale as well as declining spreads resulting
from competitive pressures on certain loan and deposit products. Partially
offsetting these unfavorable factors was a decrease of $2.0 billion in average
securities available for sale which represented 11% of average earning assets
compared with 15% a year ago.
Funding cost is affected by the composition of and rates paid on various funding
sources. Average deposits comprised 60.9% and 63.0% of PNC Bank's total sources
of funding for the six months ended June 30, 1998 and 1997, respectively, with
the remainder primarily comprised of wholesale funding obtained at prevailing
market rates.
Management anticipates modest balance sheet growth and continued competitive
pressure on the net interest margin throughout the remainder of 1998.
PROVISION FOR CREDIT LOSSES The provision for credit losses was $65 million in
the first six months of 1998 compared with $25 million in the prior-year period.
Management anticipates the Corporation will record higher provisions for credit
losses throughout the remainder of 1998.
PNC BANK CORP.
11
<PAGE> 13
Financial Review
NONINTEREST INCOME
Change
Six months ended June 30 - -------------------
dollars in millions 1998 1997 Amount Percent
- --------------------------- ------ -------- -------- ----------
Asset management $278 $218 $60 27.5%
Mutual fund servicing 87 68 19 27.9
Service charges on deposits 98 101 (3) (3.0)
Consumer services
Credit card 58 41 17 41.5
Brokerage 32 26 6 23.1
Insurance 21 19 2 10.5
Other 64 60 4 6.7
------ -------- --------
Total consumer
services 175 146 29 19.9
Corporate finance and
capital markets
Capital markets 24 21 3 14.3
Commercial mortgage
servicing 12 12 NM
Other 81 76 5 6.6
------ -------- -------- ----------
Total corporate
finance and capital 117 97 20 20.6
markets
Mortgage banking
Residential mortgage
servicing 62 56 6 10.7
Origination 37 19 18 94.7
Marketing 55 7 48 NM
Sales of servicing 7 2 5 NM
------ -------- --------
Total mortgage
banking 161 84 77 91.7
Net securities gains 26 30 (4) (13.3)
Other 208 134 74 55.2
------ -------- --------
Total $1,150 $878 $272 31.0%
========================== ====== ======== ======== ==========
NM - not meaningful
NONINTEREST INCOME Noninterest income increased $272 million or 31% in the first
six months of 1998. Noninterest income in the current period included $56
million of gains from the sales of 16 branches in Western Pennsylvania that
offset one-time costs related to consumer delivery initiatives and improvements
in credit card operations. Excluding these gains, noninterest income
increased 25% in the year-to-year comparison.
Asset management fees increased 28% primarily due to new business. Assets under
management increased 24% to $151 billion at June 30, 1998 compared with $122
billion a year ago. Mutual fund servicing fees also grew 24% resulting from an
increase in assets and accounts serviced.
Consumer services revenue increased 20% primarily due to higher credit card fees
related to growth in accounts. Corporate finance and capital markets fees
increased $20 million including $12 million of commercial mortgage servicing
revenue from Midland.
Mortgage banking revenue grew primarily due to higher marketing gains and
origination volume reflecting significant mortgage refinance activity and new
business in the first six months of 1998.
Net securities gains were $26 million in the first six months of 1998 including
$12 million resulting from MSR hedging activities. Other noninterest income
increased primarily due to the branch gains and higher venture capital income.
NONINTEREST EXPENSE
Change
Six months ended June 30 - -------------------
dollars in millions 1998 1997 Amount Percent
- --------------------------- ------- -------- -------- ----------
Staff expense
Compensation $576 $502 $74 14.7%
Employee benefits 112 108 4 3.7
------- -------- --------
Total staff expense 688 610 78 12.8
Net occupancy and
equipment
Net occupancy 101 93 8 8.6
Equipment 97 88 9 10.2
------- -------- --------
Total net occupancy
and equipment 198 181 17 9.4
Amortization
Goodwill 31 26 5 19.2
Mortgage servicing
rights 76 24 52 NM
Other 21 19 2 10.5
------- -------- --------
Total amortization 128 69 59 85.5
Marketing 64 48 16 33.3
Distributions on
capital securities 27 17 10 58.8
Other 417 369 48 13.0
------- -------- --------
Total $1,522 $1,294 $228 17.6%
========================== ======= ======== ======== ==========
NM - not meaningful
NONINTEREST EXPENSE Noninterest expense increased $228 million or 18% in the
first six months of 1998. Approximately $55 million of the increase related to
one-time costs for consumer delivery initiatives, employee displacements and the
streamlining of credit card operations. The remaining increase in noninterest
expense was primarily due to higher MSR amortization, incentive compensation
commensurate with growth in fee-based revenue, the impact of Midland and higher
marketing costs associated with National Consumer Banking initiatives. Average
full-time equivalent employees totaled approximately 25,100 in the first six
months of 1998 compared with 24,600 in the prior-year period.
PNC BANK CORP.
12
<PAGE> 14
CONSOLIDATED BALANCE SHEET REVIEW
PERIOD-END BALANCE SHEET HIGHLIGHTS
June 30 December 31
In millions 1998 1997 Change
- ------------------------------ --------- ----------- ----------
Assets $75,873 $75,120 $753
Earning assets 68,353 66,688 1,665
Loans, net of unearned income 56,237 54,245 1,992
Securities available for sale 7,540 8,522 (982)
Deposits 47,096 47,649 (553)
Borrowed funds 20,488 19,622 866
Shareholders' equity 5,633 5,384 249
=============================== ======== =========== ==========
LOANS Loans outstanding increased $2.0 billion from year-end 1997 to $56.2
billion at June 30, 1998 primarily in Corporate Banking and Secured Lending.
Certain reclassifications of loan balances were made for the current reporting
period; however, prior period amounts were not restated.
LOANS
June 30 December 31
In millions 1998 1997
- ----------------------------------------- --------- -----------
Consumer
Home equity $5,309 $4,848
Credit card 4,150 3,830
Automobile 2,921 3,221
Education 1,006 1,223
Other 1,799 1,913
--------- -----------
Total consumer 15,185 15,035
Residential mortgage 12,698 12,785
Commercial
Manufacturing 4,621 3,838
Retail/wholesale 4,084 3,575
Service providers 2,807 2,497
Real estate related 2,467 2,047
Communications 1,601 1,154
Health care 1,337 1,504
Financial services 1,742 1,027
Other 4,700 4,347
--------- -----------
Total commercial 23,359 19,989
Commercial real estate
Mortgage 901 1,848
Real estate project 1,971 2,126
--------- -----------
Total commercial real estate 2,872 3,974
Lease financing and other 2,516 2,874
Unearned income (393) (412)
--------- -----------
Total, net of unearned income $56,237 $54,245
========================================= ========= ===========
Loan portfolio composition continues to be geographically diversified among
numerous industries and types of businesses and remained relatively consistent
in the comparison. As the Corporation's businesses evolve, the loan portfolio is
expected to remain diversified. Management anticipates modest loan portfolio
growth throughout the remainder of 1998.
NET UNFUNDED COMMITMENTS
June 30 December 31
In millions 1998 1997
- ---------------------------------------- --------- ------------
Consumer (excluding credit card) $3,593 $3,363
Credit card 17,150 16,385
Residential mortgage 2,766 2,144
Commercial 32,376 29,707
Commercial real estate 1,160 1,167
Other 525 1,082
--------- ------------
Total $57,570 $53,848
======================================== ========= ============
Commitments to extend credit represent arrangements to lend funds provided there
is no violation of specified contractual conditions. Commercial commitments are
reported net of $4.9 billion and $5.9 billion of participations, assignments and
syndications, primarily to financial institutions, at June 30, 1998 and December
31, 1997, respectively.
Net outstanding letters of credit totaled $4.6 billion and $4.7 billion at June
30, 1998 and December 31, 1997, respectively, and consisted primarily of standby
letters of credit which commit the Corporation to make payments on behalf of
customers when certain specified future events occur.
SECURITIES AVAILABLE FOR SALE The securities portfolio declined $1.0 billion
from year-end 1997 to $7.5 billion at June 30, 1998. The expected
weighted-average life of the securities portfolio was 3 years and 1 month at
June 30, 1998 compared with 2 years and 9 months at year-end 1997.
SECURITIES AVAILABLE FOR SALE
June 30, 1998 December 31, 1997
------------------- --------------------
Amortized Fair Amortized Fair
In millions Cost Value Cost Value
- ----------------------- --------- -------- ---------- ---------
Debt securities
U.S. Treasury and
government
agencies $2,250 $2,248 $1,102 $1,105
Mortgage-backed 3,653 3,630 4,672 4,623
Asset-backed 1,057 1,059 2,079 2,083
State and municipal 138 143 170 177
Other debt 33 32 34 33
Corporate stocks and other 433 428 501 501
------- -------- ---------- ---------
Total $7,564 $7,540 $8,558 $8,522
======================= ========= ======== ========== =========
PNC BANK CORP.
13
<PAGE> 15
Financial Review
Securities available for sale may be sold as part of the overall asset/liability
management process. Realized gains and losses are reflected in the results of
operations and include gains or losses on associated financial derivatives.
Unrealized gains and losses are reflected in other comprehensive income. No
financial derivatives were designated to securities available for sale at June
30, 1998 and December 31, 1997.
FUNDING SOURCES Deposits were $47.1 billion at June 30, 1998, a decline of $553
million from December 31, 1997. An $866 million increase in borrowed funds from
$19.6 billion at year-end 1997 was primarily the result of increases in bank
notes and senior debt, repurchase agreements and other borrowed funds partially
offset by a decline in federal funds purchased. During the first six months of
1998, the Corporation issued $500 million of bank notes under the Euro
medium-term bank note program. Subsequent to quarter end, an additional $300
million of bank notes were issued under this program.
FUNDING SOURCES
June 30 December 31
In millions 1998 1997
- ---------------------------------------- ---------- ------------
Deposits
Demand, savings and money market $26,808 $27,475
Time 16,206 17,125
Foreign 4,082 3,049
---------- ------------
Total deposits 47,096 47,649
Borrowed funds
Bank notes and senior debt 11,788 9,826
Federal funds purchased 897 3,632
Repurchase agreements 1,658 714
Other borrowed funds 4,302 3,753
Subordinated debt 1,843 1,697
---------- ------------
Total borrowed funds 20,488 19,622
---------- ------------
Total $67,584 $67,271
======================================== ========== ============
CAPITAL The access to and cost of funding new business initiatives including
acquisitions, deposit insurance costs, ability to pay dividends and the level
and nature of regulatory oversight depend, in large part, on a financial
institution's capital strength. The minimum regulatory capital ratios are 4% for
Tier I risk-based, 8% for total risk-based and 3% for leverage. However,
regulators may require higher capital levels when particular circumstances
warrant. To qualify as well capitalized, regulators require banks to maintain
capital ratios of at least 6% for Tier I, 10% for total risk-based and 5% for
leverage. At June 30, 1998, the Corporation and each bank subsidiary met the
well capitalized capital ratio requirements.
RISK-BASED CAPITAL
June 30 December 31
Dollars in millions 1998 1997
- --------------------------------------- ---------- -------------
Capital components
Shareholders' equity
Common $5,318 $5,069
Preferred 314 315
Trust preferred capital securities 848 650
Goodwill and other (1,304) (949)
Net unrealized securities losses 16 23
--------- -------------
Tier I risk-based capital 5,192 5,108
Subordinated debt 1,690 1,666
Eligible allowance for credit losses 859 861
--------- -------------
Total risk-based capital $7,741 $7,635
========= =============
Assets
Risk-weighted assets and
off-balance-sheet instruments $71,726 $68,756
Average tangible assets 72,344 69,948
========= =============
Capital ratios
Tier I risk-based 7.24% 7.43%
Total risk-based 10.79 11.11
Leverage 7.18 7.30
- --------------------------------------- ---------- -------------
The capital position is managed through balance sheet size and composition,
issuance of debt and equity instruments, treasury stock activities, dividend
policies and retention of earnings.
In April 1998, the Corporation issued $140 million of 6.5% subordinated notes
that qualify as Tier II risk-based capital. In June 1998, the Corporation issued
$200 million of floating rate mandatorily redeemable capital securities bearing
interest at a rate per annum equal to 3-month LIBOR plus 57 basis points. The
rate in effect at June 30, 1998 was 6.2575%. These mandatorily redeemable
capital securities qualify as Tier I risk-based capital.
In May 1998, the Corporation called $39 million of 8.25% convertible
subordinated debentures at par redeemable in June. Prior to the redemption date,
these debentures were converted into common stock at a conversion price of
$23.41. The conversion of these debentures resulted in a corresponding increase
in shareholders' equity.
During the first six months of 1998, PNC Bank repurchased 3.7 million shares of
common stock. The Corporation's board of directors authorized in April 1998 the
repurchase of up to 10 million shares of common stock through April 30, 1999.
Approximately 9.3 million shares remain under this authorization.
PNC BANK CORP.
14
<PAGE> 16
YEAR 2000
The Corporation has been working since 1995 to prepare its computer systems and
applications to meet the year 2000 issues. This process involves reviewing,
modifying and replacing existing hardware, software and non-information
technology systems, as necessary, and communicating with external service
providers and customers to determine whether they are addressing their year 2000
issues. The Corporation is also assessing the potential for computer systems of
third parties such as vendors, customers, governmental entities and others to
impact the Corporation's business operations. The Corporation has not identified
any material third party problems to date, but continues to assess the
situation.
Given the Corporation's common technology infrastructure and the progress made
to date, management estimates the review and modification of its computer
systems, applications and non-information technology systems will be
substantially completed by December 31, 1998. Currently, approximately 56% of
the Corporation's mainframe, mid-range and PC client-server systems have been
tested and returned to production as year 2000 ready. The Corporation is also
taking steps designed to appraise the year 2000 preparedness of its mission
critical service providers and has plans to run tests with some of its service
providers during 1999.
The estimated total cost to become year 2000 compliant, which is being expensed
as incurred, is approximately $30 million. Through June 30, 1998 the Corporation
has expensed approximately $14 million related to the year 2000 effort and
anticipates that approximately 50% of the remaining costs will be incurred
during the second half of 1998.
Failure of the Corporation or third parties to correct year 2000 issues could
cause disruption of operations resulting in increased operating costs and other
adverse effects. In addition, to the extent customers' financial positions are
weakened as a result of year 2000 issues, credit quality could be affected. It
is not possible to predict with certainty all of the adverse effects that may
result from a failure of the Corporation or third parties to become fully year
2000 compliant or whether such effects could have a material impact on the
Corporation.
RISK MANAGEMENT
In the normal course of business, the Corporation assumes various types of risk,
the most significant of which are credit, liquidity and interest rate risk.
Market risk is also inherent in the Corporation's business operations. Market
risk is the risk of loss associated with adverse changes in the fair value of
financial instruments due to changes in interest rates, exchange rates and
equity prices. To manage these risks, PNC Bank has risk management processes
designed to provide for risk identification, measurement, monitoring and
control.
CREDIT RISK Credit risk represents the possibility that a customer or
counterparty may not perform in accordance with contractual terms. Credit risk
is inherent in the financial services business and results from extending credit
to customers, purchasing securities and entering into off-balance-sheet
financial derivative transactions. The Corporation seeks to manage credit risk
through diversification, limiting exposure to any single industry or customer
and requiring collateral or selling participations to third parties.
PNC BANK CORP.
15
<PAGE> 17
Financial Review
NONPERFORMING ASSETS
June 30 December 31
Dollars in millions 1998 1997
- ----------------------------------------- --------- -----------
Nonperforming loans
Commercial $129 $128
Commercial real estate
Mortgage 47 84
Real estate project 33 10
Residential mortgage 56 44
Consumer 7 10
--------- -----------
Total nonperforming loans 272 276
Foreclosed assets
Commercial real estate 22 27
Residential mortgage 20 21
Other 9 9
------- -----------
Total foreclosed assets 51 57
------- -----------
Total nonperforming assets $323 $333
------- -----------
Nonperforming loans to loans .48% .51%
Nonperforming assets to loans and
foreclosed assets .57 .61
Nonperforming assets to assets .43 .44
========================================= ========= ===========
The amount of nonperforming loans that were current as to principal and interest
was $47 million at June 30, 1998 and $34 million at December 31, 1997. There
were no restructured loans outstanding as of either period end presented.
Subsequent to June 30, 1998, affiliates of the Allegheny Health, Education and
Research Foundation filed for protection under Chapter 11 of the United States
Bankruptcy Code. PNC Bank has net credit exposure to these bankrupt affiliates
of approximately $80 million which is expected to become a nonperforming asset
in the third quarter of 1998. Management does not anticipate that this matter
will have a material impact on the Corporation's financial position or results
of operations.
CHANGE IN NONPERFORMING ASSETS
In millions 1998 1997
- ----------------------------------------- ---------- ----------
January 1 $333 $459
Transferred from accrual 133 169
Returned to performing (2) (19)
Principal reductions (94) (94)
Sales (28) (41)
Charge-offs and valuation adjustments (19) (32)
---------- ----------
June 30 $323 $442
========================================= ========== ==========
ACCRUING LOANS PAST DUE 90 DAYS OR MORE
Amount Percent of Loans
-------------------- ---------------------
June 30 December 31 June 30 December 31
Dollars in millions 1998 1997 1998 1997
- ---------------------- -------- ------------ --------- ------------
Consumer
Guaranteed education $22 $26 2.16% 2.32%
Credit card 69 69 1.66 1.80
Other 32 32 .32 .33
------ ------------
Total consumer 123 127 .81 .87
Residential mortgage 55 60 .43 .47
Commercial 50 78 .20 .39
Commercial real estate 16 23 .57 .59
------ ------------
Total $244 $288 .43 .53
======================== ====== ============ =========== ==========
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
In millions 1998 1997
- ----------------------------------------- ---------- ----------
January 1 $972 $1,166
Charge-offs (214) (185)
Recoveries 35 66
---------- ----------
Net charge-offs (179) (119)
Provision for credit losses 65 25
Acquisitions 1 3
---------- ----------
June 30 $859 $1,075
========================================= ========== ==========
The allowance as a percent of nonperforming loans and period-end loans was 315%
and 1.53%, respectively, at June 30, 1998. The comparable year-end 1997 amounts
were 352% and 1.79%.
CHARGE-OFFS AND RECOVERIES
Net Percent of
Six months ended June 30- Charge- Charge- Average
dollars in millions offs Recoveries offs Loans
- ------------------------- ----- ---------- -------- ---------
1998
Consumer (excluding
credit card) $46 $19 $27 .49%
Credit card 147 8 139 7.19
Residential mortgage 5 1 4 .06
Commercial 13 6 7 .06
Commercial real estate 3 1 2 .12
------ ---------- --------
Total $214 $35 $179 .66
- ------------------------- ------ ---------- -------- ---------
1997
Consumer (excluding
credit card) $55 $18 $37 .65%
Credit card 101 16 85 5.24
Residential mortgage 5 1 4 .06
Commercial 20 27 (7) (.07)
Commercial real estate 4 4
------ ---------- --------
Total $185 $66 $119 .46
========================= ====== ========== ======== =========
Credit card net charge-offs increased $54 million in the comparison, primarily
due to higher credit card outstandings and lower collections.
PNC BANK CORP.
16
<PAGE> 18
LIQUIDITY RISK Liquidity represents an institution's ability to generate cash or
otherwise obtain funds at reasonable rates to satisfy commitments to borrowers
and demands of depositors and debtholders and to invest in strategic
initiatives. Liquidity risk represents the possibility the Corporation would be
unable to generate cash or otherwise obtain funds at reasonable rates to satisfy
such obligations or investments in strategic initiatives. Liquidity risk is
managed through the coordination of the expected 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 asset
securitizations. The ability to raise funds in the capital markets depends,
among other factors, on credit ratings, market conditions, capital
considerations and investor demand.
Liquid assets consist of cash and due from banks, short-term investments, loans
held for sale and securities available for sale. At June 30, 1998, such assets
totaled $14.1 billion, with $4.8 billion pledged as collateral for borrowing,
trust and other commitments. 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 June 30, 1998, approximately $4.3 billion of
residential mortgages were available as collateral for borrowings from the FHLB.
In addition, bank affiliates have access to funds as issuers of unsecured notes
in domestic and foreign markets.
During the first six months of 1998, cash and due from banks decreased $2.2
billion to $2.1 billion compared with a decrease of $340 million during the
year-earlier period. Net cash used by operating activities totaled $606 million
in the first six months of 1998 compared with $386 million provided a year
earlier. Investing activities used net cash of $2.2 billion in the first six
months of 1998 compared with $1.2 billion provided in the first six months of
1997. Net cash provided by financing activities totaled $556 million in the
first six months of 1998 compared with $1.9 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 $785 million at June 30, 1998. Dividends may
also be impacted by capital needs, regulatory requirements, corporate policies,
contractual restrictions 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 has unused capacity under effective shelf registration statements of
approximately $1.3 billion of debt and equity securities and $400 million of
trust preferred capital securities. During the first six months of 1998, the
Corporation issued $140 million of subordinated debt and $200 million of trust
preferred capital securities. In addition, the Corporation had a $500 million
unused line of credit.
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 overall asset/liability management process.
INTEREST RATE RISK Interest rate risk arises primarily through the Corporation's
core business activities of extending loans and accepting deposits. Many
factors, including economic and financial conditions, movements in market
interest rates and consumer preferences affect the spread between interest
earned on assets and interest paid on liabilities. In managing interest rate
risk, the Corporation seeks to minimize its reliance on a particular interest
rate scenario as a source of earnings, while maximizing net interest income and
net interest margin. To achieve these objectives, the Corporation uses
securities purchases and sales, long-term and short-term funding vehicles,
financial derivatives and other capital markets instruments.
Interest rate risk is centrally managed by Asset and Liability ("A&L")
Management. The Corporation actively measures and monitors all components of
interest rate risk including term structure or repricing risk, yield curve or
nonparallel rate shift risk, basis risk and options risk. Senior management's
Corporate Asset & Liability Committee ("ALCO") provides strategic direction to
A&L Management and, in doing so, reviews capital markets activities and interest
rate risk exposures. The Finance Committee of the Board of Directors is
responsible for overseeing the Corporation's interest rate risk management
process.
The Corporation measures and manages both the short-term and long-term effects
of changing interest rates. A net interest income simulation model is used to
measure the sensitivity of net interest income to changing interest rates over
the next twenty-four month period; and an economic value of equity model is used
to measure the sensitivity of the value of existing on-balance-sheet and
off-balance-sheet positions to changing interest rates.
PNC BANK CORP.
17
<PAGE> 19
Financial Review
The income simulation model is the primary tool used to measure the direction
and magnitude of changes in net interest income resulting from changes in
interest rates. Forecasting net interest income and its sensitivity to changes
in interest rates requires that the Corporation make assumptions about the
volume and characteristics of new business and the behavior of existing
positions. These business assumptions are based on the Corporation's experience,
line of business plans and published industry experience with input by key line
of business managers. Any significant changes in major assumptions are reviewed
by ALCO. This review includes an assessment of the motivation for the change and
its effect on the simulated results. Key assumptions employed in the model
include prepayment speeds on mortgage-related assets and consumer loans, loan
volumes and pricing, deposit volumes and pricing, the expected life and
repricing characteristics of nonmaturity loans and deposits and management's
financial and capital plans.
Because these assumptions are inherently uncertain, the model cannot precisely
estimate net interest income or precisely predict the effect 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, the
difference between actual experience and the assumed volume and characteristics
of new business and the behavior of existing positions, and changes in market
conditions and management strategies, among other factors.
The Corporation's interest rate risk management policies 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. Through the first six months of 1998, the Corporation's interest rate
risk exposures were consistently within policy limits. At June 30, 1998, if
interest rates were to increase by 100 basis points over the next twelve months,
net interest income would decline by 0.7%. If interest rates were to decrease by
100 basis points over the next twelve months, net interest income would increase
by 0.1%.
The Corporation models additional interest rate scenarios covering a wider range
of rate movements to identify yield curve, term structure and basis risk
exposures. These scenarios are developed based on historical rate relationships
or management's expectations regarding the future direction and level of
interest rates. Depending on market conditions and other factors, these
scenarios may be modeled more or less frequently. Such analyses are used in
conjunction with the income simulation model and economic value of equity model
to identify inherent risk and develop appropriate strategies.
The Corporation measures the sensitivity of the value of its balance sheet and
off-balance sheet positions to movements in interest rates using an economic
value of equity sensitivity model. The model computes the value of all current
on- balance-sheet and off-balance-sheet positions under a range of instantaneous
interest rate changes. The resulting change in the value of equity is the
measure of overall long-term interest rate risk inherent in the Corporation's
existing on-balance-sheet and off-balance-sheet positions. The Corporation uses
the economic value of equity model to complement the income simulation modeling
process.
The Corporation's risk management policies provide that the change in economic
value of equity should not decline by more than 1.5% as a percentage of the book
value of assets for a 200 basis point instantaneous increase or decrease in
interest rates.
Economic value of equity sensitivities are periodically reported to ALCO and the
Finance Committee of the Board of Directors. Based on the results of the
economic value of equity model at June 30, 1998, if interest rates were to
increase by 200 basis points, the economic value of existing on-balance-sheet
and off-balance-sheet positions would decline by 0.48% of assets. If interest
rates were to decrease by 200 basis points, the economic value of existing
on-balance-sheet and off-balance-sheet positions would decline by 0.16% of
assets.
MARKET RISK Most of PNC Bank's trading activities are designed to provide
capital markets services for Corporate Banking and Private Banking customers.
While some market risk exposure is a necessary outgrowth of providing services
to customers, the performance of PNC Bank's trading operations is predominantly
based on providing services to customers and not on positioning the
Corporation's portfolio for gains from market movements.
PNC Bank's market risk is predominantly related to interest rate risk associated
with normal loan and deposit taking. Market risk associated with trading,
capital markets and foreign exchange activities is managed using a value-at-risk
approach that combines interest rate risk, foreign exchange rate risk, spread
risk and volatility risk. Exposure is measured as the maximum loss due to a two
standard deviation one day move. The combined period-end value-at-risk of all
trading operations was less than $300 thousand.
PNC BANK CORP.
18
<PAGE> 20
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
primarily 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 the first six months of 1998.
<TABLE>
<CAPTION>
FINANCIAL DERIVATIVES ACTIVITY Weighted-
Average
1998 - dollars in millions January 1 Additions Maturities Terminations June 30 Maturity
- ------------------------------------------------------ ---------- ------------- ----------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest rate risk management
Interest rate swaps
Receive fixed $4,320 $2,205 $(927) $(1,040) $4,558 2 yr. 2 mo.
Pay fixed 448 301 (81) (608) 60 1 yr. 7 mo.
Basis swaps 1,011 740 (30) 1,721 5 yr. 1 mo.
Interest rate caps 542 179 (87) 634 4 yr. 3 mo.
Interest rate floors 3,645 3,263 (2,100) 4,808 1 yr. 10 mo.
---------- ------------- ------------ ------------- -----------
Total interest rate risk management 9,966 6,688 (3,225) (1,648) 11,781 2 yr. 7 mo.
Mortgage banking activities
Residential
Forward contracts
Commitments to purchase loans 1,652 7,920 (7,782) 1,790 2 mo.
Commitments to sell loans 1,335 12,184 (10,962) 2,557 2 mo.
Options 58 385 (297) 146 2 mo.
Interest rate floors - MSR 1,470 1,375 2,845 4 yr. 4 mo.
---------- ------------- ------------ ------------- -----------
Total residential 4,515 21,864 (19,041) 7,338
Commercial 401 401 3 mo.
---------- ------------- ------------ ------------- -----------
Total mortgage banking activities 4,515 22,265 (19,041) 7,739
---------- ------------- ------------ ------------- -----------
Total $14,481 $28,953 $(22,266) $(1,648) $19,520
====================================================== ========== ============= ============ ============= =========== =============
</TABLE>
During the first six months of 1998, financial derivatives used in interest rate
risk management increased net interest income by $6 million compared with a $2
million decrease in the prior-year period.
PNC BANK CORP.
19
<PAGE> 21
Financial Review
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 those expected to be in effect based on the implied forward
yield curve.
<TABLE>
<CAPTION>
FINANCIAL DERIVATIVES
Forward Yield Curve
Notional Estimated -------------------------
June 30, 1998 - dollars in millions Value Fair Value Paid Received
- --------------------------------------------------------- --------- ---- ---------------- ---------------- ------------ ------------
<S> <C> <C> <C> <C>
Interest rate risk management
Asset rate conversion
Interest rate swaps (1)
Receive fixed designated to loans $3,420 $68 5.67% 6.16%
Pay fixed designated to loans 46 6.71 5.74
Basis swaps designated to other earning assets 337 3 5.51 5.77
Interest rate caps designated to loans (2) 634 5 NM NM
Interest rate floors designated to loans (3) 4,808 (1) NM NM
---------------- ----------------
Total asset rate conversion 9,245 75
Liability rate conversion
Interest rate swaps (1)
Receive fixed designated to:
Interest-bearing deposits 325 8 5.74 6.32
Borrowed funds 813 31 5.79 6.30
Pay fixed designated to borrowed funds 14 3 5.62 6.23
Basis swaps designated to borrowed funds 1,384 6 5.77 5.80
---------------- ----------------
Total liability rate conversion 2,536 48
---------------- ----------------
Total interest rate risk management 11,781 123
Mortgage banking activities
Residential
Forward contracts
Commitments to purchase loans 1,790 NM NM
Commitments to sell loans 2,557 (8) NM NM
Options 146 3 NM NM
Interest rate floors - MSR (3) 2,845 44 NM NM
---------------- ----------------
Total residential 7,338 39
Commercial 401 (2) NM NM
---------------- ----------------
Total mortgage banking activities 7,739 37
---------------- ----------------
Total financial derivatives $19,520 $160
========================================================= ========= ==== ================ ================ ============ ============
</TABLE>
(1) The floating rate portion of interest rate contracts is based on
money-market indices. As a percent of notional value, 69% were based on
1-month LIBOR, 25% on 3-month LIBOR and the remainder on other short-term
indices.
(2) Interest rate caps with notional values of $261 million, $166 million and
$202 million require the counterparty to pay the excess, if any, of 3-month
LIBOR over a weighted-average strike of 6.32%, 1-month LIBOR over a
weighted-average strike of 5.92% and Prime over a weighted-average strike of
8.83%, respectively.
(3) Interest rate floors with notional values of $4.6 billion and $2.8 billion
require the counterparty to pay the Corporation the excess, if any, of the
weighted-average strike of 4.99% over 3-month LIBOR and the weighted-average
strike of 5.57% over 10-year CMT, respectively.
At June 30, 1998, 1-month LIBOR was 5.66%, 3-month LIBOR was 5.72%, Prime was
8.5% and 10-year CMT was 5.44%.
NM - not meaningful
OTHER DERIVATIVES To accommodate customer needs, PNC Bank enters into
customer-related financial derivatives transactions primarily consisting of
interest rate swaps, caps, floors and foreign exchange contracts. Risk exposure
from customer positions is managed through transactions with other dealers.
Additionally, the Corporation enters into other derivatives transactions for
risk management purposes. These positions are recorded at estimated fair value
and changes in value are included in results of operations.
OTHER DERIVATIVES
Positive Negative
Notional Fair Fair Net Asset
June 30, 1998 - in millions Value Value Value (Liability)
- -------------------------------- -------- -------- --------- -----------
Customer-related
Interest rate
Swaps $7,408 $32 $(33) $(1)
Caps/floors
Sold 2,236 (6) (6)
Purchased 1,957 5 5
Foreign exchange 1,398 18 (18)
Other 709 1 (1)
-------- -------- --------- -----------
Total customer-related 13,708 56 (58) (2)
Other 1,056 1 1
-------- -------- --------- -----------
Total other derivatives $14,764 $57 $(58) $(1)
================================ ======== ======== ========= ===========
PNC BANK CORP.
20
<PAGE> 22
SECOND QUARTER 1998 VS.
SECOND QUARTER 1997
Net income for the second quarter of 1998 totaled $280 million or $.90 per
diluted share compared with $259 million or $.81 per diluted share a year ago.
Returns on average common shareholders' equity and average assets were 21.42%
and 1.53%, respectively, in the second quarter of 1998 compared with 20.21% and
1.47% in the prior-year quarter.
Taxable-equivalent net interest income increased $16 million to $637 million in
the second quarter of 1998. The net interest margin was 3.81% compared with
3.84% in the year-earlier period and 3.96% in the first quarter of 1998. The
decrease from the first quarter was primarily due to an increase in commercial
loans, growth in credit cards at introductory rates and the financing of the
Midland acquisition.
The provision for credit losses was $35 million in the second quarter of 1998
compared with $15 million last year.
Noninterest income was $611 million in the second quarter of 1998, an increase
of 38% compared with the second quarter of 1997. Asset management, mutual fund
servicing, consumer services, corporate finance and capital markets, and
mortgage banking revenues all grew in excess of 20%. In addition, noninterest
income included $56 million of gains from the sales of 16 branches in Western
Pennsylvania that offset one-time costs related to consumer delivery initiatives
and improvements in credit card operations. Excluding these gains, noninterest
income increased $110 million or 25% from the prior-year quarter.
Asset management and mutual fund servicing fees grew 24% and 30%, respectively,
from the second quarter of 1997 reflecting significant new business and strong
financial markets.
Consumer services revenue increased $17 million or 23% compared with the second
quarter of 1997 primarily due to higher credit card and brokerage fees related
to growth in accounts.
Corporate finance and capital markets fees increased 33% to $67 million in the
second quarter of 1998 including $12 million of commercial mortgage servicing
revenue from Midland.
Mortgage banking revenue grew $40 million from the prior-year quarter primarily
due to higher marketing gains and origination volumes reflecting significant
mortgage refinance activity and new business from an expanded national
distribution network. Residential mortgage originations totaled $3.0 billion
compared with $1.3 billion in the year-earlier period.
The increase in other income was primarily due to the branch gains and higher
venture capital income.
Noninterest expense of $781 million increased $131 million compared with the
second quarter of 1997. Approximately $55 million of the increase related to
one-time costs for consumer delivery initiatives, employee displacements and the
streamlining of credit card operations. The remaining increase in noninterest
expense was primarily due to higher amortization of residential MSR, the impact
of the Midland acquisition and incentive compensation commensurate with revenue
growth.
Total assets were $75.9 billion at June 30, 1998. Average earning assets
increased $2.5 billion from the prior-year quarter to $66.7 billion as higher
loans and loans held for sale more than offset reductions in the securities
portfolio. Average loans grew $2.5 billion to $55.3 billion, a 4.8% increase
from the prior year. Growth in commercial loans and credit cards more than
offset the impact of loan securitizations and the downsizing of the indirect
automobile lending portfolio. The increase in commercial loans was primarily in
middle market and secured lending. Loans represented 83.0% of average earning
assets in the second quarter of 1998 compared with 82.3% a year ago. Average
loans held for sale increased $1.5 billion reflecting higher residential
mortgage originations and the commercial mortgage inventory of Midland. Average
securities available for sale decreased $1.7 billion to $7.3 billion or 11.0% of
average earning assets.
Average deposits declined $645 million to $44.2 billion in the second quarter of
1998 representing 60.0% of total sources of funds. The ratio of wholesale funds
to total sources of funds was 30.1% for the second quarter of 1998 compared with
28.9% a year ago.
PNC BANK CORP.
21
<PAGE> 23
Consolidated Statement of Income
<TABLE>
<CAPTION>
Three months ended June 30 Six months ended June 30
------------------------ -------------------------
In thousands, except per share data 1998 1997 1998 1997
- -------------------------------------------------------------------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans and fees on loans $1,138,814 $1,078,776 $2,257,458 $2,134,685
Securities available for sale 105,994 139,036 221,247 295,240
Other 68,159 39,348 125,769 69,391
----------- ------------ ------------ ------------
Total interest income 1,312,967 1,257,160 2,604,474 2,499,316
INTEREST EXPENSE
Deposits 362,324 368,000 723,846 714,155
Borrowed funds 320,193 275,985 612,774 542,061
----------- ------------ ------------ ------------
Total interest expense 682,517 643,985 1,336,620 1,256,216
----------- ------------ ------------ ------------
Net interest income 630,450 613,175 1,267,854 1,243,100
Provision for credit losses 35,000 15,000 65,000 25,000
----------- ------------ ------------ ------------
Net interest income less provision for credit losses 595,450 598,175 1,202,854 1,218,100
NONINTEREST INCOME
Asset management 136,886 110,500 277,951 217,399
Mutual fund servicing 46,006 35,518 86,527 68,191
Service charges on deposits 49,928 50,757 97,709 101,332
Consumer services 93,467 76,190 175,672 146,161
Corporate finance and capital markets 66,686 50,150 117,319 97,025
Mortgage banking 83,191 43,265 160,885 83,497
Net securities gains 2,890 13,370 25,732 29,796
Other 132,149 64,617 208,323 134,269
----------- ------------ ------------ ------------
Total noninterest income 611,203 444,367 1,150,118 877,670
NONINTEREST EXPENSE
Staff expense 333,686 301,833 687,970 610,265
Net occupancy and equipment 102,427 91,781 198,236 181,065
Amortization 71,103 39,527 128,282 69,358
Marketing 26,728 25,436 64,124 48,277
Distributions on capital securities 13,914 9,867 27,107 16,823
Other 232,801 181,348 416,180 368,395
----------- ------------ ------------ ------------
Total noninterest expense 780,659 649,792 1,521,899 1,294,183
----------- ------------ ------------ ------------
Income before income taxes 425,994 392,750 831,073 801,587
Income taxes 145,583 133,675 281,402 276,203
----------- ------------ ------------ ------------
Net income $280,411 $259,075 $549,671 $525,384
=========== ============ ============ ============
EARNINGS PER COMMON SHARE
Basic $.92 $.82 $1.80 $1.63
Diluted .90 .81 1.77 1.61
CASH DIVIDENDS DECLARED PER COMMON SHARE .39 .37 .78 .74
AVERAGE COMMON SHARES OUTSTANDING
Basic 300,354 309,962 300,460 315,824
Diluted 305,702 315,818 305,920 321,836
==================================================================== =========== ============ ============ ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
PNC BANK CORP.
22
<PAGE> 24
Consolidated Balance Sheet
<TABLE>
<CAPTION>
June 30 December 31
Dollars in millions, except par value 1998 1997
- --------------------------------------------------------------------------------------------- ----------- -------------
<S> <C> <C>
ASSETS
Cash and due from banks $2,094 $4,303
Short-term investments 1,551 1,526
Loans held for sale 2,955 2,324
Securities available for sale 7,540 8,522
Loans, net of unearned income of $393 and $412 56,237 54,245
Allowance for credit losses (859) (972)
----------- -------------
Net loans 55,378 53,273
Other 6,355 5,172
----------- -------------
Total assets $75,873 $75,120
----------- -------------
LIABILITIES
Deposits
Noninterest-bearing $9,972 $10,158
Interest-bearing 37,124 37,491
----------- -------------
Total deposits 47,096 47,649
Borrowed funds
Bank notes and senior debt 11,788 9,826
Federal funds purchased 897 3,632
Repurchase agreements 1,658 714
Other borrowed funds 4,302 3,753
Subordinated debt 1,843 1,697
----------- -------------
Total borrowed funds 20,488 19,622
Other 1,808 1,815
----------- -------------
Total liabilities 69,392 69,086
----------- -------------
Mandatorily redeemable capital securities of subsidiary trusts 848 650
SHAREHOLDERS' EQUITY
Preferred stock 7 7
Common stock - $5 par value
Authorized: 450,000,000 shares
Issued: 352,684,081 and 348,447,600 shares 1,763 1,742
Capital surplus 1,164 1,042
Retained earnings 4,947 4,641
Deferred benefit expense (55) (41)
Accumulated other comprehensive income (16) (23)
Common stock held in treasury at cost: 51,146,435 and 48,017,641 shares (2,177) (1,984)
----------- -------------
Total shareholders' equity 5,633 5,384
----------- -------------
Total liabilities, capital securities and shareholders' equity $75,873 $75,120
============================================================================================= =========== =============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
PNC BANK CORP.
23
<PAGE> 25
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
Six months ended June 30 - in millions 1998 1997
- ------------------------------------------------------------------------------------------------------ ---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $550 $525
Adjustments to reconcile net income to net cash provided (used) by operating activities
Provision for credit losses 65 25
Depreciation, amortization and accretion 211 160
Deferred income taxes 57 76
Net securities gains (26) (30)
Net gain on sales of assets (167) (81)
Changes in
Loans held for sale (631) (294)
Other (665) 5
---------- ----------
Net cash (used) provided by operating activities (606) 386
INVESTING ACTIVITIES
Net change in loans (3,339) (2,924)
Repayment of securities available for sale 1,027 894
Sales
Securities available for sale 5,154 5,385
Loans 1,403 1,190
Foreclosed assets 34 49
Purchases
Securities available for sale (5,171) (2,761)
Loans (79) (150)
Net cash paid for acquisitions/divestitures (969)
Other (219) (484)
---------- ----------
Net cash (used) provided by investing activities (2,159) 1,199
FINANCING ACTIVITIES
Net change in
Noninterest-bearing deposits (186) (275)
Interest-bearing deposits 22 (177)
Federal funds purchased (2,735) (1,417)
Sale/issuance
Bank notes and senior debt 6,409 4,710
Repurchase agreements 53,796 38,112
Other borrowed funds 52,470 51,455
Subordinated debt 140
Capital securities 198 300
Common stock 94 88
Repayment/maturity
Bank notes and senior debt (4,447) (3,610)
Repurchase agreements (52,852) (38,000)
Other borrowed funds (51,895) (51,778)
Subordinated debt (2)
Acquisition of treasury stock (212) (1,087)
Cash dividends paid (244) (246)
---------- ----------
Net cash provided (used) by financing activities 556 (1,925)
---------- ----------
DECREASE IN CASH AND DUE FROM BANKS (2,209) (340)
Cash and due from banks at beginning of year 4,303 4,016
---------- ----------
Cash and due from banks at end of period $2,094 $3,676
================================================================================================================= ==========
CASH PAID FOR
Interest $1,331 $1,292
Income taxes 199 206
NONCASH ITEMS
Transfers from loans to other assets 25 38
Conversion of debt to equity 55 6
================================================================================================================= ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
PNC BANK CORP.
24
<PAGE> 26
Notes to Consolidated Financial Statements
BUSINESS PNC Bank Corp. ("Corporation" or "PNC Bank") is one of the largest
diversified financial services organizations in the United States. The
Corporation's major businesses include Regional Community Banking, Corporate
Banking, National Consumer Banking, Private Banking, Mortgage Banking, Secured
Lending, Asset Management and Mutual Fund Servicing. Financial products and
services are tailored to specific customer segments and offered nationally and
in PNC Bank's primary geographic markets in Pennsylvania, New Jersey, Delaware,
Ohio and Kentucky. PNC Bank 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.
ACCOUNTING POLICIES
BASIS OF FINANCIAL STATEMENT PRESENTATION The unaudited consolidated interim
financial statements have been prepared in accordance with generally accepted
accounting principles and include the accounts of PNC Bank and its subsidiaries,
most of which are wholly owned. In the opinion of management, the financial
statements reflect all adjustments, which are of a normal recurring nature,
necessary for a fair statement of the results for the interim periods presented.
Certain prior period amounts have been reclassified to conform to reporting
classifications utilized for the current reporting period. These
reclassifications did not impact the Corporation's financial condition or
results of operations.
In preparing the unaudited consolidated interim financial statements, management
is required to make estimates and assumptions that affect the amounts reported
in the financial statements. Actual results will differ from such estimates and
such differences may be material to the financial statements.
The notes included herein should be read in conjunction with the audited
consolidated financial statements included in PNC Bank's 1997 Annual Report.
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 and
recoveries of previously charged-off loans are credited to the allowance.
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 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 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.
SOFTWARE COSTS Effective January 1, 1998, the Corporation adopted Statement of
Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use." SOP 98-1 requires the capitalization of certain
costs incurred in connection with developing or obtaining software for internal
use. Qualifying software costs are capitalized and amortized over the estimated
useful life of the software. Prior to the adoption of SOP 98-1, software costs
were expensed as incurred. Restatement of prior year financial statements was
not required. The adoption of SOP 98-1 did not have a material impact on the
Corporation's financial position or results of operations.
FINANCIAL DERIVATIVES The Corporation uses off-balance-sheet financial
derivatives as part of the overall asset/liability management process and in
residential and commercial 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, forward contracts and foreign exchange contracts.
To accommodate customer needs, PNC Bank also enters into financial derivative
transactions primarily consisting of interest rate swaps, caps, floors and
foreign exchange contracts. Interest rate risk exposure from customer positions
is managed through transactions with other dealers.
Additionally, the Corporation enters into other derivatives transactions for
risk management purposes that are recorded at estimated fair value and changes
in value are included in results of operations.
COMPREHENSIVE INCOME Effective January 1, 1998, the Corporation adopted
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." SFAS No. 130 established new rules for the reporting and
display of comprehensive income and its components. SFAS No. 130 requires
unrealized gains or losses on securities available for sale to be included in
other comprehensive income. Prior to the adoption of SFAS No. 130, unrealized
gains or losses were reported separately in shareholders' equity. Prior year
financial statements have been reclassified to conform to the requirements of
SFAS No. 130. The adoption of SFAS No. 130 had no impact on net income or
shareholders' equity. Comprehensive income was $296 million in the second
quarter and $557 million in the first six
PNC BANK CORP.
25
<PAGE> 27
Notes to Consolidated Financial Statements
months of 1998 compared with $313 million and $509 million, respectively, in
1997.
EARNINGS PER COMMON SHARE Basic earnings per common share is calculated by
dividing net income adjusted for preferred stock dividends declared by the
weighted-average number of shares of common stock outstanding.
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.
RECENT ACCOUNTING PRONOUNCEMENTS SFAS No. 131 "Disclosures About Segments of an
Enterprise and Related Information," is effective for financial statements for
periods beginning after December 15, 1997. This statement requires financial and
descriptive information about an entity's operating segments to be included in
the annual financial statements. This standard, when implemented, will impact
financial statement footnote disclosure only and will not impact the reported
financial position or results of operations of the Corporation.
SFAS No. 132 "Employer's Disclosures About Pensions and Other Postretirement
Benefits," is effective for fiscal years beginning after December 15, 1997. This
statement standardizes and combines the disclosure requirements for pension and
other postretirement benefits to the extent practicable, requires additional
information on changes in the benefit obligations and fair values of plan
assets, and eliminates certain disclosures previously considered useful under
previous accounting standards. This standard, when implemented, will impact
financial statement footnote disclosure only and will not impact the reported
financial position or results of operations of the Corporation.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," is
required to be adopted in years beginning after June 15, 1999, although early
adoption is permitted. The Corporation expects to adopt the new statement
effective January 1, 2000. This statement requires the Corporation to recognize
all derivatives on the balance sheet at fair value. Derivatives that are not
hedges must be adjusted to fair value through income. If the derivative is a
hedge as defined by the statement, changes in the fair value of derivatives will
either be offset against the change in fair value of the hedged assets,
liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings based on
the nature of the hedge. The ineffective portion of a derivative's change in
fair value will be immediately recognized in earnings. Management has not yet
determined what effect this statement will have on earnings and the financial
position of the Corporation.
CASH FLOWS
During the first six months of 1998, net acquisition and divestiture activity
which affected cash flows consisted of $670 million in acquired assets, $299
million in divested liabilities, cash payments totaling $998 million and receipt
of $29 million in cash and due from banks. The Corporation did not have any
acquisition or divestiture activity which affected cash flows during the first
six months of 1997.
PNC BANK CORP.
26
<PAGE> 28
SECURITIES AVAILABLE FOR SALE
The following table sets forth the amortized cost and fair value of the
Corporation's securities portfolio, all of which is available for sale.
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
--------- ------------------ --------- --------- ------------------ --------
Unrealized Unrealized
Amortized ------------------ Fair Amortized ------------------ Fair
In millions Cost Gains Losses Value Cost Gains Losses Value
- ------------------------------------------------- ---------- --------- -------- --------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Debt securities
U.S. Treasury and government agencies $2,250 $6 $8 $2,248 $1,102 $4 $1 $1,105
Mortgage backed 3,653 2 25 3,630 4,672 4 53 4,623
Asset backed 1,057 3 1 1,059 2,079 5 1 2,083
State and municipal 138 5 143 170 7 177
Other debt 33 1 32 34 1 33
---------- --------- -------- --------- --------- -------- --------- ---------
Total debt securities 7,131 16 35 7,112 8,057 20 56 8,021
Corporate stocks and other 433 7 12 428 501 3 3 501
---------- --------- -------- --------- --------- -------- --------- ---------
Total securities available for sale $7,564 $23 $47 $7,540 $8,558 $23 $59 $8,522
================================================= ========== ========= ======== ========= ========= ======== ========= =========
</TABLE>
NONPERFORMING ASSETS
Nonperforming assets were as follows:
June 30 December 31
In millions 1998 1997
- ----------------------------------------- -------- ------------
Nonperforming loans $272 $276
Foreclosed assets 51 57
-------- ------------
Total nonperforming assets $323 $333
========================================= ======== ============
ALLOWANCE FOR CREDIT LOSSES
Changes in the allowance for credit losses were as follows:
In millions 1998 1997
- ------------------------------------------ -------- -----------
Allowance at January 1 $972 $1,166
Charge-offs
Consumer (excluding credit card) (46) (55)
Credit card (147) (101)
Residential mortgage (5) (5)
Commercial (13) (20)
Commercial real estate (3) (4)
-------- -----------
Total charge-offs (214) (185)
Recoveries
Consumer (excluding credit card) 19 18
Credit card 8 16
Residential mortgage 1 1
Commercial 6 27
Commercial real estate 1 4
-------- -----------
Total recoveries 35 66
-------- -----------
Net charge-offs (179) (119)
Provision for credit losses 65 25
Acquisitions 1 3
-------- -----------
Allowance at June 30 $859 $1,075
========================================== ======== ===========
FINANCIAL DERIVATIVES
The notional and fair values of financial derivatives used for interest rate
risk management and for mortgage banking activities were as follows:
Positive Negative
Notional Fair Notional Fair
In millions Value Value Value Value
- -------------------- --------- ------- --------- ---------
JUNE 30, 1998
Interest rate swaps $5,609 $119 $730
Interest rate caps 634 5
Interest rate floors 4,500 2 308 $(3)
-------- --------- --------- ---------
Total interest rate
risk management 10,743 126 1,038 (3)
Mortgage banking
activities 2,991 47 4,748 (10)
-------- -------- --------- ---------
Total $13,734 $173 $5,786 $(13)
==================== ======== ======== ========= =========
DECEMBER 31, 1997
Interest rate swaps $4,849 $106 $930 $(10)
Interest rate caps 542 4
Interest rate floors 3,500 6 145 (1)
-------- -------- --------- ---------
Total interest rate
risk management 8,891 116 1,075 (11)
Mortgage banking
activities 1,470 26 2,987 (6)
-------- -------- --------- ---------
Total $10,361 $142 $4,062 $(17)
==================== ======== ======== ========= =========
Other derivatives were as follows:
Positive Negative
Notional Fair Fair Net Asset
June 30, 1998 - in millions Value Value Value (Liability)
- --------------------------- -------- -------- --------- ----------
Customer-related
Interest rate
Swaps $7,408 $32 $(33) $(1)
Caps/floors
Sold 2,236 (6) (6)
Purchased 1,957 5 5
Foreign exchange 1,398 18 (18)
Other 709 1 (1)
-------- -------- --------- ----------
Total customer-related 13,708 56 (58) (2)
Other 1,056 1 1
-------- -------- --------- ----------
Total other derivatives $14,764 $57 $(58) $(1)
=========================== ======== ======== ========= ==========
PNC BANK CORP.
27
<PAGE> 29
Notes to Consolidated Financial Statements
CAPITAL SECURITIES OF SUBSIDIARY TRUSTS
Mandatorily Redeemable Capital Securities of Subsidiary Trusts ("Capital
Securities") include preferred beneficial interests in the assets of PNC Capital
Trust C ("Trust C"). Trust C holds $200 million aggregate principal amount of
certain junior subordinated debentures due June 1, 2028 issued by the
Corporation bearing interest at a floating rate per annum equal to 3-Month LIBOR
plus 57 basis points. The rate in effect at June 30, 1998 was 6.2575%. Cash
distributions on the Capital Securities are made to the extent interest on the
debentures is received by Trust C. 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 June 1, 2008, at 100% of par.
EARNINGS PER COMMON SHARE
The following table sets forth basic and diluted earnings per common share
calculations.
<TABLE>
<CAPTION>
Three months ended June 30 Six months ended June 30
------------------------- -------------------------
In thousands, except per share data 1998 1997 1998 1997
- ------------------------------------------------------------------------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
CALCULATION OF BASIC EARNINGS PER COMMON SHARE
Net income $280,411 $259,075 $549,671 $525,384
Less: Preferred dividends declared 4,842 4,870 9,691 9,744
------------ ------------ ------------ ------------
Net income applicable to basic earnings per common share $275,569 $254,205 $539,980 $515,640
------------ ------------ ------------ ------------
Basic weighted-average common shares outstanding 300,354 309,962 300,460 315,824
------------ ------------ ------------ ------------
BASIC EARNINGS PER COMMON SHARE $.92 $.82 $1.80 $1.63
============ ============ ============ ============
CALCULATION OF DILUTED EARNINGS PER COMMON SHARE
Net income $280,411 $259,075 $549,671 $525,384
Add: Interest expense on convertible debentures (net of tax) 346 758 872 1,527
Less: Dividends declared on nonconvertible preferred stock 4,538 4,538 9,075 9,075
------------ ------------ ------------ ------------
Net income applicable to diluted earnings per common share $276,219 $255,295 $541,468 $517,836
------------ ------------ ------------ ------------
Basic weighted-average common shares outstanding 300,354 309,962 300,460 315,824
Weighted-average common shares to be issued using average market price and
assuming:
Conversion of preferred stock Series A and B 149 164 153 166
Conversion of preferred stock Series C and D 1,151 1,256 1,163 1,265
Conversion of debentures 1,301 2,466 1,509 2,485
Exercise of stock options 2,203 1,665 2,204 1,792
Incentive share awards 544 305 431 304
------------ ------------ ------------ ------------
Diluted weighted-average common shares outstanding 305,702 315,818 305,920 321,836
------------ ------------ ------------ ------------
DILUTED EARNINGS PER COMMON SHARE $.90 $.81 $1.77 $1.61
============================================================================== ============ ============ ============ ============
</TABLE>
PNC BANK CORP.
28
<PAGE> 30
LITIGATION
The Corporation's Annual Report on Form 10-K for the year ended December 31,
1997 included a description of a consolidated class action complaint against the
Corporation and certain officers, alleging violations of federal securities laws
and related common law claims. The parties have entered into a settlement
agreement which has been preliminarily approved by the court. The settlement,
which remains subject to final court approval, will not have a material impact
on the Corporation's financial position or results of operations.
OTHER FINANCIAL INFORMATION
In connection with the Midlantic Corporation ("Midlantic") merger, borrowed
funds of Midlantic in the aggregate principal amount of $300 million at June 30,
1998 were 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
June 30 December 31
In millions 1998 1997
- -------------------------------------- ---------- -------------
ASSETS
Cash and due from banks $2,093 $4,302
Securities available for sale 7,141 8,276
Loans, net of unearned income 56,100 54,126
Allowance for credit losses (859) (971)
---------- -------------
Net loans 55,241 53,155
Other assets 9,605 8,144
---------- -------------
Total assets $74,080 $73,877
========== =============
LIABILITIES
Deposits $47,151 $47,766
Borrowed funds 18,985 18,437
Other liabilities 1,050 1,145
---------- -------------
Total liabilities 67,186 67,348
Mandatorily redeemable capital
securities of subsidiary trust 350 350
SHAREHOLDERS' EQUITY 6,544 6,179
---------- -------------
Total liabilities, capital
securities and shareholders'
equity $74,080 $73,877
====================================== ========== =============
PNC BANCORP, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
Six months ended June 30 - in millions 1998 1997
- ---------------------------------------- --------- ------------
Interest income $2,582 $2,476
Interest expense 1,287 1,212
--------- ------------
Net interest income 1,295 1,264
Provision for credit losses 65 25
--------- ------------
Net interest income less provision
for credit losses 1,230 1,239
Noninterest income 1,042 785
Noninterest expense 1,467 1,235
--------- ------------
Income before income taxes 805 789
Income taxes 281 276
--------- ------------
Net income $524 $513
======================================== ========= ============
The amount of dividends that may be paid by bank subsidiaries to PNC Bancorp,
Inc., a first-tier holding company, and in turn to the parent company, are
subject to certain legal limitations. Without regulatory approval, the amount
available for payment of dividends by all subsidiary banks to PNC Bancorp, Inc.
was $785 million at June 30, 1998. Dividends may also be impacted by capital
needs, regulatory requirements, corporate policies, contractual restrictions and
other factors.
PNC BANK CORP.
29
<PAGE> 31
Statistical Information
CONSOLIDATED AVERAGE BALANCE SHEET AND NET INTEREST ANALYSIS
<TABLE>
<CAPTION>
Six months ended June 30
-------------------------------------------------------------------------------
1998 1997
--------------------------------------- ---------------------------------------
Average balances in millions, interest in thousands Average Average Average Average
Taxable-equivalent basis Balances Interest Yields/Rates Balances Interest Yields/Rates
- ---------------------------------------------------- ------------ ------------- ------------ ------------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets
Loans held for sale $2,657 $93,999 7.08% $1,215 $43,864 7.22%
Securities available for sale
U.S. Treasury and government agencies 5,415 154,024 5.70 6,677 201,197 6.04
Other debt 1,585 51,723 6.53 2,305 75,892 6.58
Other 552 17,884 6.51 587 21,399 7.32
--------- ------------- ------------ ------------
Total securities available for sale 7,552 223,631 5.94 9,569 298,488 6.25
Loans, net of unearned income
Consumer (excluding credit card) 11,090 470,647 8.56 11,531 482,953 8.45
Credit card 3,899 265,773 13.75 3,274 206,941 12.75
Residential mortgage 12,671 461,677 7.29 12,974 482,514 7.44
Commercial 21,550 851,554 7.86 18,686 733,346 7.81
Commercial real estate 3,414 145,271 8.46 4,080 177,622 8.66
Other 2,095 73,274 7.00 1,825 62,691 6.88
--------- ------------- ------------ ------------
Total loans, net of unearned income 54,719 2,268,196 8.29 52,370 2,146,067 8.20
Other interest-earning assets 1,015 32,010 6.32 860 25,661 6.02
--------- ------------- ------------ ------------
Total interest-earning assets/interest income 65,943 2,617,836 7.94 64,014 2,514,080 7.86
Noninterest-earning assets
Allowance for credit losses (916) (1,121)
Cash and due from banks 2,401 2,906
Other assets 5,463 4,763
--------- ------------
Total assets $72,891 $70,562
--------- ------------
LIABILITIES, CAPITAL SECURITIES AND SHAREHOLDERS'
EQUITY
Interest-bearing liabilities
Interest-bearing deposits
Demand and money market $14,249 209,196 2.96 $13,116 181,803 2.80
Savings 2,661 26,205 1.99 2,993 29,181 1.97
Other time 17,046 460,452 5.44 17,689 472,475 5.38
Deposits in foreign offices 995 27,993 5.59 1,127 30,696 5.42
--------- ------------- ------------ ------------
Total interest-bearing deposits 34,951 723,846 4.17 34,925 714,155 4.12
Borrowed funds
Bank notes and senior debt 10,309 294,808 5.69 8,425 236,122 5.57
Federal funds purchased 2,749 76,405 5.53 3,272 89,601 5.52
Repurchase agreements 1,643 39,780 4.81 760 20,529 5.37
Other borrowed funds 4,467 134,258 5.98 4,827 141,887 5.88
Subordinated debt 1,754 67,523 7.70 1,351 53,922 7.98
--------- ------------- ------------ ------------
Total borrowed funds 20,922 612,774 5.83 18,635 542,061 5.82
--------- ------------- ------------ ------------
Total interest-bearing liabilities/interest
expense 55,873 1,336,620 4.79 53,560 1,256,216 4.71
--------- ------------- ------------ ------------
Noninterest-bearing liabilities, capital securities
and shareholders' equity
Demand and other noninterest-bearing deposits 9,448 9,550
Accrued expenses and other liabilities 1,459 1,473
Mandatorily redeemable capital
securities of subsidiary trusts 674 421
Shareholders' equity 5,437 5,558
--------- ------------
Total liabilities, capital securities and $72,891 $70,562
shareholders' equity --------- ------------ ------------ -------------
Interest rate spread 3.15 3.15
Impact of noninterest-bearing liabilities .73 .77
------------ -------------
Net interest income/margin $1,281,216 3.88% $1,257,864 3.92%
- ---------------------------------------------------- ------------ ------------- ------------ ------------ ------------ -------------
</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 and average yields/rates of the related assets and liabilities. Average
balances of securities available for sale are based on amortized historical cost
(excluding SFAS No. 115 adjustments to fair value).
PNC BANK CORP.
30
<PAGE> 32
<TABLE>
<CAPTION>
- --------------------------------------------- ------------------------------------------- ------------------------------------------
Second Quarter 1998 First Quarter 1998 Second Quarter 1997
- ------------- -------------- -------------- -------------- -------------- ------------- --------------- -------------- -------------
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>
$2,948 $51,719 7.02% $2,363 $42,280 7.16% $1,408 $25,894 7.36%
5,252 73,741 5.62 5,580 80,283 5.78 6,375 95,834 6.02
1,531 24,710 6.46 1,639 27,013 6.59 2,083 34,051 6.54
540 8,673 6.44 565 9,211 6.57 597 10,733 7.20
- ------------- -------------- -------------- -------------- --------------- --------------
7,323 107,124 5.86 7,784 116,507 6.01 9,055 140,618 6.21
10,995 234,621 8.56 11,186 236,026 8.56 11,239 237,784 8.49
4,048 132,887 13.17 3,748 132,886 14.38 3,502 106,348 12.18
12,560 228,036 7.26 12,784 233,641 7.31 13,164 244,829 7.44
22,425 444,909 7.85 20,665 406,645 7.87 18,964 373,561 7.79
3,206 66,593 8.22 3,624 78,678 8.68 4,060 88,683 8.64
2,114 37,038 7.01 2,076 36,236 6.99 1,884 33,327 7.08
- ------------- -------------- -------------- -------------- --------------- --------------
55,348 1,144,084 8.23 54,083 1,124,112 8.36 52,813 1,084,532 8.19
1,069 16,576 6.18 959 15,434 6.48 925 13,522 5.86
- ------------- -------------- -------------- -------------- --------------- --------------
66,688 1,319,503 7.89 65,189 1,298,333 8.00 64,201 1,264,566 7.85
(885) (947) (1,094)
2,020 2,787 2,877
5,809 5,112 4,837
- ------------- -------------- ---------------
$73,632 $72,141 $70,821
- ------------- -------------- ---------------
$14,344 105,649 2.95 $14,153 103,547 2.97 $13,270 94,394 2.85
2,675 13,227 1.98 2,646 12,978 1.99 2,924 14,377 1.97
16,749 226,830 5.43 17,346 233,622 5.46 17,656 238,928 5.43
1,188 16,618 5.53 800 11,375 5.68 1,463 20,301 5.49
- ------------- -------------- -------------- -------------- --------------- --------------
34,956 362,324 4.15 34,945 361,522 4.19 35,313 368,000 4.18
10,643 152,880 5.68 9,972 141,928 5.69 8,284 118,950 5.68
3,089 43,055 5.51 2,404 33,350 5.55 3,474 48,693 5.62
1,762 21,177 4.75 1,523 18,603 4.89 786 10,773 5.43
4,524 68,227 5.97 4,408 66,031 5.99 4,780 70,615 5.91
1,826 34,854 7.64 1,682 32,669 7.77 1,351 26,954 7.98
- ------------- -------------- -------------- -------------- --------------- --------------
21,844 320,193 5.81 19,989 292,581 5.85 18,675 275,985 5.88
- ------------- -------------- -------------- -------------- --------------- --------------
56,800 682,517 4.79 54,934 654,103 4.79 53,988 643,985 4.77
- ------------- -------------- -------------- -------------- --------------- --------------
9,213 9,685 9,501
1,445 1,474 1,480
698 650 492
5,476 5,398 5,360
- ------------- -------------- ---------------
$73,632 $72,141 $70,821
- ------------- -------------- -------------- ------------- --------------- -----------
3.10 3.21 3.08
.71 .75 .76
-------------- ------------- -----------
$636,986 3.81% $644,230 3.96% $620,581 3.84%
- ------------- ------------- --------------- ------------- ------------- --------------- ------------ -------------- ---------------
</TABLE>
PNC BANK CORP.
31
<PAGE> 33
Quarterly Report on Form 10-Q
Securities and Exchange Commission
Washington, D.C. 20549
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the quarterly period ended June 30, 1998.
Commission File Number 1-9718
PNC BANK CORP.
Incorporated in the Commonwealth of Pennsylvania
IRS Employer Identification No. 25-1435979
Address: One PNC Plaza
249 Fifth Avenue
Pittsburgh, Pennsylvania 15222-2707
Telephone: (412) 762-1553
As of July 31, 1998, PNC Bank Corp. had 301,563,813 shares of common stock ($5
par value) outstanding.
PNC Bank Corp. (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 and
(2) has been subject to such filing requirements for the past 90 days.
The following sections of the Financial Review set forth in the cross-reference
index are incorporated in the Quarterly Report on Form 10-Q.
Cross-Reference Page(s)
------------------------------------------ ----------
PART I FINANCIAL INFORMATION
Item 1 Consolidated Statement of Income for the
three months and six months ended June
30, 1998 and 1997 22
Consolidated Balance Sheet as of June
30, 1998 and December 31, 1997 23
Consolidated Statement of Cash Flows for
the six months ended June 30, 1998 and
1997 24
Notes to Consolidated Financial
Statements 25-29
Consolidated Average Balance Sheet and
Net Interest Analysis 30-31
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of
Operations 2-21
Item 3 Quantitative and Qualitative Disclosures
About Market Risk 17-18
- --------- ------------------------------------------ ----------
PART II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K
The following exhibit index lists Exhibits to this Quarterly Report on Form
10-Q:
12.1 Computation of Ratio of Earnings to Fixed Charges
12.2 Computation of Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividends
27 Financial Data Schedule
- -------- -------------------------------------------------------
Copies of these Exhibits may be accessed electronically at the Securities and
Exchange Commission's home page at www.sec.gov. Exhibits will also be furnished
without charge by writing to Lynn F. Evans, Director of Financial Reporting, at
corporate headquarters. Requests may also be directed to (412) 762-1553 or to
[email protected].
Since March 31, 1998, the Corporation filed the following Current Reports on
Form 8-K:
Form 8-K dated as of April 14, 1998, reporting the Corporation's consolidated
financial results for the three months ended March 31, 1998, filed pursuant to
Item 5.
Form 8-K dated as of June 8, 1998, including a tax opinion pertaining to trust
preferred securities, filed pursuant to Item 5.
Form 8-K dated as of July 16, 1998, reporting the Corporation's consolidated
financial results for the three months and six months ended June 30, 1998, filed
pursuant to Item 5.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on August 14, 1998, on its
behalf by the undersigned thereunto duly authorized.
PNC Bank Corp.
Robert L. Haunschild
Senior Vice President and
Chief Financial Officer
PNC BANK CORP.
32
<PAGE> 34
Corporate Information
CORPORATE HEADQUARTERS
PNC Bank Corp.
One PNC Plaza
249 Fifth Avenue
Pittsburgh, Pennsylvania 15222-2707
INTERNET INFORMATION
Information on PNC Bank Corp.'s financial results and its products and services
is available on the Internet at http://www.pncbank.com.
STOCK LISTING
PNC Bank Corp. common stock is traded on the New York Stock Exchange ("NYSE")
under the symbol PNC.
FINANCIAL INFORMATION
Copies of the Corporation's filings with the Securities and Exchange Commission
("SEC"), including Exhibits thereto, may be obtained:
Electronically at the SEC's home page at www.sec.gov.
By writing to Lynn F. Evans, Director of Financial Reporting, at corporate
headquarters.
By calling (412) 762-1553 or via e-mail to [email protected].
INQUIRIES
Individual shareholders should contact: Shareholder Relations at 800-843-2206.
Analysts and institutional investors should contact: William H. Callihan, Vice
President, Investor Relations, at 412-762-8257 or [email protected].
News media representatives and others seeking general information should
contact: Jonathan Williams, Vice President, Media Relations, at 412-762-4550 or
[email protected].
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.
Cash
Dividends
1998 Quarter High Low Close Declared
- --------------- ----------- ----------- ----------- ------------
First $61.625 $49.500 $59.938 $.39
Second 66.750 53.813 53.875 .39
---------
Total $.78
=============== =========== =========== =========== ============
Cash
Dividends
1997 Quarter High Low Close Declared
- --------------- ----------- ----------- ----------- ------------
First $45.000 $36.500 $40.000 $.37
Second 44.750 37.375 41.750 .37
Third 49.750 41.125 48.813 .37
Fourth 58.750 42.875 56.938 .39
---------
Total $1.50
=============== =========== =========== =========== ============
REGISTRAR AND TRANSFER AGENT
The Chase Manhattan Bank
P.O. Box 590
Ridgefield Park, New Jersey 07660
800-982-7652
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.
PNC BANK CORP.
33
<PAGE> 1
EXHIBIT 12.1
PNC BANK CORP. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS
TO FIXED CHARGES
<TABLE>
<CAPTION>
Year ended December 31
Six months ended -----------------------------------------------------------------
Dollars in thousands June 30, 1998 1997 1996 1995 1994 1993
- ----------------------------------------------- ---------------- ------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
EARNINGS
Income before taxes and cumulative effect of
changes in accounting principles $831,073 $1,618,599 $1,527,551 $627,012 $1,209,916 $1,140,487
Fixed charges excluding interest on deposits 657,104 1,171,648 1,096,893 1,487,279 1,104,573 704,228
------------ ------------ ------------- ------------ ------------ ------------
Subtotal 1,488,177 2,790,247 2,624,444 2,114,291 2,314,489 1,844,715
Interest on deposits 723,846 1,456,587 1,428,771 1,551,816 1,159,242 1,005,658
------------ ------------ ------------- ------------ ------------ ------------
Total $2,212,023 $4,246,834 $4,053,215 $3,666,107 $3,473,731 $2,850,373
============ ============ ============= ============ ============ ============
FIXED CHARGES
Interest on borrowed funds $612,336 $1,098,365 $1,064,847 $1,455,069 $1,070,565 $676,319
Interest component of rentals 17,223 29,312 29,839 31,283 32,247 26,491
Amortization of borrowed funds 438 833 816 927 1,761 1,418
Distributions on capital securities 27,107 43,138 1,391
------------ ------------- ------------ ------------ ------------ ------------
Subtotal 657,104 1,171,648 1,096,893 1,487,279 1,104,573 704,228
Interest on deposits 723,846 1,456,587 1,428,771 1,551,816 1,159,242 1,005,658
------------ ------------- ------------ ------------ ------------ ------------
Total $1,380,950 $2,628,235 $2,525,664 $3,039,095 $2,263,815 $1,709,886
------------ ------------- ------------ ------------ ------------ ------------
RATIO OF EARNINGS TO FIXED CHARGES
Excluding interest on deposits 2.26x 2.38x 2.39x 1.42x 2.10x 2.62x
Including interest on deposits 1.60 1.62 1.60 1.21 1.53 1.67
=================================================== ============ ============= ============ ============ ============ ============
</TABLE>
<PAGE> 1
EXHIBIT 12.2
PNC BANK CORP. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS
TO COMBINED FIXED CHARGES AND
PREFERRED STOCK DIVIDENDS
<TABLE>
<CAPTION>
Year ended December 31
Six months ended ----------------------------------------------------------------
Dollars in thousands June 30, 1998 1997 1996 1995 1994 1993
- --------------------------------------------------------------- ------------ ------------ ------------ ------------ -------------
EARNINGS
<S> <C> <C> <C> <C> <C> <C>
Income before taxes and cumulative effect
of changes in accounting principles $831,073 $1,618,599 $1,527,551 $627,012 $1,209,916 $1,140,487
Fixed charges and preferred stock dividends
excluding interest on deposits 672,014 1,201,582 1,105,324 1,492,391 1,112,564 712,339
------------ ------------ ------------ ------------ ------------ -------------
Subtotal 1,503,087 2,820,181 2,632,875 2,119,403 2,322,480 1,852,826
Interest on deposits 723,846 1,456,587 1,428,771 1,551,816 1,159,242 1,005,658
------------ ------------ ------------ ------------ ------------ -------------
Total $2,226,933 $4,276,768 $4,061,646 $3,671,219 $3,481,722 $2,858,484
============ ============ ============ ============ ============ =============
FIXED CHARGES
Interest on borrowed funds $612,336 $1,098,365 $1,064,847 $1,455,069 $1,070,565 $676,319
Interest component of rentals 17,223 29,312 29,839 31,283 32,247 26,491
Amortization of borrowed funds 438 833 816 927 1,761 1,418
Distributions on capital securities 27,107 43,138 1,391
Preferred stock dividends 14,910 29,934 8,431 5,112 7,991 8,111
------------ ------------ ------------ ------------ ------------ -------------
Subtotal 672,014 1,201,582 1,105,324 1,492,391 1,112,564 712,339
Interest on deposits 723,846 1,456,587 1,428,771 1,551,816 1,159,242 1,005,658
------------ ------------ ------------ ------------ ------------ -------------
Total $1,395,860 $2,658,169 $2,534,095 $3,044,207 $2,271,806 $1,717,997
============ ============ ============ ============ ============ =============
RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
Excluding interest on deposits 2.24x 2.35x 2.38x 1.42x 2.09x 2.60x
Including interest on deposits 1.60 1.61 1.60 1.21 1.53 1.66
- -------------------------------------------------- ------------ ------------ ------------ ------------ ------------ -------------
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL INFORMATION INCORPORATED BY REFERENCE TO THE 1998 SECOND
QUARTER FINANCIAL REVIEW AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL INFORMATION.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 2,094
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 7,540
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 56,237
<ALLOWANCE> (859)
<TOTAL-ASSETS> 75,873
<DEPOSITS> 47,096
<SHORT-TERM> 13,949
<LIABILITIES-OTHER> 1,808
<LONG-TERM> 6,539
0
7
<COMMON> 1,763
<OTHER-SE> 3,863
<TOTAL-LIABILITIES-AND-EQUITY> 75,873
<INTEREST-LOAN> 2,258
<INTEREST-INVEST> 221
<INTEREST-OTHER> 126
<INTEREST-TOTAL> 2,605
<INTEREST-DEPOSIT> 724
<INTEREST-EXPENSE> 1,337
<INTEREST-INCOME-NET> 1,268
<LOAN-LOSSES> 65
<SECURITIES-GAINS> 26
<EXPENSE-OTHER> 1,522
<INCOME-PRETAX> 831
<INCOME-PRE-EXTRAORDINARY> 550
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 550
<EPS-PRIMARY> 1.80
<EPS-DILUTED> 1.77
<YIELD-ACTUAL> 3.88
<LOANS-NON> 323
<LOANS-PAST> 244
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 972
<CHARGE-OFFS> 214
<RECOVERIES> 35
<ALLOWANCE-CLOSE> 859
<ALLOWANCE-DOMESTIC> 859
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
