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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
(Mark One)
[X] Annual report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 1997
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ________ to ________
PNC BANK CORP.
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-1435979
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
ONE PNC PLAZA
249 FIFTH AVENUE
PITTSBURGH, PENNSYLVANIA 15222-2707
(Address of principal executive offices)
Registrant's telephone number, including area code - (412) 762-1553
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Name of Each Exchange
Title of Each Class on Which Registered
------------------- -------------------
<S> <C>
COMMON STOCK, PAR VALUE $5.00 New York Stock Exchange
$1.60 CUMULATIVE CONVERTIBLE PREFERRED STOCK-SERIES C, PAR VALUE $1.00 New York Stock Exchange
$1.80 CUMULATIVE CONVERTIBLE PREFERRED STOCK-SERIES D, PAR VALUE $1.00 New York Stock Exchange
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
$1.80 CUMULATIVE CONVERTIBLE PREFERRED STOCK - SERIES A, PAR VALUE $1.00
$1.80 CUMULATIVE CONVERTIBLE PREFERRED STOCK - SERIES B, PAR VALUE $1.00
8.25% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2008
8 1/4% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2010
9.875% SUBORDINATED CAPITAL NOTES DUE 1999
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ___
Indicate by check mark if the disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K. _X_
The aggregate market value of the voting common equity held by non-affiliates of
the Registrant amounted to approximately $14.7 billion at January 30, 1998.
There is no non-voting common equity of the Registrant outstanding.
Number of shares of Registrant's common stock outstanding at February 28, 1998:
300,777,025
DOCUMENTS INCORPORATED BY REFERENCE
Portions of PNC Bank Corp.'s Annual Report to Shareholders for the year ended
December 31, 1997 ("Annual Report to Shareholders") are incorporated by
reference into Parts I and II and portions of the definitive Proxy Statement of
PNC Bank Corp. for the annual meeting of shareholders to be held on April 28,
1998 ("Proxy Statement") are incorporated by reference into Part III of this
Form 10-K. The incorporation by reference herein of portions of the Proxy
Statement shall not be deemed to specifically incorporate by reference the
information referred to in Item 402(a)(8) of Regulation S-K.
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TABLE OF CONTENTS
PART I Page
-------
Item 1 Business 2
Item 2 Properties 5
Item 3 Legal Proceedings 6
Item 4 Submission of Matters to a Vote of Security
Holders *
PART II
Item 5 Market for Registrant's Common Equity and
Related Stockholder Matters 6
Item 6 Selected Financial Data 6
Item 7 Management's Discussion and Analysis of
Financial Condition and Results of
Operations 6
Item 7A Quantitative and Qualitative Disclosures
About Market Risk 6
Item 8 Financial Statements and Supplementary Data 6
Item 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure *
PART III
Item 10 Directors and Executive Officers of the
Registrant 6
Item 11 Executive Compensation 7
Item 12 Security Ownership of Certain Beneficial
Owners and Management 7
Item 13 Certain Relationships and Related
Transactions 7
PART IV
Item 14 Exhibits, Financial Statement Schedules and
Reports on Form 8-K 7
SIGNATURES 8
EXHIBIT INDEX E-1
* Not applicable
PART I
Forward-Looking Statements: From time to time the Corporation has made and may
continue to make forward-looking statements about financial and business
matters. As stated under the caption "Forward-Looking Statements" in the
"Financial Review" on page 39 of the Annual Report to Shareholders, which is
incorporated herein by reference, many factors could cause actual results for
such matters to differ materially from such forward-looking statements. The
Corporation assumes no duty to update forward-looking statements.
ITEM 1 - BUSINESS
BUSINESS OVERVIEW PNC Bank Corp. ("PNC Bank" or "Corporation") is a bank holding
company registered under the Bank Holding Company Act of 1956, as amended ("BHC
Act"). PNC Bank was incorporated under the laws of the Commonwealth of
Pennsylvania in 1983 with the consolidation of Pittsburgh National Corporation
and Provident National Corporation. Since 1983, PNC Bank has diversified its
geographical presence and product capabilities through strategic bank and
nonbank acquisitions and the formation of various nonbanking subsidiaries.
The Corporation is one of the largest diversified financial services companies
in the United States and operates seven lines of business: National Consumer
Banking; Regional Community Banking; Private Banking; Secured Lending; Asset
Management and Servicing; Corporate Banking; and Mortgage Banking. Financial
products and services are customized for specific customer segments and offered
nationally and in PNC Bank's primary geographic markets in Pennsylvania, New
Jersey, Delaware, Ohio, Kentucky, Indiana, Massachusetts and Florida. At
December 31, 1997, the Corporation's consolidated total assets, deposits and
shareholders' equity were $75.1 billion, $47.6 billion and $5.4 billion,
respectively.
LINES OF BUSINESS Information relating to National Consumer Banking, Regional
Community Banking, Private Banking, Secured Lending, Asset Management and
Servicing, Corporate Banking and Mortgage Banking is set forth under the
captions "Business Strategies" and "Line of Business Review" in the "Financial
Review" included on pages 30 through 31 and 32 through 38, respectively, of the
Annual Report to Shareholders, which is incorporated herein by reference.
SUBSIDIARY BANKS While the Corporation manages seven lines of business, the
corporate legal structure currently consists of five subsidiary banks and over
110 active nonbank subsidiaries. PNC Bank, National Association, headquartered
in Pittsburgh, Pennsylvania is the Corporation's only bank subsidiary which is a
significant subsidiary within the meaning of Rule 1-02(v) of Regulation S-X. At
December 31, 1997, PNC Bank, National Association had total consolidated assets
of $69.7 billion, representing 93% of the Corporation's consolidated assets. For
additional information on subsidiaries, see Exhibit 21 to this Form 10-K, which
is incorporated herein by reference.
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STATISTICAL DISCLOSURES BY BANK HOLDING COMPANIES The following statistical
information is included on the indicated pages of the Annual Report to
Shareholders and is incorporated herein by reference:
Page of
Annual
Report
- ------------------------------------------------------ --------
Analysis of Year-to-Year Changes in Net Interest
Income 77
Average Consolidated Balance Sheet and Net Interest
Analysis 78-79
Book Values of Securities 51 and 61
Maturities and Weighted-Average Yield of Securities 61
Loan Types 62
Loan Maturities and Interest Sensitivity 80
Nonaccrual, Past Due and Restructured Loans 63
Potential Problem Loans 45
Summary of Loan Loss Experience 80
Allocation of Allowance for Credit Losses 81
Average Amount and Average Rate Paid on Deposits 78-79
Time Deposits of $100,000 or More 81
Selected Consolidated Financial Data 75
Short-Term Borrowings 81
RISK MANAGEMENT The Corporation's ordinary course of business involves varying
degrees of risk taking, the most significant of which are credit, liquidity and
interest rate risk. Market risk is also inherent in the Corporation's business
operations. Although it cannot eliminate these risks, PNC Bank has risk
management processes designed to provide for risk identification, measurement,
monitoring and control. Information relating to credit, liquidity, interest rate
and market risk and the Corporation's risk management processes is set forth
under the section "Risk Management" in the "Financial Review" included on pages
44 through 47 of the Annual Report to Shareholders, which is incorporated herein
by reference.
EFFECT OF GOVERNMENTAL MONETARY AND OTHER POLICIES The earnings and operations
of bank holding companies and their subsidiaries are affected by monetary, tax
and other policies of the United States government and its agencies, including
the Board of Governors of the Federal Reserve System (the "Federal Reserve
Board"). An important function of the Federal Reserve Board is to regulate the
national supply of bank credit. The Federal Reserve Board employs open market
operations in U.S. Government securities, changes in the discount rate on bank
borrowings and changes in reserve requirements on bank deposits to implement its
monetary policy objectives. These instruments of monetary policy are used in
varying combinations to influence the overall level of bank loans, investments
and deposits, the interest rates charged on loans and paid for deposits, the
price of the dollar in foreign exchange markets and the level of inflation. The
monetary policies of the Federal Reserve Board have had a significant effect on
the operating results of banking institutions in the past and are expected to
continue to do so in the future. It is not possible to predict the nature or
timing of future changes in monetary, tax and other policies or the effect that
they may have on the Corporation's business and earnings.
IMPACT OF INFLATION The assets and liabilities of the Corporation are primarily
monetary in nature. Accordingly, future changes in prices do not affect the
obligations to pay or receive fixed and determinable amounts of money. During
periods of inflation, monetary assets lose value in terms of purchasing power,
and monetary liabilities have corresponding purchasing power gains. The concept
of purchasing power, however, is not an adequate indicator of the effect of
inflation on banks, because it does not take into account changes in interest
rates, which are an important determinant of the Corporation's earnings. A
discussion of interest rate risk is set forth under the section "Interest Rate
Risk" in the "Financial Review" included on pages 46 and 47 of the Annual Report
to Shareholders.
SUPERVISION AND REGULATION The Corporation and its subsidiaries are subject to
numerous governmental regulations, some of which are highlighted below and in
"Note 14 - Regulatory Matters" of the "Notes to Consolidated Financial
Statements" included on pages 65 and 66 of the Annual Report to Shareholders
("Note 14 - Regulatory Matters"), which is incorporated herein by reference. The
coverage of the regulations includes activity, investment and dividend
limitations on the bank holding company and its subsidiaries and
consumer-related protections for loan, deposit, brokerage, fiduciary and mutual
fund customers.
As a bank holding company registered under the BHC Act, the Corporation is
subject to the supervision and regular inspection by the Federal Reserve Board.
Under the BHC Act, the Federal Reserve Board's prior approval is required in any
case the Corporation proposes to acquire all or substantially all of the assets
of any bank, acquire direct or indirect ownership or control of more than 5% of
the voting shares of any bank, or merge or consolidate with any other bank
holding company. The BHC Act also prohibits, with certain exceptions, the
Corporation from acquiring direct or indirect ownership or control of more than
5% of any class of voting shares of any nonbanking corporation. Under the BHC
Act, the Corporation may not engage in any business other than managing and
controlling banks or furnishing certain specified services to subsidiaries and
may not acquire voting control of nonbanking corporations unless the Federal
Reserve Board determines such businesses and services to be closely related to
banking. When reviewing bank acquisition applications for approval, the Federal
Reserve Board considers, among other things, each subsidiary bank's record in
meeting the credit needs of the communities it serves in accordance with the
Community Reinvestment Act of 1977, as amended ("CRA"). At December 31, 1997,
the Corporation's subsidiary banks were rated "Outstanding" or "Satisfactory"
with respect to CRA.
The Corporation's subsidiary banks are subject to supervision and examination by
applicable federal and state banking agencies, including such federal agencies
as the Office of the Comptroller of the Currency ("OCC") with respect to PNC
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Bank, National Association and PNC National Bank, the Federal Deposit Insurance
Corporation ("FDIC") with respect to PNC Bank, Delaware and PNC Bank, New
England, and the Office of Thrift Supervision with respect to PNC Bank, FSB. The
Corporation's subsidiary banks are subject to various federal and state
restrictions on their ability to pay dividends to the Corporation, which
constitutes the principal source of income to the parent company as discussed
under the caption "Liquidity Risk" in the "Financial Review" on page 46 of the
Annual Report to Shareholders, which is incorporated herein by reference. The
Corporation's subsidiary banks are also subject to federal laws limiting
extensions of credit to their parent holding company and nonbank affiliates as
discussed in "Note 14 - Regulatory Matters."
The federal banking agencies possess broad powers to take corrective action as
deemed appropriate for an insured depository institution and its holding
company. The extent of these powers depends upon whether the institution in
question is considered "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." Generally, as an institution is deemed to be less well
capitalized, the scope and severity of the agencies' powers increase, ultimately
permitting the agency to appoint a receiver for the institution. Business
activities may also be influenced by an institution's capital classification.
For instance, only a "well capitalized" depository institution may accept
brokered deposits without prior regulatory approval and an "adequately
capitalized" depository institution may accept brokered deposits only with prior
regulatory approval. At December 31, 1997, all of the Corporation's subsidiary
banks exceeded the required ratios for classification as "well capitalized."
Additional discussion of capital adequacy requirements is set forth under the
caption "Capital" in the "Financial Review" on pages 43 and 44 of the Annual
Report to Shareholders, which is incorporated herein by reference.
All of the subsidiary banks are insured by the FDIC and subject to premium
assessments. The amount of FDIC assessments is based on the institution's
relative risk as measured by regulatory capital ratios and certain other
factors. Under current regulations, the Corporation's subsidiary banks are not
assessed a premium on deposits insured by either the Bank Insurance Fund or the
Savings Association Insurance Fund. However, insured depository institutions
continue to pay premiums based on deposit levels to service debt on bonds issued
by a governmental entity.
The Corporation's subsidiary banks are subject to "cross-guarantee" provisions
under federal law that provide if one FDIC-insured depository institution of a
multi-bank holding company fails or requires FDIC assistance, the FDIC may
assess a "commonly controlled" depository institution for the estimated losses
suffered by the FDIC. Such liability could have a material adverse effect on the
financial condition of any assessed bank and the Corporation. While the FDIC's
claim is junior to the claims of depositors, holders of secured liabilities,
general creditors and subordinated creditors, it is superior to the claims of
shareholders and affiliates.
Under Federal Reserve Board policy, a bank holding company is expected to act as
a source of financial strength to each of its subsidiary banks and to commit
resources to support each such bank. Consistent with the "source of strength"
policy for subsidiary banks, the Federal Reserve Board has stated that, as a
matter of prudent banking, a bank holding company generally should not maintain
a rate of cash dividends unless its net income available to common shareholders
has been sufficient to fund fully the dividends, and the prospective rate of
earnings retention appears to be consistent with the corporation's capital
needs, asset quality and overall financial condition.
The Corporation's nonbank subsidiaries are subject to regulatory restrictions
imposed by the Federal Reserve Board and other federal and state agencies as
well. The Corporation's four registered broker-dealer subsidiaries are regulated
by the Securities and Exchange Commission ("SEC") and monitored by the OCC in
three instances and the Federal Reserve Board in the other instance. They are
also subject to rules and regulations promulgated by the National Association of
Securities Dealers, Inc., among others. Several nonbank subsidiaries which are
registered investment advisers are subject to the regulations of the SEC and
other agencies. Investment advisers which are national bank subsidiaries are
also subject to OCC supervision.
Over the past few years, the regulatory framework applicable to the Corporation
and its subsidiaries has been subject to extensive Congressional and agency
review, which has resulted in some liberalization and may result in further
reforms. Current proposals include easing restrictions on insurance and
investment banking activities and easing bank ownership requirements. There are
also proposals to regulate further banking and financial services, some of which
limit finance charges and other fees and charges earned by the Corporation.
Management currently cannot predict the outcome of these proposals or the
effect, if any, on the Corporation.
Since 1995, the BHC Act has permitted bank holding companies from any state to
acquire banks and bank holding companies located in any other state, subject to
certain conditions. Effective June 1, 1997, the Federal Deposit Insurance Act
gave the Corporation's subsidiary banks the ability, subject to certain
restrictions, to consolidate with one another or to acquire by acquisition or
merger branches outside their home state. Pursuant to these provisions, the
Corporation merged certain subsidiary banks during 1997. Competition may
increase further as banks branch across state lines and enter new markets.
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COMPETITION The Corporation and its subsidiaries are subject to vigorous and
intense competition from various financial institutions and increasingly from
"nonbank" entities that engage in similar activities without being subject to
bank regulatory supervision and restrictions. This is particularly true as the
Corporation expands nationally beyond its primary geographic footprint, where
expansion requires significant investments to penetrate new markets and respond
to competition.
In making loans, the subsidiary banks compete with traditional banking
institutions as well as consumer finance companies, leasing companies and other
nonbank lenders. Loan pricing and credit standards are under competitive
pressure as lenders seek to deploy capital and a broader range of borrowers have
access to capital markets. Traditional deposit activities are subject to pricing
pressures and customer migration as the competition for consumer investment
dollars intensifies among banks and other financial services companies. The
Corporation's subsidiary banks compete for deposits not only with other
commercial banks, savings banks, savings and loan associations and credit
unions, but also insurance companies and issuers of commercial paper and other
securities, including mutual funds. Various nonbank subsidiaries engaged in
investment banking and venture capital activities compete with commercial banks,
investment banking firms, insurance companies and venture capital firms. In
providing asset management services, the Corporation's subsidiaries compete with
many large banks, trust companies, brokerage houses, mutual fund managers, other
registered investment advisers and insurance companies.
The ability to access and use technology is an increasingly important
competitive factor in the financial services industry. Technology is not only
important with respect to delivery of financial services, but in processing
information. Each of the Corporation's lines of business consistently must make
technological investments to remain competitive.
EXECUTIVE OFFICERS OF THE REGISTRANT Information concerning each executive
officer of the Corporation as of March 1, 1998 is set forth below. Each
executive officer held the position indicated or another senior executive
position with the same entity or one of its affiliates or a predecessor
corporation for the past five years.
Name Age Position with Year
Corporation Employed(1)
- ---------------------- ----- ---------------------- -----------
Thomas H. O'Brien (2) 61 Chairman and Chief 1962
Executive Officer and
Director
James E. Rohr (2) 49 President and Director 1972
Walter E. Gregg, Jr. 56 Senior Executive Vice 1974
(2) President, Finance and
Administration
Richard C. Caldwell 53 Executive Vice President, 1990
Asset Management and
Servicing
Frederick J. Gronbacher 55 Executive Vice President, 1976
National Consumer
Banking
Robert L. Haunschild 48 Senior Vice President and 1990
Chief Financial Officer
William J. Johns 50 Senior Vice President and 1974
Chief Accounting Officer
Ralph S. Michael III 43 Executive Vice President 1979
and Chief Executive
Officer, Corporate
Banking
Thomas E. Paisley III 50 Senior Vice President and 1972
Chairman, Corporate
Credit Policy Committee
Helen P. Pudlin 48 Senior Vice President and 1989
General Counsel
Bruce E. Robbins 53 Executive Vice President 1973
and Chief Executive
Officer, Secured Lending
- ---------------------- ----- --------------------------- ------
(1) Where applicable, refers to year first employed by predecessor company or
acquired company.
(2) Office of the Chairman member.
ITEM 2 - PROPERTIES
The executive and administrative offices of the Corporation and PNC Bank,
National Association ("PNC Bank, N.A."), are located at One PNC Plaza,
Pittsburgh, Pennsylvania. The thirty-story structure is owned by PNC Bank, N.A.
The Corporation and PNC Bank, N.A. occupy substantially all of the building. In
addition, PNC Bank, N.A. owns a thirty-four story structure adjacent to One PNC
Plaza, known as Two PNC Plaza, 620 Liberty Avenue, Pittsburgh, Pennsylvania,
that houses additional office space. PNC Bank, N.A. also owns a data processing
and telecommunications center located in a suburb of Pittsburgh, Pennsylvania.
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The Corporation's subsidiaries own or lease numerous other premises for use in
conducting business activities. The facilities owned or occupied under lease by
the Corporation's subsidiaries are considered by management to be adequate.
Additional information pertaining to the Corporation's properties is set forth
in "Note 8 - Premises, Equipment and Leasehold Improvements" of the "Notes to
Consolidated Financial Statements" included on pages 63 and 64 of the Annual
Report to Shareholders, which is incorporated herein by reference.
ITEM 3 - LEGAL PROCEEDINGS
The Corporation's Annual Report on Form 10-K for the year ended December 31,
1996, included a description of a consolidated class action complaint against
the Corporation, its Chairman and Chief Executive Officer and its Senior Vice
President and Chief Financial Officer alleging violations of federal securities
laws and related common law claims. The parties have reached an agreement in
principle to settle this action, which is subject to documentation and court
approval. Management believes that the final disposition will not be material to
the Corporation's financial position or results of operations.
The Corporation, in the normal course of business, is subject to various other
pending and threatened lawsuits in which claims for monetary damages and other
relief are asserted. Management, after consultation with legal counsel, does not
anticipate that the ultimate aggregate liability, if any, arising out of such
other lawsuits will have a material effect on the Corporation's financial
position. At the present time, management is not in a position to determine
whether any such pending or threatened litigation will have a material adverse
effect on the Corporation's results of operations in any future reporting
period.
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Corporation's common stock is listed on the New York Stock Exchange and is
traded under the symbol "PNC". At the close of business on February 28, 1998,
there were 64,438 common shareholders of record.
Holders of common stock are entitled to receive dividends when declared by the
Board of Directors out of funds legally available therefor. The Board of
Directors may not pay or set apart dividends on the common stock until dividends
for all past dividend periods on any series of outstanding preferred stock have
been paid or declared and set apart for payment. The Board presently intends to
continue the policy of paying quarterly cash dividends. However, the amount of
any future dividends will depend on earnings, the financial condition of the
Corporation and other factors, including contractual restrictions and applicable
government regulations and policies (such as those relating to the ability of
the subsidiary banks and nonbank subsidiaries to upstream dividends to the
parent company). The Federal Reserve Board has the power to prohibit the
Corporation from paying dividends without prior regulatory approval. Further
discussion concerning dividend restrictions is set forth under the caption
"Supervision and Regulation" in Part I, Item 1 of this Form 10-K and in "Note 14
- - Regulatory Matters," which sections are incorporated herein by reference.
Additional information relating to the common stock is set forth under the
caption "Common Stock Prices/Dividends Declared" on page 82 of the Annual Report
to Shareholders, which is incorporated herein by reference.
ITEM 6 - SELECTED FINANCIAL DATA
"Selected Consolidated Financial Data" on page 75 of the Annual Report to
Shareholders is incorporated herein by reference.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The discussion of the Corporation's financial position and results of operations
set forth under the section "Financial Review" on pages 30 through 52 of the
Annual Report to Shareholders is incorporated herein by reference.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information set forth under the sections "Interest Rate Risk", "Market Risk"
and "Financial Derivatives" on pages 46 through 49 of the Annual Report to
Shareholders is incorporated herein by reference.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The "Report of Ernst & Young LLP, Independent Auditors," "Consolidated Financial
Statements," "Notes to Consolidated Financial Statements" and "Selected
Quarterly Financial Data" on pages 53, 54 through 57, 58 through 74, and 76,
respectively, of the Annual Report to Shareholders are incorporated herein by
reference.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to the principal occupations of directors of the
Corporation, their ages, directorships in other companies, and respective terms
of office, except for C.G. Grefenstette,
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Thomas Marshall, Vincent A. Sarni and Garry J. Scheuring, who are not standing
for reelection, is set forth under the heading "Election of Directors -
Information Concerning Nominees" in the Proxy Statement and is incorporated
herein by reference. Mr. Grefenstette, age 70, is the Chairman and Chief
Executive Officer of The Hillman Company, a company engaged in diversified
operations and investments, and a director of Owens & Minor, Inc. Mr. Marshall,
age 69, is the Retired Chairman of Aristech Chemical Corporation, and a director
of Arch Coal, Inc. Mr. Sarni, age 69, is the Retired Chairman and Chief
Executive Officer of PPG Industries Inc., a manufacturer of glass, chemicals,
coatings and resins. He is a director of PPG Industries, Inc., Hershey Foods
Corporation and The LTV Corporation. Mr. Scheuring, age 58, is the Retired Vice
Chairman of PNC Bank Corp., and became a director of the Corporation in
connection with the Midlantic Corporation merger, effective December 31, 1995.
Mr. Scheuring had been the Chairman, President and Chief Executive Officer of
Midlantic Corporation. Each of Messrs. Grefenstette, Marshall and Sarni has been
a director of the Corporation since 1989.
Information regarding compliance with Section 16(a) of the Securities Exchange
Act of 1934 set forth under the heading "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Proxy Statement is incorporated herein by
reference.
Information regarding executive officers of the Corporation is included in Part
I of this Form 10-K under the caption "Executive Officers of the Registrant".
Information regarding the involvement of the Corporation's Chairman and Chief
Executive Officer and Senior Vice President and Chief Financial Officer in
certain legal proceedings set forth under the heading "Legal Proceedings" in the
Proxy Statement is incorporated herein by reference.
ITEM 11 - EXECUTIVE COMPENSATION
Information regarding compensation of directors and executive officers under the
captions "Election of Directors - Compensation of Directors," "Election of
Directors - Common Stock Purchase Guideline" and "Compensation of Executive
Officers," excluding the "Personnel and Compensation Committee Report on
Executive Compensation," in the Proxy Statement is incorporated herein by
reference.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding the beneficial ownership of the equity securities of the
Corporation by all directors, each of the five highest compensated executive
officers and all directors and executive officers of the Corporation as a group
under the heading "Security Ownership of Directors and Executive Officers" in
the Proxy Statement is incorporated herein by reference.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding transactions and relationships with certain directors and
executive officers of the Corporation and their associates under the heading
"Compensation of Executive Officers-Compensation Committee Interlocks and
Insider Participation" in the Proxy Statement is incorporated herein by
reference.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
FINANCIAL STATEMENTS The following report of independent auditors and
consolidated financial information of the Corporation included in the Annual
Report to Shareholders are incorporated herein by reference.
Page of
Annual
Financial Statements Report
- ------------------------------------------------------ --------
Report of Ernst & Young LLP, Independent Auditors 53
Consolidated Statement of Income for the three
years ended December 31, 1997 54
Consolidated Balance Sheet as of December 31, 1997
and 1996 55
Consolidated Statement of Changes in
Shareholders' Equity for the three years
ended December 31, 1997 56
Consolidated Statement of Cash Flows for the
three years ended December 31, 1997 57
Notes to Consolidated Financial Statements 58-74
Selected Quarterly Financial Data 76
- ------------------------------------------------------ --------
No financial statement schedules are being filed.
REPORTS ON FORM 8-K The following reports on Form 8-K were filed during the
quarter ended December 31, 1997, or thereafter:
Form 8-K dated as of October 15, 1997, reporting the Corporation's consolidated
financial results for the three and nine months ended September 30, 1997, filed
pursuant to Item 5.
Form 8-K dated as of January 15, 1998, reporting the Corporation's consolidated
financial results for the three months and year ended December 31, 1997, filed
pursuant to Item 5.
EXHIBITS The exhibits listed on the Exhibit Index on pages E-1 and E-2 of this
Form 10-K are filed herewith or are incorporated herein by reference.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant, PNC Bank Corp., has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
PNC BANK CORP.
(Registrant)
By: /s/ Robert L. Haunschild
- ----------------------------------------------
Robert L. Haunschild, Senior Vice President
and Chief Financial Officer
March 20, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of PNC Bank Corp. and
in the capacity indicated on March 20, 1998.
<TABLE>
<CAPTION>
Signature Capacities
- ----------------------------------------- ----------------------------------------------
<S> <C>
/s/ Thomas H. O'Brien Chairman, Chief Executive
- ----------------------------------------- Officer and Director (Principal Executive
Thomas H. O'Brien Officer)
/s/ Robert L. Haunschild Senior Vice President and
- ----------------------------------------- Chief Financial Officer (Principal Financial
Robert L. Haunschild Officer)
/s/ William J. Johns Senior Vice President and Chief Accounting
- ----------------------------------------- Officer (Principal Accounting Officer)
William J. Johns
* Paul W. Chellgren; Robert N. Clay; George A. A Majority of the Directors
Davidson, Jr.; David F. Girard-diCarlo; C. G.
Grefenstette; William R. Johnson; Bruce C.
Lindsay; W. Craig McClelland; Thomas Marshall;
Jane G. Pepper; Jackson H. Randolph; Roderic H.
Ross; Vincent A. Sarni; Garry J. Scheuring;
Richard P. Simmons; Thomas J. Usher; Milton A.
Washington; and Helge H. Wehmeier
* James E. Rohr President and Director
</TABLE>
*By: /s/ Melanie S. Cibik
------------------------------------------
Melanie S. Cibik, Attorney-in-Fact,
pursuant to Power of Attorney filed
herewith
8
<PAGE> 9
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description Method of Filing +
- ---------- -------------------------------------------------------------------- --------------------------------------------
<S> <C>
3.1 Articles of Incorporation of the Corporation, as amended. Incorporated herein by reference to
Exhibit 99.1 and 99.2 of the Current
Report on Form 8-K dated October 7, 1996.
3.2 By-Laws of the Corporation, as amended. Incorporated herein by reference to
Exhibit 99.2 of the Current Report on
Form 8-K dated January 15, 1998.
4.1 Instruments defining the rights of holders of long-term debt of the
Corporation and its subsidiaries are not filed as Exhibits
because the amount of debt under each instrument is less than 10
percent of the consolidated assets of the Corporation. The
Corporation undertakes to file these instruments with the
Commission on request.
4.2 Designation of Series: $1.80 Cumulative Convertible Preferred Incorporated herein as part of Exhibit 3.1.
Stock -- Series A.
4.3 Designation of Series: $1.80 Cumulative Convertible Preferred Incorporated herein as part of Exhibit 3.1.
Stock -- Series B.
4.4 Designation of Series: $1.60 Cumulative Convertible Preferred Incorporated herein as part of Exhibit 3.1.
Stock -- Series C.
4.5 Designation of Series: $1.80 Cumulative Convertible Preferred Incorporated herein as part of Exhibit 3.1.
Stock -- Series D.
4.6 Designation of Series: Fixed/Adjustable Rate Noncumulative Incorporated herein as part of Exhibit 3.1.
Preferred Stock -- Series F.
10.1 Supplemental Executive Retirement Income and Disability Plan of Incorporated herein by reference to
the Corporation. Exhibit 10.2 of the Annual Report on
Form 10-K for the year ended December
31, 1990 ("1990 Form 10-K"). *
10.2 Amendments to Supplemental Executive Retirement Income and Incorporated herein by reference to
Disability Plan. Exhibit 10.2 of the Annual Report on
Form 10-K for the year ended December
31, 1996 ("1996 Form 10-K). *
10.3 Supplemental Executive Life Insurance and Spouse's Benefit Plan of Incorporated herein by reference to
the Corporation. Exhibit 10.3 of the 1990 Form 10-K. *
10.4 November 21, 1996 Amendment to Supplemental Executive Life Incorporated herein by reference to
Insurance and Spouse's Benefit Plan. Exhibit 10.4 of the 1996 Form 10-K. *
10.5 1997 Long-Term Incentive Award Plan of the Corporation ("1997 Incorporated herein by reference to
Award Plan"). Exhibit 4.3 of the Corporation's
Post-Effective Amendment No. 1 to
Registration Statement on Form S-8 at
File No. 33-54960. *
10.6 Form of Nonstatutory Stock Option Agreement under 1997 Award Plan. Filed herewith. *
10.7 Form of Incentive Share Agreement under 1992 Award Plan (June Incorporated herein by reference to
1995), as amended November 21, 1996. Exhibit 10.7 of the 1996 Form 10-K. *
10.8 Form of Addendum to Nonstatutory Stock Option Agreement relating Filed herewith. *
to Reload Nonstatutory Stock Options.
10.9 Form of Reload Nonstatutory Stock Option Agreement. Filed herewith. *
10.10 Form of Incentive Share Agreement - Share Price, RSR and ROCE Filed herewith. *
Performance Goals.
</TABLE>
E-1
<PAGE> 10
<TABLE>
<S> <C> <C>
10.11 PNC Bank Corp. 1994 Annual Incentive Award Plan. Incorporated by reference to Exhibit 10.6
of the Annual Report on Form 10-K for
the year ended December 31, 1994 ("1994
Form 10-K"). *
10.12 PNC Bank Corp. 1996 Executive Incentive Award Plan. Incorporated by reference to Exhibit 10.2
of the Quarterly Report on Form 10-Q for
the quarter ended September 30, 1996
("3Q 1996 Form 10-Q"). *
10.13 PNC Bank Corp. and Affiliates Deferred Compensation Plan. Incorporated by reference to Exhibit 4.2
to the Corporation's Registration
Statement on Form S-8 at File No.
333-18069. *
10.14 PNC Bank Corp. Supplemental Incentive Savings Plan as amended. Incorporated by reference to Exhibit 4.1
to the Corporation's Registration
Statement on Form S-8 at File No.
333-18069. *
10.15 PNC Bank Corp. Supplemental Pension Plan, as amended. Incorporated herein by reference to Exhibit 10.12
of the 1996 Form 10-K. *
10.16 1992 Director Share Incentive Plan. Incorporated herein by reference to
Exhibit 10.6 of the Annual Report on
Form 10-K for the year ended December
31, 1992. *
10.17 PNC Bank Corp. Directors Retirement Plan. Incorporated by reference to Exhibit 10.7
of the 1994 Form 10-K. *
10.18 PNC Bank Corp. Directors Deferred Compensation Plan. Incorporated by reference to Exhibit 10.1
of the 3Q 1996 Form 10-Q. *
10.19 Form of Change in Control Severance Agreement. Incorporated herein by reference to
Exhibit 10.17 of the 1996 Form 10-K. *
10.20 Amended and Restated Trust Agreement between the Corporation, as Incorporated herein by reference to
Settlor, and NationsBank, N.A., as Trustee (who has been Exhibit 10.18 of the 1996 Form 10-K. *
replaced by Hershey Trust Company, as successor Trustee).
12.1 Computation of Ratio of Earnings to Fixed Charges. Filed herewith.
12.2 Computation of Ratio of Earnings to Combined Fixed Charges and Filed herewith.
Preferred Dividends.
13 Excerpts from the Annual Report to Shareholders for the year Filed herewith.
ended December 31, 1997. Such Annual Report, except for
those portions thereof that are expressly incorporated
by reference herein, is furnished for information of the SEC only
and is not deemed to be "filed" as part of this Form 10-K.
21 Schedule of Certain Subsidiaries of the Corporation. Filed herewith.
23 Consent of Ernst & Young LLP, independent auditors for the Filed herewith.
Corporation.
24 Power of Attorney of directors and officers of the Corporation. Filed herewith.
27.1 Financial Data Schedule. Filed herewith.
27.2 Restated Financial Data Schedule. Filed herewith.
27.3 Restated Financial Data Schedule. Filed herewith.
</TABLE>
- --------------------------------------------------------------------
+ Except where otherwise expressly noted, incorporated document references are
to Commission File No. 1-9718.
* Denotes management contract or compensatory plan.
E-2
<PAGE> 1
EXHIBIT 10.6
PNC BANK CORP.
1997 LONG-TERM INCENTIVE AWARD PLAN
NONSTATUTORY STOCK OPTION AGREEMENT
OPTIONEE:
DATE OF GRANT:
OPTION PRICE PER SHARE:
COVERED SHARES:
Terms defined in the 1997 Long-Term Incentive Award Plan ("PLAN") of PNC Bank
Corp. ("CORPORATION") are used in this Agreement as defined in the Plan unless
otherwise defined in this Agreement. For certain definitions, see Annex C
attached hereto and incorporated herein by reference.
1. GRANT OF OPTION. Pursuant to the Plan and subject to the terms of this
Agreement, the Corporation hereby grants to the Optionee an Option to purchase
from the Corporation that number of Shares specified above as the "Covered
Shares," exercisable at the Option Price.
2. TERMS OF THE OPTION.
2.1 TYPE OF OPTION. The Option is intended to be a Nonstatutory Stock Option
without Rights.
2.2 OPTION PERIOD. The Option is exercisable, in whole or in part, at any time
and from time to time upon the earliest to occur of (i) the first anniversary of
the Date of Grant, (ii) the date of termination of the Optionee's employment
with the Corporation by reason of death or permanent and total disability, and
(iii) the date of termination of the Optionee's employment during a Coverage
Period either by the Corporation without Cause or by the Optionee with Good
Reason, provided that in the case of clause (iii) that such termination is at
least six months after the Date of Grant. The Option shall remain exercisable
until the Date of Expiration.
2.3 NONTRANSFERABILITY. The Option is not transferable by the Optionee other
than by will or by the laws of descent and distribution, and is exercisable,
during the Optionee's lifetime, only by the Optionee or, in the event of the
Optionee's legal disability, by the Optionee's legal representative.
3. CAPITAL ADJUSTMENTS. The number and class of unexercised Covered Shares and
the Option Price shall be subject to such adjustment, if any, as the Committee
in its sole discretion deems appropriate to reflect such events as stock
dividends, stock splits, recapitalizations, mergers, consolidations or
reorganizations.
4. EXERCISE OF OPTION.
4.1 NOTICE AND EFFECTIVE DATE. The Option may be exercised, in whole or in part,
by delivering to the Corporation written notice of such exercise, in such form
as the Committee may from time to time prescribe, accompanied by full payment of
(a) the Option Price with respect to that portion of the Option being exercised
and (b) any amounts required to be withheld pursuant to applicable tax laws in
connection with such exercise. In addition, the Optionee may elect to use the
cashless exercise procedure provided for pursuant to Section 4.2 hereof. The
effective date of such exercise shall be the Date of Exercise. Until the
Committee notifies the Optionee to the contrary, the form attached to this
Agreement as Annex A shall be used to exercise the Option granted hereunder.
4.2 PAYMENT OF THE OPTION PRICE. Upon exercise of the Option, in whole or in
part, the Optionee may pay the aggregate Option Price in cash, by delivering
duly endorsed certificates representing whole Shares having aggregate Fair
Market Value on the Date of Exercise not exceeding that portion of the Option
Price being paid by delivery of such Shares, or through a combination of cash
and Shares; provided, however, that no Shares may be used to pay any portion of
the Option Price that have not been held for at least six months prior to the
Date of Exercise or such other period as may be specified by the Committee.
Notwithstanding the foregoing, the Optionee may elect to complete his or her
option exercise through a brokerage service/margin account pursuant to the
cashless option exercise procedure under Regulation T of the Board of Governors
of the Federal Reserve System and in such manner as may be permitted by the
Committee from time to time, consistent with said Regulation.
4.3 PAYMENT OF TAXES. The Optionee may elect to satisfy applicable tax
withholding requirements by payment of cash or, subject to such terms and
conditions as the Committee may from time to time establish to satisfy any or
all federal, state, or local tax liabilities incurred upon such exercise,
through retention by the Corporation of Shares otherwise issuable upon such
exercise or by delivery to the Corporation of previously acquired Shares. Until
the Committee notifies the Optionee to the contrary, the form attached to this
Agreement as Annex B shall be used to make such election.
4.4 EFFECT. The exercise, in whole or in part, of the Option shall cause a
reduction in the number of unexercised Covered Shares equal to the number of
Shares with respect to which the Option is exercised.
5. RESTRICTIONS ON EXERCISE AND UPON SHARES ISSUED UPON EXERCISE.
Notwithstanding any other provision of this Agreement, the Optionee agrees, for
himself (herself) and his (her) successors, that the Option may not be exercised
at any time that the Corporation does not have in effect a registration
statement under the Securities Act of 1933, as amended, relating to the offer of
Shares under the Plan, unless the Corporation agrees to permit such exercise.
The Optionee further agrees, for himself (herself) and his (her) successors,
that, upon the issuance of any Shares pursuant to the exercise of the Option, he
(she) will, upon the request of the Corporation, agree in writing that he (she)
is acquiring such Shares for investment only and not with a view to resale, and
that he (she) will not sell, pledge, or otherwise dispose of such Shares unless
and until (a) the Corporation is furnished with an opinion of counsel to the
effect
<PAGE> 2
that registration of such Shares pursuant to the Securities Act of 1933, as
amended, is not required by that Act or by rules and regulations promulgated
thereunder; (b) the staff of the Securities and Exchange Commission has issued a
"no-action" letter with respect to such disposition; or (c) such registration or
notification as is, in the opinion of counsel for the Corporation, required for
the lawful disposition of such Shares has been filed and has become effective;
provided, however, that the Corporation is not obligated hereby to file any such
registration or notification. The Optionee further agrees that the Corporation
may place a legend embodying such restriction on the certificates evidencing
such Shares.
6. RIGHTS AS SHAREHOLDER. The Optionee shall have no rights as a Shareholder
with respect to any Covered Shares until such time as the Option is exercised
and then only with respect to those Shares issued upon such exercise.
7. EMPLOYMENT. Neither the granting of the Option evidenced by this Agreement
nor any term or provision of this Agreement shall constitute or be evidence of
any understanding, expressed or implied, on the part of the Corporation or any
of its subsidiaries to employ the Optionee for any period. References in this
Agreement to the employment of the Optionee with the Corporation shall include
employment with any subsidiary of the Corporation.
8. SUBJECT TO THE PLAN. The Option evidenced by this Agreement and the exercise
thereof are subject to the terms and conditions of the Plan, which is
incorporated by reference herein and made a part hereof, but the terms of the
Plan shall not be considered an enlargement of any benefits under this
Agreement. In addition, the Option is subject to any rules and regulations
promulgated by the Committee.
IN WITNESS WHEREOF, the Corporation has caused this Agreement to be signed on
its behalf effective as of the Date of Grant.
PNC BANK CORP.
By: ________________________________
Chairman and Chief Executive Officer
ATTEST:
____________________________________
Secretary
ACCEPTED AND AGREED TO AS OF THE DATE OF GRANT.
Optionee
Annex A - Option Exercise Form (Intentionally omitted)
Annex B - Tax Payment Election From (Intentionally omitted)
Annex C - Certain Definitions
2
<PAGE> 3
ANNEX C
TO PNC BANK CORP. 1997 LONG-TERM INCENTIVE AWARD PLAN
NONSTATUTORY STOCK OPTION AGREEMENT
CERTAIN DEFINITIONS
Except where the context otherwise indicates, the following definitions apply to
the Nonstatutory Stock Option Agreement (the "AGREEMENT") to which this Annex C
is attached:
C.1 "CAUSE" means: (a) the willful and continued failure of the Optionee to
substantially perform the Optionee's duties with the Corporation (other than any
such failure resulting from incapacity due to physical or mental illness), after
a written demand for substantial performance is delivered to the Optionee by the
Board or the Chief Executive Officer of the Corporation which specifically
identifies the manner in which the Board or Chief Executive Officer believes
that the Optionee has not substantially performed the Optionee's duties; or
(b) the willful engaging by the Optionee in illegal conduct or gross misconduct
that is materially and demonstrably injurious to the Corporation.
For purposes of the preceding clauses (a) and (b), no act or failure to act, on
the part of the Optionee, shall be considered "willful" unless it is done, or
omitted to be done, by the Optionee in bad faith and without reasonable belief
that the Optionee's action or omission was in the best interests of the
Corporation. Any act, or failure to act, based upon the instructions or prior
approval of the Board, the Chief Executive Officer or the Optionee's superior or
based upon the advice of counsel for the Corporation, shall be conclusively
presumed to be done, or omitted to be done, by the Optionee in good faith and in
the best interests of the Corporation. The cessation of employment of the
Optionee shall not be deemed to be for Cause unless and until there shall have
been delivered to the Optionee, as part of the notice of the Optionee's
termination, a copy of a resolution duly adopted by the affirmative vote of not
less than a majority of the entire membership of the Board, at a Board meeting
called and held for the purpose of considering such termination, finding that,
in the good faith opinion of the Board, the Optionee is guilty of the conduct
described in clause (a) or (b) above and specifying the particulars thereof in
detail. Such resolution shall be adopted only after reasonable notice of such
Board meeting is provided to the Optionee and the Optionee is given an
opportunity, together with counsel, to be heard before the Board.
C.2 "CHANGE IN CONTROL" means a change of control of the Corporation of a nature
that would be required to be reported in response to Item 6(e) of Schedule 14A
of Regulation 14A (or in response to any similar item on any similar schedule or
form) promulgated under the Exchange Act, whether or not the Corporation is then
subject to such reporting requirement; provided, however, that without
limitation, a Change in Control shall be deemed to have occurred if:
(a) any Person, excluding employee benefit plans of the Corporation, is or
becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the
Exchange Act or any successor provisions thereto), directly or indirectly, of
securities of the Corporation representing twenty percent (20%) or more of the
combined voting power of the Corporation's then outstanding securities,
provided, however, that such an acquisition of beneficial ownership representing
between twenty percent (20%) and forty percent (40%), inclusive, of such voting
power shall not be considered a Change in Control if the Board approves such
acquisition either prior to or immediately after its occurrence;
(b) the Corporation consummates a merger, consolidation, share exchange,
division or other reorganization or transaction of the Corporation (a
"FUNDAMENTAL TRANSACTION") with any other corporation, other than a Fundamental
Transaction that results in the voting securities of the Corporation outstanding
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of the surviving
entity) at least sixty percent (60%) of the combined voting power immediately
after such Fundamental Transaction of (i) the Corporation's outstanding
securities, (ii) the surviving entity's outstanding securities, or (iii) in the
case of a division, the outstanding securities of each entity resulting from the
division;
(c) the shareholders of the Corporation approve a plan of complete liquidation
or winding-up of the Corporation or an agreement for the sale or disposition (in
one transaction or a series of transactions) of all or substantially all of the
Corporation's assets;
(d) as a result of a proxy contest, individuals who prior to the conclusion
thereof constituted the Board (including for this purpose any new director whose
election or nomination for election by the Corporation's shareholders in
connection with such proxy contest was approved by a vote of at least two-thirds
(2/3) of the directors then still in office who were directors prior to such
proxy contest) cease to constitute at least a majority of the Board (excluding
any Board seat that is vacant or otherwise unoccupied);
(e) during any period of twenty-four consecutive months, individuals who at the
beginning of such period constituted the Board (including for this purpose any
new director whose election or nomination for election by the Corporation's
shareholders was approved by a vote of at least two-thirds (2/3) of the
directors then still in office who were directors at the beginning of such
period) cease for any reason to constitute at least a majority of the Board
(excluding any Board seat that is vacant or otherwise unoccupied); or
(f) the Board determines that a Change in Control has occurred.
Notwithstanding anything to the contrary herein, a divestiture or spin-off of a
subsidiary or division of the Corporation shall not by itself constitute a
"Change in Control."
C.3 "CIC FAILURE" means the following: (a) with respect to a CIC Triggering
Event described in Section C.4(a), the Corporation's shareholders vote against
the transaction approved by the Board or the agreement to consummate the
transaction is terminated; or
C-1
<PAGE> 4
(b) with respect to a CIC Triggering Event described in Section C.4(b), the
proxy contest fails to replace or remove a majority of the members of the Board.
C.4 "CIC TRIGGERING EVENT" means the occurrence of either of the following: (a)
the Board or the Corporation's shareholders approve a transaction described in
Subsection (b) of the definition of Change in Control contained in Section C.2
hereof; or (b) the commencement of a proxy contest in which any Person seeks to
replace or remove a majority of the members of the Board.
C.5 "COVERAGE PERIOD" means a period commencing on the earlier to occur of (i)
the date of a CIC Triggering Event and (ii) the date of a Change in Control, and
ending on the date that is two years after the date of the Change in Control,
provided, however, that in the event that a Coverage Period commences on the
date of a CIC Triggering Event such Coverage Period shall terminate upon the
earlier to occur of (x) the date of a CIC Failure and (y) the date that is two
years after the date of the Change in Control triggered by the CIC Triggering
Event. After the termination of any Coverage Period, another Coverage Period
shall commence upon the earlier to occur of clauses (i) and (ii) in the
preceding sentence.
C.6 "DATE OF EXERCISE" means the date on which the Corporation receives written
notice of the exercise in such form as the Committee may from time to time
prescribe, in whole or in part, of the Option pursuant to the terms of the
Agreement.
C.7 "DATE OF EXPIRATION" means the date on which the Option shall expire, which
shall be the earliest of the following times:
(a) upon retirement of the Optionee from employment with the Corporation prior
to the date that the Option becomes exercisable pursuant to Section 2.2 of the
Agreement;
(b) upon termination of the Optionee's employment with the Corporation for
Cause;
(c) upon termination of the Optionee's employment with the Corporation for any
reason other than (i) Cause, (ii) retirement, (iii) death, (iv) permanent and
total disability or (v) termination during a Coverage Period by the Corporation
without Cause or by the Optionee with Good Reason, unless the Committee
determines otherwise;
(d) one year after termination of the Optionee's employment with the Corporation
by reason of death;
(e) three years after the termination of the Optionee's employment with the
Corporation by reason of (i) retirement on or after the date that the Option
becomes exercisable pursuant to Section 2.2 of the Agreement, (ii) permanent and
total disability, or (iii) termination during a Coverage Period by the
Corporation without Cause or by the Optionee with Good Reason; and
(f) ten years after the Date of Grant.
C.8 "DATE OF GRANT" means the date set forth as the "Date of Grant" on page 1 of
the Agreement.
C.9 "GOOD REASON" means: (a) the assignment to the Optionee of any duties
inconsistent in any respect with the Optionee's position (including status,
offices, titles and reporting requirements), authority, duties or
responsibilities immediately prior to either the CIC Triggering Event or the
Change in Control, or any other action by the Corporation which results in a
diminution in any respect in such position, authority, duties or
responsibilities, excluding for this purpose an isolated, insubstantial and
inadvertent action not taken in bad faith that is remedied by the Corporation
promptly after receipt of notice thereof given by the Optionee;
(b) a reduction by the Corporation in the Optionee's annual base salary as in
effect on the Date of Grant, as the same may be increased from time to time;
(c) the Corporation's requiring the Optionee to be based at any office or
location that is more than fifty (50) miles from the Optionee's office or
location immediately prior to either the CIC Triggering Event or the Change in
Control;
(d) the failure by the Corporation (i) to continue in effect any bonus, stock
option or other cash or equity-based incentive plan in which the Optionee
participates immediately prior to either the CIC Triggering Event or the Change
in Control that is material to the Optionee's total compensation, unless a
substantially equivalent arrangement (embodied in an ongoing substitute or
alternative plan) has been made with respect to such plan, or (ii) to continue
the Optionee's participation in such plan (or in such substitute or alternative
plan) on a basis at least as favorable, both in terms of the amount of benefits
provided and the level of the Optionee's participation relative to other
participants, as existed immediately prior to the CIC Triggering Event or the
Change in Control; or
(e) the failure by the Corporation to continue to provide the Optionee with
benefits substantially similar to those received by the Optionee under any of
the Corporation's pension (including, but not limited to, tax-qualified plans),
life insurance, health, accident, disability or other welfare plans in which the
Optionee was participating, at costs substantially similar to those paid by the
Optionee, immediately prior to the CIC Triggering Event or the Change in
Control.
C.10 "OPTION" means the Nonstatutory Stock Option granted to the Optionee in
Section 1 of the Agreement pursuant to which the Optionee may purchase Shares as
provided in the Agreement.
C.11 "OPTION PRICE" means the dollar amount per Share set forth as the "Option
Price" on page 1 of the Agreement.
C.12 "OPTIONEE" means the person identified as the "Optionee" on page 1 of the
Agreement.
C.13 "PERSON" has the meaning given in Section 3(a)(9) of the Exchange Act and
also includes any syndicate or group deemed to be a "person" under Section
13(d)(3) of the Exchange Act.
C-2
<PAGE> 1
EXHIBIT 10.8
PNC BANK CORP.
1997 LONG-TERM INCENTIVE AWARD PLAN
ADDENDUM TO
NONSTATUTORY STOCK OPTION AGREEMENT ("AGREEMENT")
DATED
OPTIONEE:
DATE OF GRANT:
OPTION PRICE PER SHARE:
COVERED SHARES:
THIS ADDENDUM to the Agreement is made and entered into by and between PNC Bank
Corp. ("CORPORATION") and the Optionee identified above in order to provide for
the grant of a certain additional option ("RELOAD OPTION") upon the terms and
conditions set forth in this Addendum and a Reload Nonstatutory Stock Option
Agreement subsequently signed by the parties.
1. DEFINITIONS. Terms defined in the Corporation's 1997 Long-Term Incentive
Award Plan, as amended from time to time ("PLAN") or the Agreement are used in
this Addendum as defined in the Plan or the Agreement, unless otherwise defined
in this Addendum.
2. GRANT OF RELOAD OPTION. Provided that the Optionee exercises all or a portion
of the original Option while a Senior Executive and in the manner specified in
Section 3 below, the Optionee shall be granted a Reload Option upon the terms
and conditions set forth in a Reload Nonstatutory Stock Option Agreement to be
entered into by the Optionee and the Corporation following the exercise of the
original Option; provided, however, that the Committee in its sole discretion
may cancel the Optionee's right to receive a Reload Option at any time prior to
the first anniversary of the Date of Grant shown above.
3. REQUIRED MANNER OF ORIGINAL OPTION EXERCISE. In order to receive a Reload
Option, the Optionee must exercise all or a portion of the original Option, or
satisfy any related tax withholding obligation, through the surrender (including
by means of an attestation procedure) of whole shares of Common Stock which are
not subject to any contractual restriction, pledge or other encumbrance and
which have been owned by the Optionee for at least six months prior to the Date
of Exercise ("ELIGIBLE SHARES"). The Optionee may also elect to satisfy any
related tax withholding obligation by the use of shares of Common Stock acquired
upon exercise of the Option, but shall be entitled to receive a Reload Option
with respect to such shares only to the extent permitted in Section 4(b) below.
4. NATURE OF RELOAD OPTION. (a) A Reload Option will be to purchase, at Fair
Market Value as of the original Option's Date of Exercise, a number of shares of
Common Stock equal to the number of Eligible Shares surrendered (including by
means of an attestation procedure) by the Optionee to exercise the original
Option or to satisfy any related tax withholding obligation.
(b) If the Optionee elects to satisfy any related tax withholding obligation by
the use of shares of Common Stock acquired upon exercise of the Option ("TAX
SHARES"), the Optionee shall be granted a Reload Option with respect to those
shares only if he or she has first attested to the ownership of a number of
Eligible Shares at least equal to the number of Tax Shares for which a Reload
Option is sought and in excess of the number of Eligible Shares surrendered
(including by means of an attestation procedure) to exercise the original
Option.
(c) Subject generally to the lapse of a one-year vesting period beginning upon
the Reload Option's Date of Grant, a Reload Option will be exercisable only
between its Date of Grant and the original Option's Date of Expiration, and only
in accordance with the terms and conditions of the governing Reload Nonstatutory
Stock Option Agreement.
5. NO ADDITIONAL RELOAD OPTION. No Reload Option will entitle the Optionee to
receive a Reload Option upon its exercise.
IN WITNESS WHEREOF, the Corporation has caused this Addendum to be signed on its
behalf, effective as of the Date of Grant.
PNC BANK CORP.
By: ________________________________
Chairman and Chief Executive Officer
ATTEST
____________________________________
Secretary
ACCEPTED AND AGREED TO AS OF THE DATE OF GRANT:
____________________________________
Optionee
<PAGE> 1
EXHIBIT 10.9
PNC BANK CORP. 1997 LONG-TERM INCENTIVE AWARD PLAN
RELOAD NONSTATUTORY STOCK OPTION AGREEMENT
OPTIONEE:
DATE OF EXERCISED OPTION GRANT:
DATE OF RELOAD OPTION GRANT:
RELOAD OPTION PRICE PER SHARE:
COVERED SHARES:
The Optionee, having exercised all or a portion of the Nonstatutory Stock Option
granted under that Nonstatutory Stock Option Agreement effective as of
_________________, 19____ in a manner specified in the Addendum to that
Agreement, is entitled to receive and is hereby granted (upon complete execution
of this Agreement) a reload option, upon the terms and conditions set forth in
this Reload Nonstatutory Stock Option Agreement. Terms defined in the 1997
Long-Term Incentive Award Plan ("PLAN") of PNC Bank Corp. ("CORPORATION") are
used in this Agreement as defined in the Plan unless otherwise defined in this
Agreement. For certain definitions, see Annex C attached hereto and incorporated
herein by reference.
1. GRANT OF OPTION. Pursuant to the Plan and subject to the terms of this
Agreement, the Corporation hereby grants to the Optionee an Option to purchase
from the Corporation that number of Shares specified above as the "Covered
Shares," exercisable at the Option Price.
2. TERMS OF THE OPTION.
2.1 TYPE OF OPTION. The Option is intended to be a Nonstatutory Stock Option
without Rights.
2.2 OPTION PERIOD. The Option is exercisable, in whole or in part, at any time
and from time to time upon the earliest to occur of (i) the first anniversary of
the Date of Grant, (ii) the date of termination of the Optionee's employment
with the Corporation by reason of death or permanent and total disability, and
(iii) the date of termination of the Optionee's employment during a Coverage
Period either by the Corporation without Cause or by the Optionee with Good
Reason, provided in the case of clause (iii) that such termination is at least
six months after the Date of Grant. The Option shall remain exercisable until
the Date of Expiration.
2.3 NONTRANSFERABILITY. The Option is not transferable by the Optionee other
than by will or by the laws of descent and distribution, and is exercisable,
during the Optionee's lifetime, only by the Optionee or, in the event of the
Optionee's legal disability, by the Optionee's legal representative.
3. CAPITAL ADJUSTMENTS. The number and class of unexercised Covered Shares and
the Option Price shall be subject to such adjustment, if any, as the Committee
in its sole discretion deems appropriate to reflect such events as stock
dividends, stock splits, recapitalizations, mergers, consolidations or
reorganizations.
4. EXERCISE OF OPTION.
4.1 NOTICE AND EFFECTIVE DATE. The Option may be exercised, in whole or in part,
by delivering to the Corporation written notice of such exercise, in such form
as the Committee may from time to time prescribe, accompanied by full payment of
(a) the Option Price with respect to that portion of the Option being exercised
and (b) any amounts required to be withheld pursuant to applicable tax laws in
connection with such exercise. In addition, the Optionee may elect to use the
cashless exercise procedure provided for pursuant to Section 4.2 hereof. The
effective date of such exercise shall be the Date of Exercise. Until the
Committee notifies the Optionee to the contrary, the form attached to this
Agreement as Annex A shall be used to exercise the Option granted hereunder.
4.2 PAYMENT OF THE OPTION PRICE. Upon exercise of the Option, in whole or in
part, the Optionee may pay the aggregate Option Price in cash, by delivering
(including through the use of an attestation procedure approved or ratified by
the Committee) duly endorsed certificates representing whole Shares having
aggregate Fair Market Value on the Date of Exercise not exceeding that portion
of the Option Price being paid by delivery of such Shares, or through a
combination of cash and Shares; provided, however, that no Shares may be used to
pay any portion of the Option Price that have not been held for at least six
months prior to the Date of Exercise or such other period as may be specified by
the Committee. Notwithstanding the
<PAGE> 2
foregoing, the Optionee may elect to complete his or her option exercise through
a brokerage service/margin account pursuant to the cashless option exercise
procedure under Regulation T of the Board of Governors of the Federal Reserve
System and in such manner as may be permitted by the Committee from time to
time, consistent with said Regulation.
4.3 PAYMENT OF TAXES. The Optionee may elect to satisfy applicable tax
withholding requirements by payment of cash or, subject to such terms and
conditions as the Committee may from time to time establish to satisfy any or
all federal, state, or local tax liabilities incurred upon such exercise,
through retention by the Corporation of Shares otherwise issuable upon such
exercise or by delivery to the Corporation (including through the use of an
attestation procedure approved or ratified by the Committee) of previously
acquired Shares. Until the Committee notifies the Optionee to the contrary, the
form attached to this Agreement as Annex B shall be used to make such election.
4.4 EFFECT. The exercise, in whole or in part, of the Option shall cause a
reduction in the number of unexercised Covered Shares equal to the number of
Shares with respect to which the Option is exercised.
4.5 NO ADDITIONAL RELOAD OPTION. The exercise of the Option shall not entitle
the Optionee to receive an additional reload option, regardless of the manner in
which the Option is exercised.
5. RESTRICTIONS ON EXERCISE AND UPON SHARES ISSUED UPON EXERCISE.
Notwithstanding any other provision of this Agreement, the Optionee agrees, for
himself (herself) and his (her) successors, that the Option may not be exercised
at any time that the Corporation does not have in effect a registration
statement under the Securities Act of 1933, as amended, relating to the offer of
Shares under the Plan, unless the Corporation agrees to permit such exercise.
The Optionee further agrees, for himself (herself) and his (her) successors,
that, upon the issuance of any Shares pursuant to the exercise of the Option, he
(she) will, upon the request of the Corporation, agree in writing that he (she)
is acquiring such Shares for investment only and not with a view to resale, and
that he (she) will not sell, pledge, or otherwise dispose of such Shares unless
and until (a) the Corporation is furnished with an opinion of counsel to the
effect that registration of such Shares pursuant to the Securities Act of 1933,
as amended, is not required by that Act or by rules and regulations promulgated
thereunder; (b) the staff of the Securities and Exchange Commission has issued a
"no-action" letter with respect to such disposition; or (c) such registration or
notification as is, in the opinion of counsel for the Corporation, required for
the lawful disposition of such Shares has been filed and has become effective;
provided, however, that the Corporation is not obligated hereby to file any such
registration or notification. The Optionee further agrees that the Corporation
may place a legend embodying such restriction on the certificates evidencing
such Shares.
6. RIGHTS AS SHAREHOLDER. The Optionee shall have no rights as a Shareholder
with respect to any Covered Shares until such time as the Option is exercised
and then only with respect to those Shares issued upon such exercise.
7. EMPLOYMENT. Neither the granting of the Option evidenced by this Agreement
nor any term or provision of this Agreement shall constitute or be evidence of
any understanding, expressed or implied, on the part of the Corporation or any
of its subsidiaries to employ the Optionee for any period. References in this
Agreement to the employment of the Optionee with the Corporation shall include
employment with any subsidiary of the Corporation.
8. SUBJECT TO THE PLAN. The Option evidenced by this Agreement and the exercise
thereof are subject to the terms and conditions of the Plan, which is
incorporated by reference herein and made a part hereof, but the terms of the
Plan shall not be considered an enlargement of any benefits under this
Agreement. In addition, the Option is subject to any rules and regulations
promulgated by the Committee.
IN WITNESS WHEREOF, the Corporation has caused this Agreement to be signed on
its behalf, effective as of the Date of Grant.
PNC BANK CORP.
By: ________________________________
Chairman and Chief Executive Officer
ATTEST:
____________________________________
Secretary
ACCEPTED AND AGREED TO AS OF THE DATE OF GRANT.
____________________________________
Optionee
Annex A - Option Exercise Form (Intentionally omitted)
Annex B - Tax Payment Election Form (Intentionally omitted)
Annex C - Certain Definitions
2
<PAGE> 3
ANNEX C
TO PNC BANK CORP. 1997 LONG-TERM INCENTIVE AWARD PLAN
RELOAD NONSTATUTORY STOCK OPTION AGREEMENT
CERTAIN DEFINITIONS
Except where the context otherwise indicates, the following definitions apply to
the Reload Nonstatutory Stock Option Agreement (the "AGREEMENT") to which this
Annex C is attached:
C.1 "CAUSE" means: (a) the willful and continued failure of the Optionee to
substantially perform the Optionee's duties with the Corporation (other than any
such failure resulting from incapacity due to physical or mental illness), after
a written demand for substantial performance is delivered to the Optionee by the
Board or the Chief Executive Officer of the Corporation which specifically
identifies the manner in which the Board or Chief Executive Officer believes
that the Optionee has not substantially performed the Optionee's duties; or
(b) the willful engaging by the Optionee in illegal conduct or gross misconduct
that is materially and demonstrably injurious to the Corporation. For purposes
of the preceding clauses (a) and (b), no act or failure to act, on the part of
the Optionee, shall be considered "willful" unless it is done, or omitted to be
done, by the Optionee in bad faith and without reasonable belief that the
Optionee's action or omission was in the best interests of the Corporation. Any
act, or failure to act, based upon the instructions or prior approval of the
Board, the Chief Executive Officer or the Optionee's superior or based upon the
advice of counsel for the Corporation, shall be conclusively presumed to be
done, or omitted to be done, by the Optionee in good faith and in the best
interests of the Corporation. The cessation of employment of the Optionee shall
not be deemed to be for Cause unless and until there shall have been delivered
to the Optionee, as part of the notice of the Optionee's termination, a copy of
a resolution duly adopted by the affirmative vote of not less than a majority of
the entire membership of the Board, at a Board meeting called and held for the
purpose of considering such termination, finding that, in the good faith opinion
of the Board, the Optionee is guilty of the conduct described in clause (a) or
(b) above and specifying the particulars thereof in detail. Such resolution
shall be adopted only after reasonable notice of such Board meeting is provided
to the Optionee and the Optionee is given an opportunity, together with counsel,
to be heard before the Board.
C.2 "CHANGE IN CONTROL" means a change of control of the Corporation of a nature
that would be required to be reported in response to Item 6(e) of Schedule 14A
of Regulation 14A (or in response to any similar item on any similar schedule or
form) promulgated under the Exchange Act, whether or not the Corporation is then
subject to such reporting requirement; provided, however, that without
limitation, a Change in Control shall be deemed to have occurred if: (a) any
Person, excluding employee benefit plans of the Corporation, is or becomes the
"beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act
or any successor provisions thereto), directly or indirectly, of securities of
the Corporation representing twenty percent (20%) or more of the combined voting
power of the Corporation's then outstanding securities, provided, however, that
such an acquisition of beneficial ownership representing between twenty percent
(20%) and forty percent (40%), inclusive, of such voting power shall not be
considered a Change in Control if the Board approves such acquisition either
prior to or immediately after its occurrence;
(b) the Corporation consummates a merger, consolidation, share exchange,
division or other reorganization or transaction of the Corporation (a
"FUNDAMENTAL TRANSACTION") with any other corporation, other than a Fundamental
Transaction that results in the voting securities of the Corporation outstanding
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of the surviving
entity) at least sixty percent (60%) of the combined voting power immediately
after such Fundamental Transaction of (i) the Corporation's outstanding
securities, (ii) the surviving entity's outstanding securities, or (iii) in the
case of a division, the outstanding securities of each entity resulting from the
division;
(c) the shareholders of the Corporation approve a plan of complete liquidation
or winding-up of the Corporation or an agreement for the sale or disposition (in
one transaction or a series of transactions) of all or substantially all of the
Corporation's assets;
(d) as a result of a proxy contest, individuals who prior to the conclusion
thereof constituted the Board (including for this purpose any new director whose
election or nomination for election by the Corporation's shareholders in
connection with such proxy contest was approved by a vote of at least two-thirds
(2/3) of the directors then still in office who were directors prior to such
proxy contest) cease to constitute at least a majority of the Board (excluding
any Board seat that is vacant or otherwise unoccupied);
(e) during any period of twenty-four consecutive months, individuals who at the
beginning of such period constituted the Board (including for this purpose any
new director whose election or nomination for election by the Corporation's
shareholders was approved by a vote of at least two-thirds (2/3) of the
directors then still in office who were directors at the beginning of such
period) cease for any reason to constitute at least a majority of the Board
(excluding any Board seat that is vacant or otherwise unoccupied); or
(f) the Board determines that a Change in Control has occurred. Notwithstanding
anything to the contrary herein, a divestiture or spin-off of a subsidiary or
division of the Corporation shall not by itself constitute a "Change in
Control."
C.3 "CIC FAILURE" means the following: (a) with respect to a CIC Triggering
Event described in Section C.4(a), the Corporation's shareholders vote against
the transaction approved by the Board or the agreement to consummate the
transaction is terminated; or
C-1
<PAGE> 4
(b) with respect to a CIC Triggering Event described in Section C.4(b), the
proxy contest fails to replace or remove a majority of the members of the Board.
C.4 "CIC TRIGGERING EVENT" means the occurrence of either of the following: (a)
the Board or the Corporation's shareholders approve a transaction described in
Subsection (b) of the definition of Change in Control contained in Section C.2
hereof; or (b) the commencement of a proxy contest in which any Person seeks to
replace or remove a majority of the members of the Board.
C.5 "COVERAGE PERIOD" means a period commencing on the earlier to occur of (i)
the date of a CIC Triggering Event and (ii) the date of a Change in Control, and
ending on the date that is two years after the date of the Change in Control,
provided, however, that in the event that a Coverage Period commences on the
date of a CIC Triggering Event such Coverage Period shall terminate upon the
earlier to occur of (x) the date of a CIC Failure and (y) the date that is two
years after the date of the Change in Control triggered by the CIC Triggering
Event. After the termination of any Coverage Period, another Coverage Period
shall commence upon the earlier to occur of clauses (i) and (ii) in the
preceding sentence.
C.6 "DATE OF EXERCISE" means the date on which the Corporation receives written
notice of the exercise in such form as the Committee may from time to time
prescribe, in whole or in part, of the Option pursuant to the terms of the
Agreement.
C.7 "DATE OF EXPIRATION" means the date on which the Option shall expire, which
shall be the earliest of the following times: (a) upon retirement of the
Optionee from employment with the Corporation prior to the date that the Option
becomes exercisable pursuant to Section 2.2 of the Agreement;
(b) upon termination of the Optionee's employment with the Corporation for
Cause;
(c) upon termination of the Optionee's employment with the Corporation for any
reason other than (i) Cause, (ii) retirement, (iii) death, (iv) permanent and
total disability or (v) termination during a Coverage Period by the Corporation
without Cause or by the Optionee with Good Reason, unless the Committee
determines otherwise;
(d) one year after termination of the Optionee's employment with the Corporation
by reason of death;
(e) three years after the termination of the Optionee's employment with the
Corporation by reason of (i) retirement on or after the date that the Option
becomes exercisable pursuant to Section 2.2 of the Agreement, (ii) permanent and
total disability, or (iii) termination during a Coverage Period by the
Corporation without Cause or by the Optionee with Good Reason; and
(f) ten years after the Date of Exercised Option Grant set forth on page 1 of
the Agreement.
C.8 "DATE OF GRANT" means the date set forth as the "Date of Reload Option
Grant" on page 1 of the Agreement.
C.9 "GOOD REASON" means: (a) the assignment to the Optionee of any duties
inconsistent in any respect with the Optionee's position (including status,
offices, titles and reporting requirements), authority, duties or
responsibilities immediately prior to either the CIC Triggering Event or the
Change in Control, or any other action by the Corporation which results in a
diminution in any respect in such position, authority, duties or
responsibilities, excluding for this purpose an isolated, insubstantial and
inadvertent action not taken in bad faith that is remedied by the Corporation
promptly after receipt of notice thereof given by the Optionee;
(b) a reduction by the Corporation in the Optionee's annual base salary as in
effect on the Date of Grant, as the same may be increased from time to time;
(c) the Corporation's requiring the Optionee to be based at any office or
location that is more than fifty (50) miles from the Optionee's office or
location immediately prior to either the CIC Triggering Event or the Change in
Control;
(d) the failure by the Corporation (i) to continue in effect any bonus, stock
option or other cash or equity-based incentive plan in which the Optionee
participates immediately prior to either the CIC Triggering Event or the Change
in Control that is material to the Optionee's total compensation, unless a
substantially equivalent arrangement (embodied in an ongoing substitute or
alternative plan) has been made with respect to such plan, or (ii) to continue
the Optionee's participation in such plan (or in such substitute or alternative
plan) on a basis at least as favorable, both in terms of the amount of benefits
provided and the level of the Optionee's participation relative to other
participants, as existed immediately prior to the CIC Triggering Event or the
Change in Control; or
(e) the failure by the Corporation to continue to provide the Optionee with
benefits substantially similar to those received by the Optionee under any of
the Corporation's pension (including, but not limited to, tax-qualified plans),
life insurance, health, accident, disability or other welfare plans in which the
Optionee was participating, at costs substantially similar to those paid by the
Optionee, immediately prior to the CIC Triggering Event or the Change in
Control.
C.10 "OPTION" means the Reload Nonstatutory Stock Option granted to the Optionee
in Section 1 of the Agreement pursuant to which the Optionee may purchase Shares
as provided in the Agreement.
C.11 "OPTION PRICE" means the dollar amount per Share set forth as the "Reload
Option Price Per Share" on page 1 of the Agreement.
C.12 "OPTIONEE" means the person identified as the "Optionee" on page 1 of the
Agreement.
C.13 "PERSON" has the meaning given in Section 3(a)(9) of the Exchange Act and
also includes any syndicate or group deemed to be a "person" under Section
13(d)(3) of the Exchange Act.
C-2
<PAGE> 1
EXHIBIT 10.10
Share Price, RSR and ROCE Performance Goals
PNC BANK CORP.
1997 LONG-TERM INCENTIVE AWARD PLAN
* * *
INCENTIVE SHARE AGREEMENT
GRANTEE:
DATE OF GRANT:
INCENTIVE SHARES:
ADDITIONAL INCENTIVE SHARES (EQUALS 50% OF INCENTIVE SHARES):
1. DEFINITIONS. Terms defined in the 1997 Long-Term Incentive Award
Plan ("Plan") of PNC Bank Corp. ("Corporation") are used in this Agreement as
defined in the Plan unless otherwise defined in this Agreement. In addition,
except where the context otherwise indicates, the following definitions apply:
1.1 "Award Date" means the first Business Day following the achievement
of the Share Price Performance Goal, except as provided in Section 3.2. An Award
Date shall in no event be a date later than the Termination Date.
1.2 "Awarded Shares" mean any and all Incentive Shares and Additional
Incentive Shares issued to the Grantee pursuant to Section 3.1(a), Section
3.1(b) or Section 3.2 of this Agreement.
1.3 "Business Day" means any day when the New York Stock Exchange is
open for business.
1.4 "Cause" means:
(a) the willful and continued failure of the Grantee to substantially
perform the Grantee's duties with the Corporation (other than any such
failure resulting from incapacity due to physical or mental illness),
after a written demand for substantial performance is delivered to the
Grantee by the Board or the Chief Executive Officer of the Corporation
which specifically identifies the manner in which the Board or Chief
Executive Officer believes that the Grantee has not substantially
performed the Grantee's duties; or
(b) the willful engaging by the Grantee in illegal conduct or gross
misconduct that is materially and demonstrably injurious to the
Corporation.
For purposes of the preceding clauses (a) and (b), no act or failure to
act, on the part of the Grantee, shall be considered "willful" unless
it is done, or omitted to be done, by the Grantee in bad faith and
without reasonable belief that the Grantee's action or omission was in
the best interests of the Corporation. Any act, or failure to act,
based upon the instructions or prior approval of the Board, the Chief
Executive Officer or the Grantee's superior or based upon the advice of
counsel for the Corporation, shall be conclusively presumed to be done,
or omitted to be done, by the Grantee in good faith and in the best
interests of the Corporation. The cessation of employment of the
Grantee shall not be deemed to be for
<PAGE> 2
Cause unless and until there shall have been delivered to the Grantee,
as part of the notice of the Grantee's termination, a copy of a
resolution duly adopted by the affirmative vote of not less than a
majority of the entire membership of the Board, at a Board meeting
called and held for the purpose of considering such termination,
finding that, in the good faith opinion of the Board, the Grantee is
guilty of the conduct described in clause (a) or (b) above and
specifying the particulars thereof in detail. Such resolution shall be
adopted only after reasonable notice of such Board meeting is provided
to the Grantee and the Grantee is given an opportunity, together with
counsel, to be heard before the Board.
1.5 "Change in Control" means a change of control of the Corporation of
a nature that would be required to be reported in response to Item 6(e) of
Schedule 14A of Regulation 14A (or in response to any similar item on any
similar schedule or form) promulgated under the Exchange Act, whether or not the
Corporation is then subject to such reporting requirement; provided, however,
that without limitation, a Change in Control shall be deemed to have occurred
if:
(a) any Person, excluding employee benefit plans of the Corporation, is
or becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5
under the Exchange Act or any successor provisions thereto), directly
or indirectly, of securities of the Corporation representing twenty
percent (20%) or more of the combined voting power of the Corporation's
then outstanding securities, provided, however, that such an
acquisition of beneficial ownership representing between twenty percent
(20%) and forty percent (40%), inclusive, of such voting power shall
not be considered a Change in Control if the Board approves such
acquisition either prior to or immediately after its occurrence;
(b) the Corporation consummates a merger, consolidation, share
exchange, division or other reorganization or transaction of the
Corporation (a "Fundamental Transaction") with any other corporation,
other than a Fundamental Transaction that results in the voting
securities of the Corporation outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity) at least
sixty percent (60%) of the combined voting power immediately after such
Fundamental Transaction of (i) the Corporation's outstanding
securities, (ii) the surviving entity's outstanding securities, or
(iii) in the case of a division, the outstanding securities of each
entity resulting from the division;
2
<PAGE> 3
(c) the shareholders of the Corporation approve a plan of complete
liquidation or winding-up of the Corporation or an agreement for the
sale or disposition (in one transaction or a series of transactions) of
all or substantially all of the Corporation's assets;
(d) as a result of a proxy contest, individuals who prior to the
conclusion thereof constituted the Board (including for this purpose
any new director whose election or nomination for election by the
Corporation's shareholders in connection with such proxy contest was
approved by a vote of at least two-thirds (2/3) of the directors then
still in office who were directors prior to such proxy contest) cease
to constitute at least a majority of the Board (excluding any Board
seat that is vacant or otherwise unoccupied);
(e) during any period of twenty-four consecutive months, individuals
who at the beginning of such period constituted the Board (including
for this purpose any new director whose election or nomination for
election by the Corporation's shareholders was approved by a vote of at
least two-thirds (2/3) of the directors then still in office who were
directors at the beginning of such period) cease for any reason to
constitute at least a majority of the Board (excluding any Board seat
that is vacant or otherwise unoccupied); or
(f) the Board determines that a Change in Control has occurred.
Notwithstanding anything to the contrary herein, a divestiture or spin-off of a
subsidiary or division of the Corporation shall not by itself constitute a
"Change in Control."
1.6 "CIC Failure" means the following:
(a) with respect to a CIC Triggering Event described in Section 1.7(a),
the Corporation's shareholders vote against the transaction approved by
the Board or the agreement to consummate the transaction is terminated;
or
(b) with respect to a CIC Triggering Event described in Section 1.7(b),
the proxy contest fails to replace or remove a majority of the members
of the Board.
1.7 "CIC Triggering Event" means the occurrence of either of the
following:
(a) the Board or the Corporation's shareholders approve a transaction
described in Subsection (b) of the definition of Change in Control
contained in Section 1.5 hereof; or
(b) the commencement of a proxy contest in which any Person seeks to
replace or remove a majority of the members of the Board.
1.8 "Coverage Period" means a period commencing on the earlier to occur
of (a) the date of a CIC Triggering Event and (b) the date of a Change in
Control, and ending on the date that is two years after the date of the Change
in Control, provided, however, that in the event that a Coverage Period
commences on the date of a CIC Triggering Event such Coverage Period shall
terminate upon the earlier to occur of (i) the date of a CIC Failure and (ii)
the date that is two years after the date of the Change in Control triggered by
the CIC Triggering Event. After the termination of any Coverage Period, another
Coverage Period shall commence upon the earlier to occur of clauses (a) and (b)
in the preceding sentence.
3
<PAGE> 4
1.9 "Good Reason" means
(a) the assignment to the Grantee of any duties inconsistent in any
respect with the Grantee's position (including status, offices, titles
and reporting requirements), authority, duties or responsibilities
immediately prior to either the CIC Triggering Event or the Change in
Control, or any other action by the Corporation which results in a
diminution in any respect in such position, authority, duties or
responsibilities, excluding for this purpose an isolated, insubstantial
and inadvertent action not taken in bad faith that is remedied by the
Corporation promptly after receipt of notice thereof given by the
Grantee;
(b) a reduction by the Corporation in the Grantee's annual base salary
as in effect on the Date of Grant as set forth above, as the same may
be increased from time to time;
(c) the Corporation's requiring the Grantee to be based at any office
or location that is more than fifty (50) miles from the Grantee's
office or location immediately prior to either the CIC Triggering Event
or the Change in Control;
(d) the failure by the Corporation (i) to continue in effect any bonus,
stock option or other cash or equity-based incentive plan in which the
Grantee participates immediately prior to either the CIC Triggering
Event or the Change in Control that is material to the Grantee's total
compensation, unless a substantially equivalent arrangement (embodied
in an ongoing substitute or alternative plan) has been made with
respect to such plan, or (ii) to continue the Grantee's participation
in such plan (or in such substitute or alternative plan) on a basis at
least as favorable, both in terms of the amount of benefits provided
and the level of the Grantee's participation relative to other
participants, as existed immediately prior to the CIC Triggering Event
or the Change in Control; or
(e) the failure by the Corporation to continue to provide the Grantee
with benefits substantially similar to those received by the Grantee
under any of the Corporation's pension (including, but not limited to,
tax-qualified plans), life insurance, health, accident, disability or
other welfare plans in which the Grantee was participating, at costs
substantially similar to those paid by the Grantee, immediately prior
to the CIC Triggering Event or the Change in Control.
1.10 "Grant" means the total number of Incentive Shares and Additional
Incentive Shares granted pursuant to Section 2 of this Agreement.
1.11 "Median" means the position in the Peer Group below and above
which there is an equal number of positions or if there is no one middle
position, the two middle positions.
1.12 "Median Range" means within three (3) positions (either direction)
of the Peer Group Median.
1.13 "Peer Group" means Banc One Corporation, BankAmerica Corporation,
Bank of Boston Corporation, Bank of New York Company, Inc., Barnett Banks, Inc.,
Chase Manhattan Corporation, Corestates Financial Corp., First Chicago NBD
Corporation, First Union Corporation, Fleet Financial Group, Inc., KeyCorp.,
Mellon Bank Corporation, National City Corporation, NationsBank Corporation,
Norwest Corporation, SunTrust Banks, Inc., Wachovia Corporation, and Wells Fargo
& Company. The Peer Group may be adjusted from time to time by the Committee to
reflect mergers or consolidations or at any time at the discretion of the
Committee.
4
<PAGE> 5
1.14 "Person" has the meaning given in Section 3(a)(9) of the Exchange
Act and also includes any syndicate or group deemed to be a "person" under
Section 13(d)(3) of the Exchange Act.
1.15 "Restricted Period" means the period that begins on an Award Date
and ends on the earlier to occur of (a) the second anniversary of the Award Date
and (b) the day immediately preceding the date of termination of the Grantee's
employment during a Coverage Period by the Corporation or a Subsidiary without
Cause or by the Grantee for Good Reason.
1.16 "ROCE" or "Return on Common Equity" means, with respect to each of
the Corporation and members of the Peer Group, the annualized cumulative return
on common equity for the period commencing January 1, 1997 through the last day
of the calendar quarter immediately preceding the last day on which the Share
Price Performance Goal is met or, for the purpose of Section 3.2, through the
Termination Date. The Return on Common Equity of any Peer Group member and the
Corporation may be adjusted to reflect significant nonrecurring items, including
without limitation, merger-related charges or gains/losses on a sale of a
business unit, as approved by the Committee. ROCE shall be expressed as a
percent rounded to the nearest one-hundredths (e.g., 0.00%, with 0.005% being
rounded upward to 0.01%).
1.17 "ROCE Performance Goal" means the Corporation's ROCE is within the
Median Range of the Peer Group or higher.
1.18 "RSR" or "Relative Shareholder Return" means the cumulative total
shareholder return with respect to the Corporation on the Common Stock and with
respect to the other members of the Peer Group on a class of common stock
registered under Section 12 of the Exchange Act. For each of the Corporation and
members of the Peer Group, cumulative total shareholder return shall be
calculated by dividing: (a) the sum of: (i) the cumulative amount of dividends
for the measurement period, assuming dividend reinvestment, and (ii) the
difference between the share price at the end and the beginning of the
measurement period; by (b) the closing share price on December 31, 1996. The
term "measurement period" shall be the period beginning at the "measurement
point" established by the market close on December 31, 1996, and continuing
through (and including) the market close on the last day on which the Share
Price Performance Goal is met or, for the purpose of Section 3.2, the
Termination Date. With respect to dividends, it should be assumed that dividends
are reinvested into additional shares of the same class of equity securities at
the frequency with which dividends are paid on such securities during the
applicable period. RSR shall be expressed as a percent rounded to the nearest
one-hundredths (e.g., 0.00%, with 0.005% being rounded upward to 0.01%).
1.19 "RSR Performance Goal" means the Corporation's RSR is within the
Median Range of the Peer Group or higher.
1.20 "Share Price Performance Goal" means the first consecutive 20
Business Day period that begins when the closing price of a share of Common
Stock in the New York Stock Exchange composite transactions, as reported in The
Wall Street Journal or other authoritative source, is $57.00 and during which
period the cumulative average of the closing prices of a share of Common Stock
in New York Stock Exchange composite transactions, as reported in The Wall
Street Journal or other authoritative source, equals or exceeds $57.00.
1.21 "Termination Date" means (and includes) December 31, 1999.
2. GRANT OF INCENTIVE SHARES. Pursuant to Article 12 of the Plan and
subject to the terms and conditions of this Agreement, the Corporation hereby
grants to the Grantee named above that number of shares of Common Stock
specified above as Incentive Shares and, subject to the proviso of Section
3.1(a) as well, that number of shares of Common Stock specified above as
Additional Incentive Shares.
5
<PAGE> 6
3. TERMS OF GRANT. The Grant shall be subject to the following terms
and conditions:
3.1 On the Award Date,
(a) the Corporation shall issue to the Grantee one hundred percent
(100%) of the Incentive Shares if (1) the Share Price Performance Goal
is achieved, and (2) (i) the ROCE Performance Goal is achieved and (ii)
the RSR Performance Goal is achieved; provided, however, that, if the
goals referred to in the foregoing clauses (1) and (2) are all
achieved, (x) the Corporation shall also issue to the Grantee fifty
percent (50%) of the Additional Incentive Shares if the Corporation's
RSR is within the top five of the Peer Group, and/or (y) the
Corporation shall also issue to the Grantee fifty percent (50%) of the
Additional Incentive Shares if the Corporation's ROCE is within the top
five of the Peer Group; or
(b) the Corporation shall issue to the Grantee fifty percent (50%) of
the Incentive Shares if the Share Price Performance Goal is achieved,
but either or both of the ROCE Performance Goal and the RSR Performance
Goal are not achieved.
3.2 In the event that the Share Price Performance Goal has not been
achieved on or before the Termination Date, on the Termination Date, the
Corporation shall issue to the Grantee fifty percent (50%) of the Incentive
Shares if both the Corporation's RSR and the Corporation's ROCE are within the
top third of the Peer Group. If Incentive Shares are issued on the Termination
Date pursuant to this Section 3.2, such date shall be referred to as the "Award
Date".
3.3 Except as provided in Section 10 as the result of the Committee's
discretion in the event of the Grantee's retirement, death or total disability,
Incentive Shares and Additional Incentive Shares shall not be issued unless the
Grantee has been continuously employed by the Corporation or a Subsidiary for
the period beginning on the Date of Grant through the Award Date.
3.4 Awarded Shares shall be deposited with the Corporation or its
designee during the term of the Restricted Period, unless released and reissued
sooner as provided in Section 6 below, and any certificates representing such
Awarded Shares shall contain the following legend:
"This certificate and the shares of stock represented hereby are
subject to the terms and conditions (including forfeiture and
restrictions against transfer) contained in the PNC Bank Corp. 1997
Long-Term Incentive Award Plan and an Agreement entered into between
the registered owner and PNC Bank Corp. Release from such terms and
conditions shall be made only in accordance with the provisions of the
Plan and the Agreement, a copy of each of which is on file in the
office of the Corporate Secretary of PNC Bank Corp."
If a book-entry system is used with respect to Awarded Shares, appropriate
notation of such forfeiture possibility and transfer restriction shall be made
on the system with respect to the account or accounts to which the Awarded
Shares are credited.
3.5. If the Grantee has been continuously employed by the Corporation
or a Subsidiary throughout the Restricted Period, the Awarded Shares deposited
with the Corporation or its designee shall be released and reissued to the
Grantee as soon as practicable following the end of the Restricted Period
pursuant to Section 7 below.
6
<PAGE> 7
3.6 If the conditions specified in Section 3.1(a), Section 3.1(b) or
Section 3.2 are not met on or before the Termination Date, none of the Incentive
Shares or Additional Incentive Shares shall be issued to the Grantee.
3.7 In the event the Corporation is unable to make the ROCE and RSR
calculations for the Peer Group and the Corporation on the Award Date, such
calculations and any issuances of Awarded Shares shall be made as soon
thereafter as practicable.
4. RIGHTS AS SHAREHOLDER. Except as provided in Section 5 below, the
Grantee shall have all the rights and privileges of a shareholder with respect
to the Awarded Shares including, but not limited to, the right to vote the
Awarded Shares and the right to receive dividends thereon. All such rights and
privileges shall cease upon forfeiture of the Awarded Shares.
5. PROHIBITIONS AGAINST SALE, ASSIGNMENT, ETC. The Grant, the Awarded
Shares, the right to vote Awarded Shares and the right to receive dividends
thereon may not be sold, assigned, transferred, exchanged, pledged, hypothecated
or otherwise encumbered until (except with respect to the Grant) released by the
Corporation to the Grantee pursuant to Section 7 below.
6. FORFEITURE. In the event the Grantee's employment with the
Corporation or a Subsidiary terminates prior to the lapse of a Restricted
Period, all Awarded Shares shall be forfeited by the Grantee to the Corporation
without payment of any consideration by the Corporation, and neither the Grantee
nor any successors, heirs, assigns or personal representatives of the Grantee
shall thereafter have any further rights or interest in the Awarded Shares or
the certificates representing the Awarded Shares. Notwithstanding the foregoing,
in the event of the Grantee's death or total disability during a Restricted
Period, all Awarded Shares will be released and reissued by the Corporation to
the Grantee or his or her legal representative pursuant to Section 7 below. In
the event of the Grantee's retirement during a Restricted Period, all Awarded
Shares will be forfeited, unless the Committee determines that such Awarded
Shares shall be released and reissued by the Corporation to the Grantee in light
of the facts and circumstances applicable to the Grantee and the Corporation.
When making such determination, the Committee may consider advice from its
outside auditors that such termination of the Restricted Period would not
prevent accounting for a business combination as a pooling of interests if such
accounting treatment is desired by the Corporation.
7. TERMINATION OF PROHIBITIONS. At the end of the Restricted Period and
in the event of the Grantee's death, total disability or retirement during the
periods described in Section 6 above (and subject to the Committee's discretion,
if any, as described in such Section), the Corporation shall release and reissue
the certificate representing such Awarded Shares without the legend referred to
in Section 3.4 above and shall deliver such certificate to the Grantee or his or
her legal representative.
8. PAYMENT OF WITHHOLDING. The Grantee may satisfy any applicable
federal, state or local income tax withholding requirements arising from the
vesting (and, hence, reissuance) of Awarded Shares pursuant to this Agreement by
payment of cash or through retention by the Corporation of Awarded Shares then
to be reissued to the Grantee hereunder or by delivery to the Corporation of
previously acquired shares of Common Stock. However, payment of any applicable
federal, state or local income tax withholding requirements arising from a Code
Section 83(b) election shall be satisfied by payment of cash or by delivery to
the Corporation of previously acquired shares of Common Stock.
9. EMPLOYMENT. Neither the granting of the Incentive Shares or
Additional Incentive Shares evidenced by this Agreement nor any term or
provision of this Agreement shall constitute or be evidence of any
understanding, expressed or implied, on the part of the Corporation or any
Subsidiary to employ the Grantee for
7
<PAGE> 8
any period or in any way alter the Grantee's status as an employee at will.
10. TERMINATION. The Grant shall terminate upon the earlier to occur of
the following: (a) the Termination Date; or (b) the termination of the Grantee's
employment with the Corporation or a Subsidiary, unless such termination is due
to Grantee's retirement, death or total disability and the Committee determines
that such Grant shall continue to a date no later than the Termination Date in
light of the facts and circumstances applicable to the Grantee.
11. SUBJECT TO THE PLAN AND THE COMMITTEE. The Grant and this Agreement
are subject to the terms and conditions of the Plan, which are incorporated
herein by reference and made a part hereof, but the terms of the Plan shall not
be considered an enlargement of any benefits under this Agreement. If the Plan
is not approved by the Corporation's shareholders at the Corporation's 1997
Annual Meeting, all references to the Plan shall mean the 1992 Long-Term
Incentive Award Plan. In addition, the Grant and this Agreement are subject to
any interpretations of or any rules and regulations issued by the Committee.
IN WITNESS WHEREOF, the Corporation has caused this Agreement to be
signed on its behalf as of the Date of Grant.
ATTEST: PNC BANK CORP.
_____________________________ By ___________________________
Accepted and agreed to as of the Date of Grant set forth above.
______________________________
Grantee
8
<PAGE> 1
PNC BANK CORP. AND SUBSIDIARIES EXHIBIT 12.1
COMPUTATION OF RATIO OF EARNINGS
TO COMBINED FIXED CHARGES
<TABLE>
<CAPTION>
Year ended December 31
Dollars in thousands 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
EARNINGS
Income before taxes and cumulative effect of changes in accounting
principles $1,618,599 $1,527,551 $627,012 $1,209,916 $1,140,487
Fixed charges excluding interest on deposits 1,171,648 1,096,893 1,487,279 1,104,573 704,228
-----------------------------------------------------------------
Subtotal 2,790,247 2,624,444 2,114,291 2,314,489 1,844,715
Interest on deposits 1,456,587 1,428,771 1,551,816 1,159,242 1,005,658
-----------------------------------------------------------------
Total $4,246,834 $4,053,215 $3,666,107 $3,473,731 $2,850,373
=================================================================
FIXED CHARGES
Interest on borrowed funds $1,098,365 $1,064,847 $1,455,069 $1,070,565 $676,319
Interest component of rentals 29,312 29,839 31,283 32,247 26,491
Amortization of notes and debentures 833 816 927 1,761 1,418
Distributions on Mandatorily Redeemable Capital
Securities of Subsidiary Trust 43,138 1,391
-----------------------------------------------------------------
Subtotal 1,171,648 1,096,893 1,487,279 1,104,573 704,228
Interest on deposits 1,456,587 1,428,771 1,551,816 1,159,242 1,005,658
-----------------------------------------------------------------
Total $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 2.38x 2.39x 1.42x 2.10x 2.62x
Including interest on deposits 1.62 1.60 1.21 1.53 1.67
====================================================================================================================================
</TABLE>
<PAGE> 1
PNC BANK CORP. AND SUBSIDIARIES EXHIBIT 12.2
COMPUTATION OF RATIO OF EARNINGS
TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
<TABLE>
<CAPTION>
Year ended December 31
Dollars in thousands 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
EARNINGS
Income before taxes and cumulative effect of changes in accounting
principles $1,618,599 $1,527,551 $627,012 $1,209,916 $1,140,487
Fixed charges and preferred stock dividends excluding interest on 1,201,582 1,105,324 1,492,391 1,112,564 712,339
deposits
---------------------------------------------------------------
Subtotal 2,820,181 2,632,875 2,119,403 2,322,480 1,852,826
Interest on deposits 1,456,587 1,428,771 1,551,816 1,159,242 1,005,658
---------------------------------------------------------------
Total $4,276,768 $4,061,646 $3,671,219 $3,481,722 $2,858,484
===============================================================
FIXED CHARGES
Interest on borrowed funds $1,098,365 $1,064,847 $1,455,069 $1,070,565 $676,319
Interest component of rentals 29,312 29,839 31,283 32,247 26,491
Amortization of notes and debentures 833 816 927 1,761 1,418
Distributions on Mandatorily Redeemable Capital Securities
of Subsidiary Trust 43,138 1,391
Preferred stock dividend requirements 29,934 8,431 5,112 7,991 8,111
---------------------------------------------------------------
Subtotal 1,201,582 1,105,324 1,492,391 1,112,564 712,339
Interest on deposits 1,456,587 1,428,771 1,551,816 1,159,242 1,005,658
---------------------------------------------------------------
Total $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 2.35x 2.38x 1.42x 2.09x 2.60x
Including interest on deposits 1.61 1.60 1.21 1.53 1.66
===================================================================================================================================
</TABLE>
<PAGE> 1
EXHIBIT 13
FINANCIAL
REVIEW 1997 VERSUS 1996
This Financial Review should be read in conjunction with PNC Bank Corp. and
subsidiaries' ("Corporation" or "PNC Bank") Consolidated Financial Statements
and Statistical Information included herein.
OVERVIEW
PNC BANK CORP. The Corporation is one of the largest diversified financial
services companies in the United States and operates seven lines of business:
National Consumer Banking, Regional Community Banking, Private Banking, Secured
Lending, Asset Management and Servicing, Corporate Banking and Mortgage Banking.
Financial products and services are customized for specific customer segments
and offered nationally and in PNC Bank's primary geographic markets in
Pennsylvania, New Jersey, Delaware, Ohio, Kentucky, Indiana, Massachusetts and
Florida.
SUMMARY FINANCIAL RESULTS Net income for 1997 was $1.052 billion or $3.28 per
diluted share compared with $992 million and $2.88, respectively, a year ago.
Returns on average common shareholders' equity and average assets were 20.01%
and 1.49% compared with 17.18% and 1.40%, respectively, in 1996. Results for
1996 include a $22 million after-tax charge to recapitalize the Savings
Association Insurance Fund ("SAIF"). Excluding the SAIF assessment, earnings for
1996 totaled $1.015 billion or $2.94 per diluted share. On this basis, returns
on average common shareholders' equity and average assets were 17.58% and 1.43%,
respectively.
Earnings are impacted by noncash expenses associated with purchase
acquisitions. Excluding the impact of goodwill and other amortization related to
purchase transactions, diluted earnings per share for 1997 and 1996 were $3.51
and $3.04, respectively.
Total revenue for 1997 increased 11.8% compared with the same period in 1996
primarily due to noninterest income growth. Noninterest income increased to
$1.808 billion for 1997, a 29.6% increase over 1996 reflecting significant
growth in nearly all categories of noninterest revenue. Noninterest income
represented 42% of total revenue compared with 36% in 1996. Taxable-equivalent
net interest income increased $45 million for 1997 and the net interest margin
widened 11 basis points to 3.94% compared with 3.83% in the prior year. These
increases resulted from a higher-yielding earning asset mix which offset the
impact of spread compression, change in deposit mix and lower average deposit
levels.
The provision for credit losses was $70 million for 1997. No provision was
recorded in the prior year.
Operating expenses increased $303 million to $2.615 billion largely due to
$187 million of incremental costs associated with AAA Financial Services and
credit card-related initiatives. The efficiency ratio, computed excluding
distributions on capital securities from expense, was 59.4% for 1997 compared
with 59.6% a year ago.
Total assets were $75.1 billion at December 31, 1997 compared to $73.3
billion at December 31, 1996. Average earning assets declined $708 million in
the year-to-year comparison to $64.0 billion as loan growth was more than offset
by securities portfolio reductions. Average loans grew 7.7% to $52.9 billion, a
$3.8 billion increase from the prior year. Loans represented 82.6% of average
earning assets compared with 75.9% a year ago. Growth in credit cards,
residential mortgages and middle market commercial loans more than offset
downsizing of the indirect automobile lending portfolio and the impact of loan
securitizations. Average securities declined $4.8 billion to $8.8 billion or
13.7% of average earning assets. Asset quality and coverage ratios remained
strong. The ratio of nonperforming assets to loans and foreclosed assets was
.61% at December 31, 1997 compared with .88% at December 31, 1996. The allowance
for credit losses was 352% of nonperforming loans and 1.79% of total loans at
December 31, 1997 compared to 334% and 2.25%, respectively, a year ago. Net
charge-offs were .51% of average loans in 1997 compared with .33% in 1996. The
increase in net charge-offs was primarily associated with higher credit card
outstandings. Shareholders' equity totaled $5.4 billion at December 31, 1997.
The leverage ratio was 7.30% and Tier I and total risk-based capital ratios were
7.43% and 11.11%, respectively. As part of the Corporation's capital management
initiatives, 29.3 million shares of common stock were repurchased during 1997.
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 CORP.
30
<PAGE> 2
PNC Bank has responded to these challenges by transitioning to an
organization comprised of autonomous lines of business with highly focused
customer segments. This approach provides the basis for developing
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 and investing in
specialized financial services businesses including asset management, mutual
fund servicing, private 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 our
wholesale leverage activities have allowed PNC Bank to significantly improve the
composition of the earnings stream.
NATIONAL CONSUMER BANKING offers a full range of consumer products and
services through technologically advanced cost efficient channels. National
Consumer Banking's focus is on delivering convenient value-added financial
services nationally by expanding direct marketing and through establishing
affinity relationships such as those with AAA and mall owners nationwide.
REGIONAL COMMUNITY BANKING offers a full range of products and services to
small business and retail customers within PNC Bank's geographic footprint.
Regional Community Banking's focus is on employing information and customer
knowledge to identify and meet consumer preferences for traditional and
automated products and services through retail branches and automated
distribution channels.
PRIVATE BANKING offers personalized investment management, brokerage,
personal trust, estate planning and traditional banking services to the
affluent. Services are provided by teams of highly qualified specialists working
together to provide trusted advice and creative financial solutions.
SECURED LENDING is engaged in commercial real estate banking, business credit
and equipment leasing activities.
Real estate banking provides comprehensive credit and noncredit services to a
broad base of clients including commercial and residential developers,
investors, mortgage bankers and property management companies. On January 28,
1998, PNC Bank announced a definitive agreement to acquire the assets of Midland
Loan Services, L.P. ("Midland"), one of the largest commercial loan servicers in
the nation.
Business credit offers asset-based lending, syndication and treasury
management services within the PNC Bank primary geographic markets and
nationally. Leasing provides equipment lease financing for a wide range of
customers and is focused on growth from the existing PNC Bank corporate customer
base and national markets. ASSET MANAGEMENT AND SERVICING includes the BlackRock
organization which offers a full range of fixed income, domestic and
international equity and liquidity products; PFPC Inc., the Corporation's mutual
fund servicing business; HAWTHORN, a PNC Company, which serves the
ultra-affluent market, and PNC Bank's institutional trust business. BlackRock
represents the recent integration of PNC Bank's investment advisory and asset
management capabilities under a single organization and brand. This integration
provides the opportunity to grow into one of the largest asset managers in the
country, leveraging the BlackRock Financial Management reputation as an
established world-class fixed income manager. BlackRock's initiatives focus on
expanding marketing and delivery channels for a full range of institutional and
retail investment products. PFPC Inc., the Corporation's mutual fund servicing
business, specializes in providing institutional money managers, brokerage
firms, pension managers and insurance companies with custom designed products
including accounting and administration, transfer agent and custody services.
PFPC is the second largest mutual fund accounting agent and the third largest
full-service transfer agent in the United States and is focused on domestic and
international expansion. CORPORATE BANKING provides a full range of credit,
capital markets and treasury management products and services to large and
mid-size businesses, institutions and government entities. Client relationship
teams possessing specific expertise focus on the individual customer needs to
provide customized service. Teams of specialists also focus on specific industry
segments, including communications, dealer finance, health care and public
finance, large corporate, financial institutions, energy, metals and mining and
emerging growth. MORTGAGE BANKING is focused on efficiently delivering high
quality mortgage originations and servicing, and expanding nonmortgage product
offerings including second mortgages, home equity lines of credit, credit cards
and insurance products.
PNC BANK CORP.
31
<PAGE> 3
FINANCIAL
REVIEW 1997 VERSUS 1996
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.
The management accounting process uses various balance sheet and income
statement allocations and transfers to measure business unit performance.
Allocations 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.
The financial results presented herein reflect each line of business as if
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 position.
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. Capital assignments are not equivalent to regulatory
capital guidelines and the total capital assigned will differ from consolidated
shareholders' equity.
Total line of business financial results differ from consolidated financial
results primarily due to eliminations, different provision for credit loss
methodologies and corporate 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 include
net securities gains, certain holding company expenses and other items not
allocated in the management accounting process.
<TABLE>
<CAPTION>
Return on
Average Assets Revenue Earnings Assigned Capital
------------------ --------------- --------------- -------------------
Year ended December 31 - dollars in millions 1997 1996 1997 1996 1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
National Consumer Banking $10,311 $8,219 $650 $380 $25 $54 4% 10%
Regional Community Banking 35,188 35,839 1,627 1,667 416 425 28 28
Private Banking 2,527 2,396 398 352 89 71 27 23
Secured Lending 5,937 5,864 247 210 134 95 30 21
Asset Management and Servicing 749 616 421 332 84 61 35 30
Corporate Banking 16,120 15,298 737 673 229 218 18 18
Mortgage Banking 10,388 9,289 421 340 54 29 15 9
----------------------------------------------------
Total lines of business 81,220 77,521 4,501 3,954 1,031 953 21 21
Eliminations (14,237)(10,782) (222) (217) (112) (79)
Provision for credit losses 105 66
Corporate administration and other unassigned 3,661 4,068 53 137 28 52
----------------------------------------------------
Total consolidated $70,644 $70,807 $4,332 $3,874 $1,052 $992 19 17
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
PNC BANK CORP.
32
<PAGE> 4
NATIONAL CONSUMER BANKING
<TABLE>
<CAPTION>
Year ended December 31 - dollars
in millions 1997 1996
- ----------------------------------------------------------
<S> <C> <C>
INCOME STATEMENT
Net interest income $385 $261
Noninterest income 265 119
-----------------
Total revenue 650 380
Provision for credit losses 227 92
Noninterest expense 383 201
-----------------
Pretax earnings 40 87
Income taxes 15 33
-----------------
Earnings $25 $54
-----------------
AVERAGE BALANCE SHEET
Loans $9,581 $7,877
Other assets 730 342
-----------------
Total assets $10,311 $8,219
-----------------
Net deposits $36 $24
Assigned funds and other liabilities 9,610 7,648
Assigned capital 665 547
-----------------
Total funds $10,311 $8,219
-----------------
PERFORMANCE RATIOS
After-tax profit margin 4% 14%
Efficiency 59 53
Return on assigned capital 4 10
- -----------------------------------------------------------
</TABLE>
National Consumer Banking is strategically positioned to capitalize on consumer
acceptance of mass marketed financial services and electronic delivery.
Management's objective is to improve longer-term returns on assigned capital by
emphasizing revenue growth in higher yielding products such as credit cards and
education loans and mass marketing a full range of products and services through
the most technologically advanced cost efficient channels. Credit card,
automobile, student, home equity and residential mortgage loans, as well as
deposit accounts and money market mutual funds will be marketed in conjunction
with AAA and other national initiatives.
The Corporation's exclusive marketing agreement with AAA, entered in 1996,
marked the first major step in building a national consumer business. Continuing
to build national scale during 1997, the Mall V.I.P.SM Visa(R) card was
introduced in conjunction with top mall owners in the country. These alliances
provide unique opportunities to access customers nationwide. The education
lending business has grown through innovative affinity relationships with groups
such as the Association of Independent California Colleges and Universities.
National Consumer Banking has also focused on expansion of electronic delivery
employing debit cards, offsite ATMs and online banking. Through affinity
relationships and technology, PNC Bank delivers products in locations across the
country providing convenient customer access.
Significant start-up investments in long-term initiatives produced positive
momentum during 1997. Total revenue grew 71% and noninterest income increased to
41% of total revenue compared with 31% in 1996. Noninterest income grew 123% or
$146 million principally due to loan securitization income, increased credit
card fees and higher electronic banking income.
Net interest income increased 48% or $124 million over 1996 driven by higher
loan outstandings and a change in loan portfolio mix. Average loans increased
22% as growth in wider spread credit card loans exceeded declines in lower
yielding indirect auto loans and education loans. Credit card loans increased
$2.4 billion due to AAA and other marketing initiatives. Indirect auto loans
declined consistent with the strategic decision to reduce loans with
unattractive returns. Education loans declined as a result of $1 billion of
student loan securitizations.
National Consumer Banking accounted for 3% of line of business earnings in
1997 compared with 6% in 1996. Earnings declined $29 million or 54% due to costs
associated with national business expansion. Noninterest expense increased $182
million largely driven by higher marketing and credit card processing costs,
acquired portfolio premium amortization and interchange fees. In addition to the
impact on earnings from marketing and other expansion costs, net interest income
is adversely affected until credit card rate incentives offered during
introductory periods expire and yields earned are reset to market rates. The AAA
initiative reduced earnings by $57 million in 1997.
The provision for credit losses increased $135 million and was directly
related to a larger proportion of credit card loans which have inherently higher
charge-offs.
PNC BANK CORP.
33
<PAGE> 5
FINANCIAL
REVIEW 1997 VERSUS 1996
REGIONAL COMMUNITY BANKING
<TABLE>
<CAPTION>
Year ended December 31 - dollars
in millions 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
INCOME STATEMENT
Net interest income $1,348 $1,387
Noninterest income 279 280
-----------------
Total revenue 1,627 1,667
Provision for credit losses 26 21
Noninterest expense 930 960
-----------------
Pretax earnings 671 686
Income taxes 255 261
-----------------
Earnings $416 $425
-----------------
AVERAGE BALANCE SHEET
Loans $9,078 $8,637
Assigned assets and other assets 26,110 27,202
-----------------
Total assets $35,188 $35,839
-----------------
Net deposits $33,570 $34,188
Other liabilities 134 151
Assigned capital 1,484 1,500
-----------------
Total funds $35,188 $35,839
-----------------
PERFORMANCE RATIOS
After-tax profit margin 26% 26%
Efficiency 57 58
Return on assigned capital 28 28
- --------------------------------------------------------------------------------
</TABLE>
Regional Community Banking is focused on efficiently employing the traditional
branch delivery system while expanding less capital intensive, technologically
advanced alternative delivery systems. Many Community Banking customers still
prefer more traditional delivery channels but increasingly demand convenience
and choice among products and services. To address this transition, the Regional
Community Bank was reorganized along specific customer segments.
Consumers' demands for convenient high value products and services coupled
with intense competitive pressures continue to shrink net interest spreads.
Consumers are migrating from traditional deposit accounts toward higher return
products such as money market accounts. In addition, niche competitors exert
pricing pressure. As consumer preferences change, the challenge is to offer the
proper products and maintain the appropriate balance of resources between the
traditional branch structure and technologically advanced delivery channels.
Regional Community Banking earned $416 million accounting for 40% of line of
business earnings in 1997 compared with 45% a year ago. Earnings declined $9
million primarily due to a $39 million or 3% reduction in net interest income
attributable to a modest decline in deposit levels and customer migration to
higher cost money market deposit products. Noninterest income was essentially
flat as a 9% increase in deposit service fees offset the impact of branch
consolidation.
Noninterest expense declined $30 million due to expense reduction associated
with consolidating branch locations and the transfer of activity from
traditional branches to alternative delivery channels. The increase in the
provision for credit losses was due to higher outstandings.
PRIVATE BANKING
<TABLE>
<CAPTION>
Year ended December 31 - dollars
in millions 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
INCOME STATEMENT
Net interest income $113 $97
Noninterest income 285 255
-----------------
Total revenue 398 352
Provision for credit losses 4 1
Noninterest expense 251 237
-----------------
Pretax earnings 143 114
Income taxes 54 43
-----------------
Earnings $89 $71
-----------------
AVERAGE BALANCE SHEET
Loans $2,468 $2,340
Other assets 59 56
-----------------
Total assets $2,527 $2,396
-----------------
Net deposits $1,661 $1,501
Assigned funds and other liabilities 542 592
Assigned capital 324 303
-----------------
Total funds $2,527 $2,396
-----------------
PERFORMANCE RATIOS
After-tax profit margin 22% 20%
Efficiency 63 67
Return on assigned capital 27 23
- --------------------------------------------------------------------------------
</TABLE>
Private Banking offers investment management, full service brokerage, financial
planning and traditional trust and banking services. Private Banking's objective
is to be the financial "advisor of choice" in the growing affluent market,
providing a full range of high quality customized predominantly fee-based
investment products and services.
Private Banking earned $89 million in 1997 accounting for 9% of total line of
business earnings and representing a 25% increase over 1996.
Total revenue grew $46 million reflecting double digit growth in noninterest
and net interest income. Noninterest income increased $30 million in 1997 due to
increased investment management, trust, and brokerage assets under
administration driven by new business and market value appreciation. Assets
under administration increased $9 billion to $59 billion at December 31, 1997.
Net interest income increased due to loan and deposit growth.
Noninterest expense increased due to the addition of sales and service
personnel, higher incentive compensation commensurate with revenue growth and
infrastructure development and technology investment costs.
PNC BANK CORP.
34
<PAGE> 6
SECURED LENDING
<TABLE>
<CAPTION>
Year ended December 31 - dollars
in millions 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
INCOME STATEMENT
Net interest income $195 $181
Noninterest income 52 29
-----------------
Total revenue 247 210
Provision for credit losses (38)
Noninterest expense 82 62
-----------------
Pretax earnings 203 148
Income taxes 69 53
-----------------
Earnings $134 $95
-----------------
AVERAGE BALANCE SHEET
Loans $5,853 $5,667
Other assets 84 197
-----------------
Total assets $5,937 $5,864
-----------------
Net deposits $787 $637
Assigned funds and other liabilities 4,698 4,766
Assigned capital 452 461
-----------------
Total funds $5,937 $5,864
-----------------
PERFORMANCE RATIOS
After-tax profit margin 54% 45%
Efficiency 33 30
Return on assigned capital 30 21
- --------------------------------------------------------------------------------
</TABLE>
Secured Lending includes PNC Bank's activities in commercial real estate,
business credit and equipment leasing. Secured Lending's objective is to
establish a significant national presence in each of these businesses providing
product and advisory services focused on expanding fee-based revenues.
Real estate banking is a relationship-driven, full service provider of
financial products including capital markets financing and operational services.
Real estate banking serves regional and national customers including commercial
and residential developers, investors, mortgage bankers and property management
companies. PNC Bank's real estate experience extends across all major property
types throughout the U.S.
Targeted strategic growth areas include commercial mortgage origination,
securitization and servicing, loan syndications, private debt placements and
treasury management. Consistent with this strategy, on January 28, 1998, PNC
Bank announced a definitive agreement to acquire the assets of Midland, one of
the largest commercial real estate loan servicers in the nation. Midland is a
technology-based firm specializing in the origination, securitization and
servicing of commercial real estate assets.
This transaction provides important competitive advantages for PNC Bank as
more real estate customers demand sophisticated, technology-driven services and
increased access to capital markets. The Corporation anticipates this
transaction will close in the second quarter of 1998.
Business credit provides asset-based lending, syndication and treasury
management services. In 1997 several commercial finance groups were combined to
provide the platform to streamline operations and pursue national expansion
opportunities.
Leasing provides equipment lease financing to a wide range of businesses,
industries and institutions and also provides product support for PNC Bank's
capital markets activities.
Secured Lending contributed 13% of total line of business earnings in 1997
compared with 10% in 1996. Earnings increased $39 million or 41% in the
comparison as a result of higher revenue and continued improvement in credit
quality.
Consistent with Secured Lending's objectives, noninterest income increased
79% in 1997 and represented 21% of total revenue compared to 14% in 1996.
Noninterest income grew $23 million in 1997 primarily due to capital markets
distribution activities and treasury management fees.
Noninterest expense increased $20 million in 1997 primarily due to
increased personnel and delivery costs associated with expanding capital markets
capabilities.
PNC BANK CORP.
35
<PAGE> 7
FINANCIAL
REVIEW 1997 VERSUS 1996
ASSET MANAGEMENT AND SERVICING
<TABLE>
<CAPTION>
Asset Mutual Fund
Management Servicing Total
------------------- ------------------- --------------------
Year ended December 31 - dollars in millions 1997 1996 1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT
Advisory, processing and other fee income $265 $203 $143 $121 $408 $324
Net interest income 6 (1) 7 9 13 8
-----------------------------------------------------------------------
Total revenue 271 202 150 130 421 332
Operating expenses 190 154 95 80 285 234
-----------------------------------------------------------------------
Pretax earnings 81 48 55 50 136 98
Income taxes 31 18 21 19 52 37
-----------------------------------------------------------------------
Earnings $50 $30 $34 $31 $84 $61
-----------------------------------------------------------------------
AVERAGE BALANCE SHEET
Loans $52 $31 $61 $58 $113 $89
Assigned assets and other assets 536 421 100 106 636 527
-----------------------------------------------------------------------
Total assets $588 $452 $161 $164 $749 $616
-----------------------------------------------------------------------
Net deposits $388 $295 $63 $82 $451 $377
Other liabilities 37 26 17 14 54 40
Assigned capital 163 131 81 68 244 199
-----------------------------------------------------------------------
Total funds $588 $452 $161 $164 $749 $616
-----------------------------------------------------------------------
PERFORMANCE RATIOS
After-tax profit margin 19% 15% 22% 23% 20% 18%
Efficiency 70 76 64 62 68 71
Return on assigned capital 31 23 41 44 35 30
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Asset Management and Mutual Fund Servicing comprise the Asset Management and
Servicing line of business which contributed 8% of total line of business
earnings in 1997 compared with 6% in 1996. Earnings increased $23 million or 38%
in the comparison. Fee income increased 26% due to an increase in managed assets
and assets under administration driven by new business and market appreciation.
Operating expenses increased primarily due to incremental costs associated with
servicing new business and higher compensation commensurate with revenue growth.
Assets under administration by PFPC Inc., the Corporation's mutual fund
servicing operation, increased $76 billion or 23% in the year-to-year comparison
to $406 billion at December 31, 1997. Managed assets totaled $137 billion at
December 31, 1997, a 26% increase compared with a year ago.
COMPOSITION OF MANAGED ASSETS
<TABLE>
<CAPTION>
December 31 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Fixed income 43% 45%
Equity 28 27
Liquidity management 29 28
- --------------------------------------------------------------------------------
</TABLE>
Asset Management includes BlackRock, HAWTHORN and PNC Bank's institutional trust
business and provides a full range of high quality investment advisory and asset
management services to individuals and institutions.
BlackRock manages in excess of $108 billion of assets for individual and
institutional investors. Domestic and international equities, global fixed
income, money markets and risk management advisory services are included in the
product base. BlackRock is also pursuing growth of technology-related
businesses, through which institutional clients are offered BlackRock's risk
management capabilities.
BlackRock is currently the second largest U.S. bank manager of mutual funds.
BlackRock's proprietary mutual fund family, with approximately $35 billion in
assets, provides institutional and individual investors with a full range of
equity, bond and money market investment options.
HAWTHORN, created in 1997 through the combination of PNC Bank's family wealth
management unit and Stolper & Co., provides institutional investment-level
advisory services to the ultra-affluent. HAWTHORN has $10.6 billion in assets
under management and an additional $6.3 billion under administration and
custody.
PNC BANK CORP.
36
<PAGE> 8
Asset Management earnings increased $20 million or 67% over the prior year
led by strong revenue growth. Revenue increased $69 million or 34% due to new
business and market appreciation while operating expenses increased $36 million
or 23%.
PFPC Inc., the Corporation's mutual fund servicing operation, specializes in
providing mutual fund complexes with tailored services including accounting and
administration, transfer agent and custody services.
PFPC Inc. had double digit growth in assets and accounts serviced during 1997
leading to 15% revenue growth. Operating expenses increased $15 million due to
higher compensation expense commensurate with revenue growth and increased
investments in technology and facilities associated with business expansion.
PFPC's assets and accounts serviced were as follows:
<TABLE>
<CAPTION>
December 31 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Assets (billions)
Custody $223 $200
Accounting/administration 182 130
- --------------------------------------------------------------------------------
Accounts (millions)
Shareholder 4.6 4.3
Checking and credit/debit card 2.1 1.6
- --------------------------------------------------------------------------------
</TABLE>
Revenue from investment management and mutual fund servicing is included in
Asset Management and Servicing. Revenue from marketing asset management products
and services to consumers is included primarily in the Private Banking line of
business. The following table sets forth revenue and earnings from asset
management products and services included in each line of business.
<TABLE>
<CAPTION>
Year ended December 31 - in millions Revenue Earnings
- --------------------------------------------------------------------------------
1997
<S> <C> <C>
Asset Management and Servicing $421 $84
Private Banking 224 55
----------------
Total $645 $139
- --------------------------------------------------------------------------------
1996
Asset Management and Servicing $332 $61
Private Banking 200 47
----------------
Total $532 $108
- --------------------------------------------------------------------------------
</TABLE>
Asset Management and Servicing revenue is primarily affected by the volume of
new business, the value of assets managed and serviced, investment performance
and financial market conditions. Revenue may be positively affected by strong
investment performance or improving financial markets. Conversely, declining
performance or deteriorating financial markets may have an adverse effect on
revenue.
Corporate Banking
<TABLE>
<CAPTION>
Year ended December 31 - dollars
in millions 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
INCOME STATEMENT
Net interest income $450 $444
Noninterest income 287 229
---------------------
Total revenue 737 673
Provision for credit losses 5 (17)
Noninterest expense 363 339
---------------------
Pretax earnings 369 351
Income taxes 140 133
---------------------
Earnings $229 $218
---------------------
AVERAGE BALANCE SHEET
Loans $15,201 $14,487
Other assets 919 811
---------------------
Total assets $16,120 $15,298
---------------------
Net deposits $2,211 $2,230
Assigned funds and other liabilities 12,643 11,864
Assigned capital 1,266 1,204
---------------------
Total funds $16,120 $15,298
---------------------
PERFORMANCE RATIOS
After-tax profit margin 31% 32%
Efficiency 49 50
Return on assigned capital 18 18
- --------------------------------------------------------------------------------
</TABLE>
Corporate Banking provides specialized credit, capital markets and treasury
management products and services and includes PNC Bank's equity management
business which makes venture capital investments.
The ongoing pressure on leverage related products has led to significantly
more emphasis on altering the revenue composition through growth of noncredit
revenue such as treasury management and capital markets. The strategic focus for
Corporate Banking is on developing and delivering a comprehensive range of
higher margin fee-based products and services.
Corporate Banking contributed $229 million or 22% of total 1997 line of
business earnings representing an $11 million or 5% increase over 1996 earnings.
Total revenue increased 10% or $64 million to $737 million reflecting
noninterest income growth of 25%. Noninterest income represented 39% of 1997
revenue compared to 34% in 1996.
Net interest income increased $6 million or 1% to $450 million in 1997 as the
impact of higher loan volumes exceeded the impact of lower net interest spreads
resulting from continued competitive pricing pressure. Average loans increased
$714 million or 5% over the prior year with the most significant increase
occurring in the middle market portfolios.
Noninterest income was $287 million for 1997, a $58 million increase over the
prior year primarily due to a $27 million increase in venture capital income and
a $22 million increase
PNC BANK CORP.
37
<PAGE> 9
FINANCIAL
REVIEW 1997 VERSUS 1996
in capital markets fees. Noninterest income for 1997 includes capital markets
fees of $71 million, venture capital revenue of $98 million and treasury
management fees and other income of $118 million. Treasury management revenue
does not reflect the total compensation for these services due to the acceptance
of compensating balances in lieu of cash payments.
Noninterest expense in 1997 was $363 million, a $24 million or 7% increase
over 1996. This increase reflects a 6% increase in full-time equivalent
personnel and increased incentive compensation, primarily related to increased
noncredit revenue.
MORTGAGE BANKING
<TABLE>
<CAPTION>
Year ended December 31 - dollars
in millions 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
INCOME STATEMENT
Net interest income $137 $119
Noninterest income 284 221
-----------------
Total revenue 421 340
Provision for credit losses 5 5
Noninterest expense 329 289
-----------------
Pretax earnings 87 46
Income taxes 33 17
-----------------
Earnings $54 $29
-----------------
AVERAGE BALANCE SHEET
Loans $7,836 $7,289
Other assets 2,552 2,000
-----------------
Total assets $10,388 $9,289
-----------------
Net deposits $621 $618
Assigned funds and other liabilities 9,402 8,343
Assigned capital 365 328
-----------------
Total funds $10,388 $9,289
-----------------
PERFORMANCE RATIOS
After-tax profit margin 13% 8%
Efficiency 78 85
Return on assigned capital 15 9
- --------------------------------------------------------------------------------
</TABLE>
Mortgage Banking activities include origination, securitization and servicing of
residential mortgages, as well as retention of selected loans in the portfolio.
Mortgage Banking contributed 5% of total line of business earnings in 1997
compared with 3% in 1996. Earnings increased $25 million to $54 million for 1997
primarily due to higher origination and securitization activity. Net interest
income increased $18 million or 15% in 1997 as a result of higher loan portfolio
volume offsetting lower spreads.
Noninterest expense increased $40 million in 1997 reflecting a $15 million
increase in volume-related expenses and a $25 million increase in mortgage
servicing rights ("MSR") amortization expense.
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. In a period of rising
interest rates, a converse relationship would exist. The Corporation seeks to
manage this risk by using financial instruments whose values move in the
opposite direction of MSR value changes.
Mortgage Banking's results include servicing revenue and the impact from
securities and interest rate floors used to hedge the value of MSR in
noninterest income, while MSR amortization is reflected in noninterest expense.
The following table reflects the components of net mortgage banking revenue.
MORTGAGE BANKING REVENUE
<TABLE>
<CAPTION>
Year ended December 31 - dollars
in millions 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Servicing $160 $155
MSR amortization (81) (56)
Hedging activities 18 (6)
--------------
Net servicing revenue 97 93
Origination and securitization 98 60
Other 8 12
--------------
Net mortgage banking revenue $203 $165
- --------------------------------------------------------------------------------
</TABLE>
During 1997, Mortgage Banking funded $6.1 billion of residential mortgages with
70% representing retail originations. The comparable amounts were $5.6 billion
and 64%, respectively, in 1996. At December 31, 1997, the mortgage servicing
portfolio totaled $40.7 billion, including $31.7 billion of loans serviced for
others, had a weighted-average coupon of 7.94% and an estimated fair value of
$474 million. Capitalized MSR totaled $377 million at December 31, 1997 compared
with $313 million a year ago.
MORTGAGE SERVICING PORTFOLIO
<TABLE>
<CAPTION>
In millions 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
January 1 $39,543 $37,299
Originations 6,136 5,614
Purchases 1,917 3,737
Repayments (6,734) (6,075)
Sales (161) (1,032)
-----------------
December 31 $40,701 $39,543
- --------------------------------------------------------------------------------
</TABLE>
PNC BANK CORP.
38
<PAGE> 10
FORWARD-LOOKING STATEMENTS
PNC Bank has made, and may continue to make, various forward-looking statements
with respect to earnings per share, AAA Financial Services, credit quality,
interest rate and market risk, corporate objectives, revenue composition and
growth, Year 2000, BlackRock, Midland 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 and in the Corporation's Annual
Report, the following factors, among others, could cause actual results to
differ materially from forward-looking statements: continued pricing pressures
on loan and deposit products; success and timing of AAA and other business
initiatives and strategies; competition; changes in economic conditions;
continued customer disintermediation; customers' acceptance of PNC Bank's
products and services; and the extent and timing of technological advancement,
capital management actions, actions of the Federal Reserve Board and legislative
and regulatory actions and reforms.
CONSOLIDATED INCOME STATEMENT REVIEW
INCOME STATEMENT HIGHLIGHTS
<TABLE>
<CAPTION>
Year ended December 31 -
in millions 1997 1996 Change
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net interest income
(taxable-equivalent basis) $2,524 $2,479 $45
Provision for credit losses 70 70
Noninterest income before
net securities gains 1,759 1,373 386
Net securities gains 49 22 27
Noninterest expense 2,615 2,312 303
Income taxes 566 535 31
Net income 1,052 992 60
- --------------------------------------------------------------------------------
</TABLE>
Taxable-equivalent net interest income increased to $2.524 billion for 1997, a
$45 million increase over 1996. The net interest margin widened 11 basis points
to 3.94% compared with 3.83% in the prior year. These increases resulted from a
higher-yielding earning asset mix which offset the impact of spread compression,
change in deposit mix and lower average deposit levels. Average securities
declined $4.8 billion to $8.8 billion for 1997 while average loans increased
$3.8 billion to $52.9 billion.
PNC BANK CORP.
39
<PAGE> 11
FINANCIAL
REVIEW 1997 VERSUS 1996
<TABLE>
<CAPTION>
NET INTEREST INCOME ANALYSIS
Average Balances Interest Income/Expense Average Yields/Rates
------------------------ -------------------------------------------------
Taxable-equivalent basis
Year ended December 31 - dollars
in millions 1997 1996 Change 1997 1996 Change 1997 1996 Change
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets
Securities $8,774 $13,550 $(4,776) $546 $867 $(321) 6.22% 6.40% (18)bp
Loans, net of unearned income
Consumer 11,224 12,192 (968) 953 1,028 (75) 8.49 8.43 6
Credit card 3,558 1,165 2,393 459 163 296 12.92 13.94 (102)
Residential mortgage 13,105 12,049 1,056 976 898 78 7.45 7.45
Commercial 19,089 17,727 1,362 1,500 1,388 112 7.86 7.83 3
Commercial real estate 4,060 4,186 (126) 358 373 (15) 8.82 8.92 (10)
Other 1,871 1,797 74 130 119 11 6.94 6.63 31
---------------------------------------------------
Total loans, net
of unearned income 52,907 49,116 3,791 4,376 3,969 407 8.27 8.08 19
Other interest-earning assets 2,336 2,059 277 158 137 21 6.75 6.64 11
---------------------------------------------------
Total interest-earning assets/
interest income 64,017 64,725 (708) 5,080 4,973 107 7.93 7.68 25
Noninterest-earning assets 6,627 6,082 545
-------------------------
Total assets $70,644 $70,807 $(163)
-------------------------
Interest-bearing liabilities
Deposits
Demand and money market $13,477 $12,619 $858 391 332 59 2.90 2.63 27
Savings 2,852 3,445 (593) 57 69 (12) 1.97 2.02 (5)
Other time 17,441 18,307 (866) 948 981 (33) 5.44 5.36 8
Deposits in foreign offices 1,094 846 248 61 46 15 5.58 5.44 14
---------------------------------------------------
Total interest-bearing deposits 34,864 35,217 (353) 1,457 1,428 29 4.18 4.06 12
Borrowed funds 18,594 18,314 280 1,099 1,066 33 5.91 5.82 9
---------------------------------------------------
Total interest-bearing
liabilities/
interest expense 53,458 53,531 (73) 2,556 2,494 62 4.78 4.66 12
-----------------------------------------------------
Noninterest-bearing liabilities,
capital securities
and shareholders' equity 17,186 17,276 (90)
-------------------------
Total liabilities and
shareholders' equity $70,644 $70,807 $(163)
-------------------------
Interest rate spread 3.15 3.02 13
Impact of noninterest-bearing sources .79 .81 (2)
-----------------------
Net interest income/margin $2,524 $2,479 $45 3.94% 3.83% 11 bp
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
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 can have a significant impact on net interest income and margin.
In 1997, average loans comprised 82.6% of average earning assets compared to
75.9% for 1996. A higher percentage of loans in the earning asset base coupled
with growth in higher yielding asset categories, predominantly credit card,
contributed positively to net interest income and margin. These positive impacts
were partially offset by declining spreads primarily attributable to competitive
pressures on certain loan and deposit products. Funding cost is affected by the
composition of and rates paid on various funding sources. Average deposits
comprised 63.0% and 63.7% of PNC Bank's total sources of funding for the years
ended December 31, 1997 and 1996, respectively, with the remainder primarily
comprised of wholesale funding obtained at prevailing market rates.
Management anticipates modest balance sheet growth and continuation of the
challenging competitive environment through 1998.
PROVISION FOR CREDIT LOSSES The provision for credit losses was $70 million in
1997. No provision was recorded in the prior year. PNC Bank's loan portfolio is
comprised of an increasingly larger proportion of consumer loans, primarily
credit cards, which have inherently higher charge-offs. Accordingly, management
anticipates the Corporation will continue to record higher provisions for credit
losses in 1998.
PNC BANK CORP.
40
<PAGE> 12
NONINTEREST INCOME
<TABLE>
<CAPTION>
Change
Year ended December 31 - -----------------
dollars in millions 1997 1996 Amount Percent
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Asset management
Asset management
and trust $462 $378 $84 22.2%
Mutual fund servicing 141 119 22 18.5
-----------------------
Total asset
management 603 497 106 21.3
Service fees
Deposit 317 289 28 9.7
Credit card and
merchant services 93 30 63 NM
Corporate finance and
capital markets 83 65 18 27.7
Consumer services 75 64 11 17.2
Brokerage 54 54
Insurance 40 30 10 33.3
Other 50 34 16 47.1
-----------------------
Total service fees 712 566 146 25.8
Mortgage banking 156 154 2 1.3
Other 288 156 132 84.6
-----------------------
Total noninterest
income before net
securities gains 1,759 1,373 386 28.1
Net securities gains 49 22 27 NM
-----------------------
Total $1,808 $1,395 $413 29.6%
- --------------------------------------------------------------------------------
NM - not meaningful
</TABLE>
Noninterest income before net securities gains totaled $1.759 billion in 1997, a
$386 million or 28.1% increase compared with 1996. Net securities gains were $49
million in 1997 including $17 million associated with mortgage banking
activities.
Strong asset management and service fee growth reflects the strategic
emphasis on expanding fee-based revenue. Asset management benefited from new
business and market appreciation. Service fees exhibited strong growth in nearly
all categories. Deposit fees increased $28 million due to a revised fee
structure implemented during 1996 and higher treasury management revenue. Credit
card and merchant services fees increased $63 million, reflecting credit card
portfolio growth largely due to acquisitions to build scale in National Consumer
Banking and the July 1996 termination of a third party alliance.
Mortgage banking revenue grew primarily due to higher income from origination
and securitization activities exceeding an $8 million decline in gains from the
sale of servicing. Mortgage originations were $6.1 billion in 1997 compared with
$5.6 billion in 1996.
Other noninterest income increased in the comparison primarily due to a $27
million increase in venture capital income and asset securitization income of
$55 million.
NONINTEREST EXPENSE
<TABLE>
<CAPTION>
Change
Year ended December 31 - ------------------
dollars in millions 1997 1996 Amount Percent
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Staff expense
Compensation $1,016 $930 $86 9.2%
Employee benefits 192 180 12 6.7
-----------------------
Total staff expense 1,208 1,110 98 8.8
Net occupancy 189 197 (8) (4.1)
Equipment 180 172 8 4.7
Goodwill amortization 53 54 (1) (1.9)
Other amortization 121 63 58 92.1
Taxes other than income 57 53 4 7.5
Distributions on
capital securities 43 1 42 NM
Other 764 662 102 15.4
-----------------------
Total $2,615 $2,312 $303 13.1%
- --------------------------------------------------------------------------------
NM - not meaningful
</TABLE>
Noninterest expense increased $303 million to $2.615 billion in 1997 primarily
due to $187 million of incremental costs associated with AAA and credit
card-related national consumer initiatives. Higher incentive compensation
commensurate with revenue growth and the cost of trust preferred capital
securities also contributed to the increase. Excluding AAA and credit
card-related national consumer initiatives and the cost of trust preferred
capital securities, noninterest expense increased $74 million or 3%. Average
full-time equivalent employees totaled 24,639 in 1997 compared with 25,020 in
1996. The efficiency ratio was 59.4% compared with 59.6% a year ago.
YEAR 2000 The Corporation has been working to prepare its computer systems and
applications for the year 2000. This process involves reviewing, modifying and
replacing existing hardware and software as necessary and communicating with
external service providers and customers to assure they are addressing their
year 2000 issues. The Corporation is also assessing the potential for systems of
third parties such as vendors, customers, governmental entities and others to
impact the Corporation's business operations.
Given the Corporation's common technology infrastructure, management
estimates the review and modification of its computer systems and applications
will be substantially completed by December 31, 1998. The expected total cost to
become year 2000 compliant is approximately $30 million which is being expensed
as incurred. Failure of the Corporation or third parties to correct year 2000
issues could cause disruption of operations resulting in increased operating
costs. In addition, to the extent customers' financial positions are weakened as
a result of year 2000 issues, credit quality could be affected.
PNC BANK CORP.
41
<PAGE> 13
FINANCIAL
REVIEW 1997 VERSUS 1996
BALANCE SHEET REVIEW
Total assets increased $1.9 billion since year-end 1996 primarily due to
increases in loans, loans held for sale and short-term investments partially
offset by a reduction in the securities portfolio.
YEAR-END BALANCE SHEET HIGHLIGHTS
<TABLE>
<CAPTION>
December 31 - in millions 1997 1996 Change
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets $75,120 $73,260 $1,860
Earning assets 66,688 65,439 1,249
Loans, net of unearned income 54,245 51,798 2,447
Securities 8,522 11,917 (3,395)
Deposits 47,649 45,676 1,973
Borrowed funds 19,622 19,604 18
Shareholders' equity 5,384 5,869 (485)
- --------------------------------------------------------------------------------
</TABLE>
LOANS Loans outstanding increased $2.4 billion from year-end 1996 to $54.2
billion at December 31, 1997. Loan portfolio composition continues to be
geographically diversified among numerous industries and types of businesses and
reflects growth in the Corporation's core businesses, national consumer
initiatives and the impact of acquisitions. As the Corporation's businesses
evolve, the loan portfolio is expected to remain diversified. The credit card
portfolio increased 38.0% due to AAA and other marketing initiatives. Growth in
residential mortgages and commercial loans was partially offset by reductions in
indirect automobile lending and $1.0 billion of student loan securitizations.
Management anticipates modest loan portfolio growth in 1998.
LOANS
<TABLE>
<CAPTION>
December 31 - in millions 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Consumer
Home equity $4,848 $4,569
Automobile 3,221 3,731
Credit card 3,830 2,776
Student 1,223 1,725
Other 1,913 2,067
-----------------
Total consumer 15,035 14,868
Residential mortgage 12,785 12,703
Commercial
Manufacturing 3,838 3,770
Retail/Wholesale 3,575 3,369
Service providers 2,497 2,464
Real estate related 2,047 1,527
Communications 1,154 1,239
Health care 1,504 1,277
Financial services 1,027 717
Other 4,347 4,225
-----------------
Total commercial 19,989 18,588
Commercial real estate
Mortgage 1,848 1,941
Real estate project 2,126 2,157
-----------------
Total commercial real estate 3,974 4,098
Lease financing and other 2,874 1,926
Unearned income (412) (385)
-----------------
Total, net of unearned income $54,245 $51,798
- --------------------------------------------------------------------------------
</TABLE>
Unfunded commercial commitments, net of participations and syndications, totaled
$29.7 billion and $27.1 billion at December 31, 1997 and 1996, respectively.
Unfunded credit card commitments increased $2.9 billion to $16.4 billion.
Commercial commitments generally have fixed expiration dates, may require
payment of a fee, and contain termination clauses in the event the customer's
credit quality deteriorates. Based on the Corporation's historical experience,
most commitments expire unfunded and therefore cash requirements are
substantially less than the total commitment.
PNC BANK CORP.
42
<PAGE> 14
SECURITIES The securities portfolio declined $3.4 billion from year-end 1996
to $8.5 billion at December 31, 1997. The expected weighted-average life of the
securities portfolio was 2 years and 9 months at December 31, 1997 compared with
2 years and 11 months at year-end 1996.
SECURITIES AVAILABLE FOR SALE
<TABLE>
<CAPTION>
1997 1996
--------------------------------------------------------
December 31 - Amortized Fair Amortized Fair
in millions Cost Value Cost Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Debt securities
U.S. Treasury and
government
agencies $1,102 $1,105 $3,238 $3,237
Mortgage-backed 4,672 4,623 6,301 6,176
Asset-backed 2,079 2,083 1,609 1,615
State and municipal 170 177 218 227
Other debt 34 33 100 105
Corporate stocks
and other 501 501 554 557
-----------------------------------
Total $8,558 $8,522 $12,020 $11,917
- --------------------------------------------------------------------------------
</TABLE>
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.
During 1997, $10.2 billion of securities were sold at a $49 million net gain.
The securities portfolio includes collateralized mortgage obligations and
other mortgage-backed securities. These securities are marketable and generally
guaranteed, primarily by U.S. government agencies. Expected lives of such
securities can vary as interest rates change. In a rising interest rate
environment, prepayments on the underlying mortgage securities may slow and
lengthen the expected lives. Conversely, expected lives would shorten in a
declining interest rate environment. The Corporation monitors the impact of this
risk through the use of an income simulation model as part of the
asset/liability management process.
The notional value of financial derivatives designated to securities
available for sale was $5.5 billion at December 31, 1996. The net fair value of
such financial derivatives, which is reflected in the preceding table, was less
than $1 million. These contracts matured during 1997 and no financial
derivatives were designated to securities available for sale at December 31,
1997.
FUNDING SOURCES Deposits increased 4.3% to $47.6 billion at December 31, 1997
compared with $45.7 billion at year-end 1996 while borrowed funds remained
relatively unchanged. Deposits increased primarily due to an increase in
short-term foreign deposits. During 1997, the Corporation diversified its
funding base by initiating a $2.5 billion Euro medium-term bank note program.
The Corporation issued approximately $514 million of bank notes under this
program.
FUNDING SOURCES
<TABLE>
<CAPTION>
December 31 - in millions 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Deposits
Demand, savings and money market $27,475 $27,027
Time 17,125 17,803
Foreign 3,049 846
-----------------
Total deposits 47,649 45,676
Borrowed funds
Bank notes and senior debt 9,826 8,093
Federal funds purchased 3,632 3,933
Repurchase agreements 714 645
Other borrowed funds 3,753 5,576
Subordinated debt 1,697 1,357
-----------------
Total borrowed funds 19,622 19,604
-----------------
Total $67,271 $65,280
- --------------------------------------------------------------------------------
</TABLE>
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 December 31, 1997, the Corporation and each bank subsidiary met the well
capitalized capital ratio requirements.
PNC BANK CORP.
43
<PAGE> 15
FINANCIAL
REVIEW 1997 VERSUS 1996
RISK-BASED CAPITAL
<TABLE>
<CAPTION>
December 31 - dollars in millions 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Capital components
Shareholders' equity
Common $5,069 $5,553
Preferred 315 316
Trust preferred capital securities 650 350
Goodwill and other (949) (1,003)
Net unrealized securities losses 23 67
-----------------
Tier I risk-based capital 5,108 5,283
Subordinated debt 1,666 1,343
Eligible allowance
for credit losses 861 801
-----------------
Total risk-based capital $7,635 $7,427
-----------------
Assets
Risk-weighted assets and
off-balance-sheet instruments $68,756 $63,761
Average tangible assets 69,948 68,597
-----------------
Capital ratios
Tier I risk-based 7.43% 8.29%
Total risk-based 11.11 11.65
Leverage 7.30 7.70
- --------------------------------------------------------------------------------
</TABLE>
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 May 1997, the Corporation issued $300 million of 8.315% mandatorily
redeemable capital securities which qualify as Tier I capital. In July 1997, the
Corporation issued $350 million of 6 7/8% subordinated notes that qualify as
Tier II capital.
In the fourth quarter of 1996, the Corporation issued $300 million of
nonconvertible preferred stock and $350 million of 7.95% mandatorily redeemable
capital securities. These issuances qualify as Tier I capital.
During 1997, PNC Bank repurchased 29.3 million shares of common stock. In
April 1997, the Corporation's board of directors authorized the repurchase of up
to 15 million shares of common stock through March 31, 1998. At December 31,
1997 approximately 3.6 million shares remain under this authorization.
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.
The Corporation, through its credit management process, manages and monitors
credit risk by establishing uniform credit policies and exercising centralized
oversight, review and approval procedures. Credit Policy, at the direction of
the board of directors, establishes underwriting standards that set forth the
criteria used in extending credit.
To support consistent application of underwriting standards, credit officers
work with lending officers in evaluating the creditworthiness of borrowers and
structuring transactions. Credit decisions are made at the line of business or
market level. However, credit requests above certain limits or that involve
exceptions to certain policies require additional corporate approvals.
NONPERFORMING ASSETS
<TABLE>
<CAPTION>
December 31 - dollars in millions 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Nonaccrual loans
Commercial $128 $156
Commercial real estate
Mortgage 84 109
Real estate project 10 25
Consumer 10 6
Residential mortgage 44 51
---------------
Total nonaccrual loans 276 347
Restructured loans 2
---------------
Total nonperforming loans 276 349
Foreclosed assets
Commercial real estate 27 71
Residential mortgage 21 22
Other 9 17
---------------
Total foreclosed assets 57 110
---------------
Total nonperforming assets $333 $459
---------------
Nonperforming loans to loans .51% .67%
Nonperforming assets to loans and
foreclosed assets .61 .88
Nonperforming assets to asset .44 .63
- --------------------------------------------------------------------------------
</TABLE>
PNC BANK CORP.
44
<PAGE> 16
At December 31, 1997, $34 million of nonperforming loans were current as to
principal and interest compared with $80 million at December 31, 1996.
CHANGE IN NONPERFORMING ASSETS
<TABLE>
<CAPTION>
In millions 1997 1996
- ---------------------------------------------------------------
<S> <C> <C>
January 1 $459 $536
Transferred from accrual 308 447
Returned to performing (26) (40)
Principal reductions (230) (277)
Sales (99) (134)
Charge-offs and valuation adjustments (79) (73)
-------------------------
December 31 $333 $459
- ---------------------------------------------------------------
</TABLE>
ACCRUING LOANS
PAST DUE 90 DAYS OR MORE
<TABLE>
<CAPTION>
Amount Percent of Loans
December 31 - ------------- ------------------
dollars in millions 1997 1996 1997 1996
- -------------------------------------------------------------
<S> <C> <C> <C> <C>
Consumer
Guaranteed student $26 $51 2.32% 2.95%
Credit card 69 43 1.80 1.56
Other 32 46 .33 .45
----------------
Total consumer 127 140 .87 .96
Residential mortgage 60 58 .47 .46
Commercial 78 34 .39 .19
Commercial real estate 23 12 .59 .29
----------------
Total $288 $244 .53 .47
- -------------------------------------------------------------
</TABLE>
Loans not included in past due, nonaccrual or restructured categories, but where
known information about possible credit problems causes management to be
uncertain of the borrower's ability to comply with existing repayment terms over
the next six months totaled $41 million at December 31, 1997.
ALLOWANCE FOR CREDIT LOSSES In determining the adequacy of the allowance for
credit losses, the Corporation makes allocations to specific problem loans based
on discounted cash flow analyses or collateral valuations for impaired loans and
to pools of watchlist and nonwatchlist loans for various credit risk factors.
Allocations to loan pools are developed by risk rating and industry
classifications and based on management's judgment concerning historical loss
trends and other relevant factors. These factors may include, among others,
local, regional and national economic conditions, portfolio concentrations,
industry competition and consolidation and the impact of government regulation.
Consumer and residential mortgage loan allocations are based on historical loss
experience adjusted for portfolio activity and current economic conditions.
ALLOWANCE FOR CREDIT LOSSES
<TABLE>
<CAPTION>
In millions 1997 1996
- ---------------------------------------------------------
<S> <C> <C>
January 1 $1,166 $1,259
Charge-offs (385) (247)
Recoveries 113 83
--------------------
Net charge-offs (272) (164)
Provision for credit losses 70
Acquisitions 8 71
--------------------
December 31 $972 $1,166
- ---------------------------------------------------------
</TABLE>
The allowance as a percent of nonperforming loans and period-end loans was 352%
and 1.79%, respectively, at December 31, 1997. The comparable 1996 amounts were
334% and 2.25%.
CHARGE-OFFS AND RECOVERIES
<TABLE>
<CAPTION>
Year ended Net Percent of
December 31 - Charge- Charge- Average
dollars in millions offs Recoveries offs Loans
- ------------------------ ------------------------------------------
<S> <C> <C> <C> <C>
1997
Consumer $107 $37 $70 .62%
Credit card 208 25 183 5.14
Residential mortgage 9 1 8 .06
Commercial 49 38 11 .06
Commercial real estate 12 12
-----------------------------
Total $385 $113 $272 .51
- ------------------------------------------------------------------------
1996
Consumer $101 $35 $66 .54%
Credit card 66 7 59 5.06
Residential mortgage 9 2 7 .06
Commercial 53 29 24 .14
Commercial real estate 18 10 8 .19
----------------------------
Total $247 $83 $164 .33
- ------------------------------------------------------------------------
</TABLE>
Credit card net charge-offs increased $124 million in the comparison primarily
due to higher outstandings associated with purchased portfolios.
PNC BANK CORP.
45
<PAGE> 17
FINANCIAL
REVIEW 1997 VERSUS 1996
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 December 31, 1997,
such assets totaled $16.7 billion, with $4.5 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 December 31, 1997, approximately
$5.9 billion of residential mortgages were available as collateral for
borrowings from the FHLB.
During 1997, cash and due from banks increased $287 million to $4.3 billion
compared with an increase of $337 million in 1996. Net cash used by operating
activities totaled $41 million in 1997 compared with $210 million provided a
year earlier. The funding of loan originations resulted in a $48 million use of
cash by investing activities in 1997. Investing activities provided cash of $1.6
billion in 1996. Net cash provided by financing activities totaled $376 million
compared with $1.4 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 $237 million at December 31, 1997. 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. In
July 1997, PNC Bank issued $350 million of subordinated notes. The Corporation
also has unused capacity under effective shelf registration statements of
approximately $1.4 billion of debt and equity 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 taking 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, which
meets quarterly, 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- and
off-balance sheet positions to changing interest rates.
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 Corporate 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
PNC BANK CORP.
46
<PAGE> 18
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. Over the course of 1997, the Corporation's interest rate risk exposures
were consistently within policy limits. At December 31, 1997, if interest rates
were to increase by 100 basis points over the next twelve months, net interest
income would decline by 0.8%. If interest rates were to decrease by 100 basis
points over the next twelve months there would be no effect on net interest
income.
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- 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- and
off-balance sheet positions. The Corporation uses the economic value of equity
model to complement the income simulation modeling process.
Economic value of equity sensitivities are periodically reported to Corporate
ALCO and the Finance Committee of the Board of Directors. Based on the results
of the economic value of equity model at December 31, 1997, if interest rates
were to increase by 100 basis points, the economic value of existing on- and
off-balance sheet positions would increase by 0.02% of assets. If interest rates
were to decrease by 100 basis points, the economic value of existing on- and
off-balance sheet positions would decline by 0.16% of assets.
MARKET RISK 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 year-end
value-at-risk of all trading operations was less than $300 thousand.
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
value-added services to our customers and not on positioning the Corporation's
portfolio for gains from market movements.
PNC BANK CORP.
47
<PAGE> 19
FINANCIAL
REVIEW 1997 VERSUS 1996
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 1997.
FINANCIAL DERIVATIVES ACTIVITY
<TABLE>
<CAPTION>
Weighted-
Average
1997 - dollars in millions January 1 Additions Maturities Terminations December 31 Maturity
- ---------------------------------------------------------------------------------------------------------------------------------
Interest rate risk management
Interest rate swaps
<S> <C> <C> <C> <C> <C> <C> <C>
Receive fixed $7,003 $2,304 $(1,357) $(3,630) $4,320 2 yr. 0 mo.
Pay fixed 602 (154) 448 2 yr. 3 mo.
Basis swaps 335 981 (305) 1,011 5 yr. 3 mo.
Interest rate caps 5,813 372 (5,643) 542 3 yr. 8 mo.
Interest rate floors 2,500 1,146 (1) 3,645 1 yr. 6 mo.
-----------------------------------------------------------
Total interest rate risk management 16,253 4,803 (7,460) (3,630) 9,966 2 yr. 3 mo.
Mortgage banking activities
Forward contracts
Commitments to purchase loans 395 10,171 (8,914) 1,652 2 mo.
Commitments to sell loans 894 10,115 (9,674) 1,335 2 mo.
Interest rate floors - MSR 1,050 670 (250) 1,470 4 yr. 2 mo.
-----------------------------------------------------------
Total mortgage banking activities 2,339 20,956 (18,588) (250) 4,457
-----------------------------------------------------------
Total $18,592 $25,759 $(26,048) $(3,880) $14,423
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
During 1997, financial derivatives used in interest rate risk management reduced
net interest income by $14 million compared with an $11 million reduction in the
prior year.
PNC BANK CORP.
48
<PAGE> 20
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.
FINANCIAL DERIVATIVES
<TABLE>
<CAPTION>
Forward Yield Curve
Notional Estimated -------------------
December 31, 1997 - 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 $3,170 $64 5.79% 6.45%
Pay fixed designated to loans 427 (10) 7.30 5.89
Basis swaps designated to other earning assets 336 2 5.77 5.99
Interest rate caps designated to loans(2) 542 4 NM NM
Interest rate floors designated to loans(3) 3,645 4 NM NM
----------------------
Total asset rate conversion 8,120 64
Liability rate conversion
Interest rate swaps(1)
Receive fixed designated to interest-bearing liabilities 1,150 37 5.88 6.31
Pay fixed designated to borrowed funds 21 3 5.47 6.38
Basis swaps designated to borrowed funds 675 1 5.96 5.99
----------------------
Total liability rate conversion 1,846 41
----------------------
Total interest rate risk management 9,966 105
Mortgage banking activities
Forward contracts
Commitments to purchase loans 1,652 (1) NM NM
Commitments to sell loans 1,335 (5) NM NM
Interest rate floors - MSR(3) 1,470 26 NM NM
----------------------
Total mortgage banking activities 4,457 20
----------------------
Total financial derivatives $14,423 $125
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The floating rate portion of interest rate contracts is based on
money-market indices. As a percent of notional value, 67% were based on
1-month LIBOR, 28% on 3-month LIBOR and the remainder on other short-term
indices.
(2) Substantially all interest rate caps require the counterparty to pay the
Corporation the excess, if any, of 3-month LIBOR over a weighted-average
strike of 6.32%.
(3) Interest rate floors with notional values of $3.5 billion and $1.5 billion
require the counterparty to pay the Corporation the excess, if any, of the
weighted-average strike of 5.16% over 3-month LIBOR and the weighted-average
strike of 5.91% over 10-year CMT, respectively.
At December 31, 1997, 3-month LIBOR was 5.81% and 10-year CMT was 5.75%.
NM - not meaningful
CUSTOMER-RELATED DERIVATIVES To accommodate customer needs, PNC Bank enters
into 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. These positions
are recorded at estimated fair value and changes in value are included in the
results of operations. The opposing schedule sets forth information relating to
positions associated with customer derivatives.
<TABLE>
<CAPTION>
Positive Negative
Notional Fair Fair Net Asset
December 31, 1997 - in millions Value Value Value (Liability)
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest rate
Swaps $3,518 $ 15 $ (14) $ 1
Caps/floors
Sold 1,340 (4) (4)
Purchased 1,215 4 4
Foreign exchange 1,700 23 (23)
Other 734 1 (1)
------------------------------------------------------
Total $8,507 $ 43 $ (42) $ 1
- ----------------------------------------------------------------------------------------
</TABLE>
PNC BANK CORP.
49
<PAGE> 21
FINANCIAL
REVIEW 1996 VERSUS 1995
OVERVIEW
Net income for 1996 totaled $992 million or $2.88 per diluted share compared
with $408 million or $1.19, respectively, in 1995. Returns on average common
shareholders' equity and average assets for 1996 were 17.18% and 1.40%,
respectively, compared with 7.05% and 0.54%, respectively, in 1995. The 1996
results include a $22 million after-tax charge to recapitalize the SAIF.
Excluding the SAIF assessment, earnings for 1996 totaled $1.015 billion or $2.94
per diluted share. On this basis, returns on average common shareholders' equity
and average assets were 17.58% and 1.43%, respectively. The 1995 results include
$380 million of after-tax charges recorded in connection with the Midlantic
Corporation ("Midlantic") merger and actions taken to reposition the
Corporation's balance sheet. Excluding these charges, 1995 earnings were $788
million or $2.30 per diluted share.
INCOME STATEMENT REVIEW
INCOME STATEMENT HIGHLIGHTS
<TABLE>
<CAPTION>
Year ended December 31 - in millions 1996 1995 Change
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Net interest income
(taxable-equivalent basis) $2,479 $2,189 $290
Provision for credit losses 6 (6)
Noninterest income before net
securities gains (losses) 1,373 1,240 133
Net securities gains (losses) 22 (280) 302
Noninterest expense before
special charges 2,312 2,209 103
Special charges 260 (260)
Income taxes 535 219 316
Net income 992 408 584
- -----------------------------------------------------------------------------
</TABLE>
NET INTEREST INCOME Taxable-equivalent net interest income totaled $2.479
billion in 1996 compared with $2.189 billion for 1995. The net interest margin
widened to 3.83% in 1996 compared with 3.15% in 1995. These increases were
primarily due to loan growth, the October 1995 Chemical Bank, New Jersey
acquisition and changes in balance sheet composition.
PROVISION FOR CREDIT LOSSES Favorable economic conditions during 1996 and
1995, combined with management's ongoing attention to asset quality, resulted in
lower nonperforming assets and strong coverage ratios. The Corporation did not
record a provision for credit losses in 1996 compared with a provision of $6
million in 1995.
NONINTEREST INCOME Noninterest income before securities transactions increased
$133 million to $1.373 billion in 1996. Asset management and trust revenue
increased $77 million or 18.3% due to new business and an increase in the value
of assets under administration.
Service fees increased $71 million in 1996 to $566 million, primarily
reflecting growth in deposit services, treasury management, brokerage and
corporate finance. During 1996, mortgage banking revenue decreased $33 million
to $154 million primarily due to lower servicing sales.
Other noninterest income increased $18 million to $156 million in 1996
primarily due to higher venture capital income.
Net securities gains totaled $22 million in 1996 compared with losses of $280
million in 1995. During 1995, securities were sold and related financial
derivatives were terminated in connection with initiatives to downsize the
securities portfolio and to reduce interest rate sensitivity.
NONINTEREST EXPENSE Noninterest expense before special charges increased $103
million or 4.7% in 1996 primarily due to purchase acquisitions consummated
during 1995, incentive compensation and the one-time assessment to recapitalize
the SAIF. Compensation expense increased primarily due to acquisitions and
incentive compensation in fee-based businesses including asset management and
brokerage.
In connection with the Midlantic merger, the Corporation recorded special
charges of $260 million in 1995 for elimination of duplicate operations and
facilities, employee severance, professional services, termination of an
interest rate cap position and various other costs.
PNC BANK CORP.
50
<PAGE> 22
BALANCE SHEET REVIEW
Total assets and earning assets were $73.3 billion and $65.4 billion,
respectively, at December 31, 1996 compared with $73.4 billion and $66.8 billion
at year-end 1995. The decline was primarily due to a reduced securities
portfolio offset by loan growth.
LOANS Loans outstanding increased $3.1 billion from year-end 1995 to $51.8
billion at December 31, 1996. Loan portfolio composition remained relatively
consistent in the comparison except for an increase in the credit card portfolio
attributable to AAA-related initiatives.
SECURITIES The securities portfolio declined $3.9 billion from year-end 1995
to $11.9 billion at December 31, 1996, reflecting the impact of management's
actions to reduce reliance on investment activities and related wholesale
funding.
The following table presents the amortized cost and fair value of securities
available for sale at year-end 1996 and 1995.
SECURITIES AVAILABLE FOR SALE
<TABLE>
<CAPTION>
1996 1995
-------------------------------------------------------
December 31 - Amortized Fair Amortized Fair
in millions Cost Value Cost Value
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Debt securities
U.S. Treasury and
government
agencies $ 3,238 $ 3,237 $ 4,241 $ 4,314
Mortgage-backed 6,301 6,176 8,631 8,566
Asset-backed 1,609 1,615 2,023 2,032
State and municipal 218 227 343 367
Other debt 100 105 99 97
Corporate stocks
and other 554 557 455 457
Associated derivatives 6
-------------------------------------------------------
Total $12,020 $11,917 $15,792 $15,839
- ------------------------------------------------------------------------------------
</TABLE>
FUNDING SOURCES Deposits decreased $1.2 billion to $45.7 billion compared with
$46.9 billion at year-end 1995. Time deposits declined $858 million as consumers
sought more attractive yields from alternative investments. Borrowed funds
totaled $19.6 billion at December 31, 1996 compared with $19.1 billion at the
end of 1995.
ASSET QUALITY The allowance for credit losses totaled $1.2 billion at
December 31, 1996 compared with $1.3 billion at December 31, 1995.
ASSET QUALITY
<TABLE>
<CAPTION>
December 31 - in millions 1996 1995
- ------------------------------------------------------------------
<S> <C> <C>
Nonperforming assets $459 $536
Accruing loans past due 90 days or more
Consumer 97 87
Credit card 43 8
Residential mortgage 58 63
Commercial 34 22
Commercial real estate 12 45
--------------------
Total $244 $225
--------------------
Allowance as a percent of period-end
Loans 2.25% 2.59%
Nonperforming loans 334.40 351.68
- ------------------------------------------------------------------
</TABLE>
CAPITAL Shareholders' equity totaled $5.9 billion and $5.8 billion at December
31, 1996 and 1995, respectively, and the leverage ratio was 7.70% and 6.37% in
the comparison. Tier I and total risk-based capital ratios were 8.29% and
11.65%, respectively, at December 31, 1996. The comparable December 31, 1995
ratios were 8.00% and 11.56%, respectively.
PNC BANK CORP.
51
<PAGE> 23
FINANCIAL
REVIEW 1996 VERSUS 1995
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 at December 31, 1996.
FINANCIAL DERIVATIVES
<TABLE>
<CAPTION>
Forward Yield Curve
Notional Estimated ----------------------
December 31, 1996 - 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 $6,020 $100 5.88% 5.94%
Pay fixed designated to loans 552 (15) 7.36 6.17
Interest rate caps designated to(2)
Securities 5,500 NM NM
Loans 313 2 NM NM
Interest rate floors designated to loans(3) 2,500 3 NM NM
---------------------
Total asset rate conversion 14,885 90
Liability rate conversion
Interest rate swaps(1)
Receive fixed designated to interest-bearing liabilities 983 9 5.88 6.12
Pay fixed designated to borrowed funds 50 5.63 5.68
Basis swaps designated to borrowed funds 335 3 5.67 5.66
---------------------
Total liability rate conversion 1,368 12
---------------------
Total interest rate risk management 16,253 102
Mortgage banking activities
Forward contracts
Commitments to purchase loans 395 (1) NM NM
Commitments to sell loans 894 NM NM
Interest rate floors - MSR(3) 1,050 10 NM NM
---------------------
Total mortgage banking activities 2,339 9
---------------------
Total financial derivatives $18,592 $111
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The floating rate portion of interest rate contracts is based on
money-market indices. As a percent of notional value, 51% were based on
3-month LIBOR, 45% on 1-month LIBOR and the remainder on other short-term
indices.
(2) Interest rate caps with notional values of $5.783 billion and $30 million
require the counterparty to pay the Corporation the excess, if any, of
3-month LIBOR over a weighted-average strike of 6.49% and 1-month LIBOR over
6.75%, respectively.
(3) Interest rate floors with notional values of $2.5 billion and $1.05 billion
require the counterparty to pay the Corporation the excess, if any, of the
weighted-average strike of 4.92% over 3-month LIBOR and the weighted-average
strike of 5.88% over 10-year CMT.
At December 31, 1996, 1-month LIBOR was 5.50%, 3-month LIBOR was 5.56% and
10-year CMT was 6.43%.
NM - not meaningful
PNC BANK CORP.
52
<PAGE> 24
REPORTS ON
CONSOLIDATED FINANCIAL STATEMENTS
MANAGEMENT'S REPORT
PNC Bank Corp. is responsible for the preparation, integrity and fair
presentation of its published financial statements. The accompanying
consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and, as such, include judgments and
estimates of management. PNC Bank Corp. also prepared the other information
included in the annual report and is responsible for its accuracy and
consistency with the consolidated financial statements.
Management is responsible for establishing and maintaining effective internal
control over financial reporting. The internal control system is augmented by
written policies and procedures and by audits performed by an internal audit
staff which reports to the Audit Committee of the Board of Directors. Internal
auditors monitor the operation of the internal control system and report
findings to management and the Audit Committee, and corrective actions are taken
to address identified control deficiencies and other opportunities for improving
the system. The Audit Committee, composed solely of outside directors, provides
oversight to the financial reporting process.
There are inherent limitations in the effectiveness of any system of
internal control, including the possibility of human error and circumvention or
overriding of controls. Accordingly, even an effective internal control system
can provide only reasonable assurance with respect to financial statement
preparation. Further, because of changes in conditions, the effectiveness of an
internal control system may vary over time.
Management assessed PNC Bank Corp.'s internal control over financial
reporting as of December 31, 1997. This assessment was based on criteria for
effective internal control over financial reporting described in "Internal
Control-Integrated Framework" issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this assessment, management
believes that PNC Bank Corp. maintained an effective internal control system
over financial reporting as of December 31, 1997.
/s/ Thomas H. O'Brien /s/ Robert L. Haunschild
- ----------------------------- ---------------------------------------
Thomas H. O'Brien Robert L. Haunschild
Chairman and Senior Vice President and
Chief Executive Officer Chief Financial Officer
REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS
SHAREHOLDERS AND BOARD OF DIRECTORS
PNC BANK CORP.
We have audited the accompanying consolidated balance sheet of PNC Bank Corp.
and subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of income, changes in shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of PNC Bank Corp.'s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of PNC Bank Corp. and
subsidiaries at December 31, 1997 and 1996, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Pittsburgh, Pennsylvania
January 23, 1998
PNC BANK CORP.
53
<PAGE> 25
CONSOLIDATED
STATEMENT OF INCOME
<TABLE>
<CAPTION>
Year ended December 31 - dollars in millions, except per share data 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Loans and fees on loans $4,354 $3,943 $3,743
Securities 540 859 1,283
Other 157 136 123
-----------------------------------------------
Total interest income 5,051 4,938 5,149
-----------------------------------------------
INTEREST EXPENSE
Deposits 1,457 1,428 1,552
Borrowed funds 1,099 1,066 1,455
-----------------------------------------------
Total interest expense 2,556 2,494 3,007
----------------------------------------------
Net interest income 2,495 2,444 2,142
Provision for credit losses 70 6
-----------------------------------------------
Net interest income less provision for credit losses 2,425 2,444 2,136
-----------------------------------------------
NONINTEREST INCOME
Asset management and trust 603 497 420
Service fees 712 566 495
Mortgage banking 156 154 187
Net securities gains (losses) 49 22 (280)
Other 288 156 138
-----------------------------------------------
Total noninterest income 1,808 1,395 960
-----------------------------------------------
NONINTEREST EXPENSE
Staff expense 1,208 1,110 1,065
Net occupancy and equipment 369 369 346
Amortization 174 117 115
Other 821 715 683
Distributions on capital securities 43 1
Special charges 260
-----------------------------------------------
Total noninterest expense 2,615 2,312 2,469
-----------------------------------------------
Income before income taxes 1,618 1,527 627
Income taxes 566 535 219
-----------------------------------------------
Net income $1,052 $992 $408
-----------------------------------------------
EARNINGS PER COMMON SHARE
Basic $3.33 $2.91 $1.20
Diluted 3.28 2.88 1.19
CASH DIVIDENDS DECLARED PER COMMON SHARE 1.50 1.42 1.40
AVERAGE COMMON SHARES OUTSTANDING (in thousands)
Basic 310,147 338,568 336,455
Diluted 316,221 344,576 343,868
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
PNC BANK CORP.
54
<PAGE> 26
CONSOLIDATED
BALANCE SHEET
<TABLE>
<CAPTION>
December 31 - dollars in millions, except par value 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $4,303 $4,016
Short-term investments 1,526 774
Loans held for sale 2,324 941
Securities available for sale 8,522 11,917
Loans, net of unearned income of $412 and $385 54,245 51,798
Allowance for credit losses (972) (1,166)
------------------------------
Net loans 53,273 50,632
Other 5,172 4,980
------------------------------
Total assets $75,120 $73,260
------------------------------
LIABILITIES
Deposits
Noninterest-bearing $10,158 $10,937
Interest-bearing 37,491 34,739
------------------------------
Total deposits 47,649 45,676
Borrowed funds
Bank notes and senior debt 9,826 8,093
Federal funds purchased 3,632 3,933
Repurchase agreements 714 645
Other borrowed funds 3,753 5,576
Subordinated debt 1,697 1,357
------------------------------
Total borrowed funds 19,622 19,604
Other 1,815 1,761
------------------------------
Total liabilities 69,086 67,041
Mandatorily redeemable capital securities of subsidiary trusts 650 350
SHAREHOLDERS' EQUITY
Preferred stock 7 7
Common stock - $5 par value
Authorized: 450,000,000 shares
Issued: 348,447,600 and 345,154,238 shares 1,742 1,726
Capital surplus 1,042 939
Retained earnings 4,641 4,075
Deferred benefit expense (41) (60)
Net unrealized securities losses (23) (67)
Common stock held in treasury at cost: 48,017,641 and 21,036,195 shares (1,984) (751)
------------------------------
Total shareholders' equity 5,384 5,869
------------------------------
Total liabilities, capital securities and shareholders' equity $75,120 $73,260
===========================================================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
PNC BANK CORP.
55
<PAGE> 27
CONSOLIDATED
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Preferred Common Capital Retained
Dollars in millions, except per share data Stock Stock Surplus Earnings Other Total
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 $51 $1,719 $692 $3,535 $(270) $5,727
Net income 408 408
Cash dividends declared
Common (PNC - $1.40, Midlantic -
$.96 per share) (383) (383)
Preferred (3) (3)
Common stock issued (4,532,108 shares) 23 (8) 15
Preferred stock redeemed (50) (50)
Treasury stock activity 5 (119) (114)
Midlantic merger - treasury stock issued (38) (146) 184
Tax benefit of ESOP and stock option plans 2 14 16
Deferred benefit expense 4 4
Net unrealized securities gains 148 148
--------------------------------------------------------------------------
Balance at December 31, 1995 1 1,704 545 3,571 (53) 5,768
--------------------------------------------------------------------------
Net income 992 992
Cash dividends declared
Common (482) (482)
Preferred (6) (6)
Common stock issued (4,290,890 shares) 22 74 96
Preferred stock issued (6,000,000 shares) 6 290 296
Treasury stock activity 1 (1) (751) (751)
Tax benefit of ESOP and stock option plans 29 1 30
Deferred benefit expense 19 19
Net unrealized securities losses (93) (93)
--------------------------------------------------------------------------
Balance at December 31, 1996 7 1,726 939 4,075 (878) 5,869
--------------------------------------------------------------------------
Net income 1,052 1,052
Cash dividends declared
Common (469) (469)
Preferred (19) (19)
Common stock issued (3,293,362 shares) 16 57 73
Treasury stock activity 19 (1,233) (1,214)
Tax benefit of ESOP and stock option plans 27 2 29
Deferred benefit expense 19 19
Net unrealized securities gains 44 44
--------------------------------------------------------------------------
Balance at December 31, 1997 $7 $1,742 $1,042 $4,641 $(2,048) $5,384
===========================================================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
PNC BANK CORP.
56
<PAGE> 28
CONSOLIDATED
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31 - in millions 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $1,052 $992 $408
Adjustments to reconcile net income to net cash provided
(used) by operating activities
Provision for credit losses 70 6
Depreciation, amortization and accretion 346 290 296
Deferred income taxes 133 190 128
Net securities (gains) losses (49) (22) 280
Net gain on sales of assets (179) (89) (77)
Valuation adjustments (3) (9) (15)
Change in
Loans held for sale (1,383) (282) (172)
Other (28) (860) 266
-----------------------------------------------
Net cash provided (used) by operating activities (41) 210 1,120
-----------------------------------------------
INVESTING ACTIVITIES
Net change in loans (5,182) (1,657) (2,021)
Repayment
Securities available for sale 2,014 6,045 1,791
Investment securities 1,944
Purchases
Securities available for sale (8,725) (9,063) (3,409)
Investment securities (161)
Credit card portfolios (202) (1,822)
Other loans (332) (683) (702)
Sales
Securities available for sale 10,223 6,789 7,983
Loans 2,863 671 160
Foreclosed assets 116 151 125
Net cash received for acquisitions/divestitures 460 49
Other (823) 664 1,276
-----------------------------------------------
Net cash provided (used) by investing activities (48) 1,555 7,035
-----------------------------------------------
FINANCING ACTIVITIES
Net change in
Noninterest-bearing deposits (779) 221 272
Interest-bearing deposits 2,766 (1,919) (2,134)
Federal funds purchased (301) (541) (125)
Sale/issuance
Repurchase agreements 84,315 70,626 74,102
Bank notes and senior debt 9,125 8,197 7,946
Other borrowed funds 99,469 88,663 98,786
Subordinated debt 350 344
Capital securities 300 350
Preferred stock 296
Common stock 155 120 88
Repayment/maturity
Repurchase agreements (84,246) (72,832) (75,553)
Bank notes and senior debt (7,390) (6,561) (10,686)
Other borrowed funds (101,368) (86,991) (100,250)
Subordinated debt (5)
Redemption of preferred stock (50)
Acquisition of treasury stock (1,532) (569) (236)
Cash dividends paid (488) (488) (387)
-----------------------------------------------
Net cash provided (used) by financing activities 376 (1,428) (7,888)
-----------------------------------------------
INCREASE IN CASH AND DUE FROM BANKS 287 337 267
Cash and due from banks at beginning of year 4,016 3,679 3,412
-----------------------------------------------
Cash and due from banks at end of year $4,303 $4,016 $3,679
-----------------------------------------------
CASH PAID FOR
Interest $2,569 $2,636 $3,102
Income taxes 418 193 122
NONCASH ITEMS
Increase in securities available for sale 18,078
Decrease in investment securities (18,078)
Transfers from loans to other assets 71 76 99
===========================================================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
PNC BANK CORP.
57
<PAGE> 29
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 National Consumer Banking, Regional
Community Banking, Private Banking, Secured Lending, Asset Management and
Servicing, Corporate Banking and Mortgage Banking. Financial products and
services are customized for specific customer segments and offered nationally
and in PNC Bank's primary geographic markets in Pennsylvania, New Jersey,
Delaware, Ohio, Kentucky, Indiana, Massachusetts and Florida. 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.
NOTE 1 ACCOUNTING POLICIES
BASIS OF FINANCIAL STATEMENT PRESENTATION The consolidated financial statements
include the accounts of PNC Bank and its subsidiaries, substantially all of
which are wholly owned. Such statements have been prepared in accordance with
generally accepted accounting principles. All significant intercompany accounts
and transactions have been eliminated.
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the amounts reported. Actual results
will differ from such estimates and such differences may be material to the
financial statements.
LOANS HELD FOR SALE Loans held for sale primarily consist of residential
mortgages and are carried at the lower of cost or aggregate market value. Gains
and losses on sales of loans held for sale are included in noninterest income.
SECURITIES Securities are classified as investments and carried at amortized
cost if management has the positive intent and ability to hold the securities to
maturity. Securities purchased with the intention of recognizing short-term
profits are placed in the trading account, carried at market value and
classified as short-term investments. Gains and losses on trading securities are
included in other income. Securities not classified as investments or trading
are designated as securities available for sale and carried at fair value with
unrealized gains and losses, net of income taxes, reflected in shareholders'
equity. Gains and losses on sales of securities available for sale are computed
on a specific security basis and included in noninterest income.
LOANS Loans are stated at the principal amounts outstanding, net of unearned
income. Interest income with respect to loans is accrued on the principal amount
outstanding, except for lease financing income and interest on certain consumer
loans which are recognized over their respective terms using methods which
approximate the level yield method. Significant loan fees are deferred and
accreted to interest income over the respective lives of the loans.
NONPERFORMING ASSETS Nonperforming assets are comprised of nonaccrual and
restructured loans and foreclosed assets. Generally, loans other than consumer
are classified as nonaccrual and the accrual of interest is discontinued when it
is determined the collection of interest or principal is doubtful or when a
default of interest or principal has existed for 90 days or more, unless the
loan is well secured and in the process of collection. When interest accrual is
discontinued, accrued but uncollected interest credited to income in the current
year is reversed and unpaid interest accrued in the prior year, if any, is
charged against the allowance for credit losses. Consumer loans are generally
charged off when payments are past due 180 days.
A loan is categorized as restructured if the original interest rate or
repayment terms are restructured due to a deterioration in the financial
condition of the borrower.
Nonperforming loans are generally not returned to performing status until the
obligation is brought current, has performed in accordance with the contractual
terms for a reasonable period of time and collection of the contractual
principal and interest is no longer doubtful.
Foreclosed assets are comprised of property acquired through a foreclosure
proceeding or acceptance of a deed-in-lieu of foreclosure. These assets are
recorded on the date acquired at the lower of the related loan balance or market
value of the collateral less estimated disposition costs. Market values are
estimated primarily based upon appraisals. Subsequently, foreclosed assets are
valued at the lower of the amount recorded at acquisition date or the then
current market value less estimated disposition costs. Gains or losses realized
upon disposition of such property are reflected in other expense.
Impaired loans consist of nonaccrual and restructured commercial and
commercial real estate loans. Interest collected on these loans is recognized on
the cash basis or cost recovery method.
ALLOWANCE FOR CREDIT LOSSES The allowance for credit losses is a reserve for
estimated credit losses established through provisions charged against income.
Loans deemed to be uncollectible are charged against the allowance 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 periodic evaluations
of the credit portfolio and other relevant factors. This evaluation is
inherently
PNC BANK CORP.
58
<PAGE> 30
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. Impaired loans are generally evaluated based
on the present value of expected future cash flows or the fair value of the
underlying collateral if principal repayment is expected to come from the sale
or operation of such collateral.
SERVICING OF FINANCIAL ASSETS Originated servicing rights for loans sold are
recognized by allocating total costs incurred between the loan and the servicing
rights based on their relative fair values. Purchased servicing rights are
recorded at cost. Servicing rights are amortized in proportion to estimated net
servicing income. To determine the fair value of servicing rights, the
Corporation estimates the present value of future cash flows incorporating
numerous assumptions including servicing income, cost of servicing, discount
rates, prepayment speeds and default rates.
A valuation allowance is maintained for the excess, if any, of the carrying
amount of capitalized servicing rights over estimated fair value. For purposes
of measuring impairment, servicing rights are disaggregated and stratified based
on predominant risk characteristics, primarily loan type, interest rate and
investor type.
GOODWILL AND OTHER Goodwill is amortized on a straight-line basis over periods
ranging from 15 to 25 years. Other amortizable assets are reduced using
accelerated and straight-line methods over their respective estimated useful
lives. On a periodic basis, management reviews goodwill and other amortizable
assets and evaluates events or changes in circumstances that may indicate
impairment in the carrying amount of such assets. In such instances, impairment,
if any, is measured on a discounted future cash flow basis.
DEPRECIATION AND AMORTIZATION For financial reporting purposes, premises and
equipment are depreciated principally using the straight-line method over the
estimated useful lives of the assets. Accelerated methods are used for federal
income tax purposes. Leasehold improvements are amortized over their estimated
useful lives or their respective lease terms, whichever is shorter.
TREASURY STOCK The Corporation records common stock purchased for treasury at
cost. At the date of subsequent reissue, the treasury stock account is reduced
by the cost of such stock on the first-in, first-out basis.
FINANCIAL DERIVATIVES The Corporation uses off-balance-sheet financial
derivatives as part of the overall asset/liability management process, in
mortgage banking activities and in providing risk management services to
customers. 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.
Interest rate swaps are agreements with a counterparty to exchange periodic
interest payments calculated on a notional principal amount. Purchased interest
rate caps and floors are agreements where, for a fee, the counterparty agrees to
pay the Corporation the amount, if any, by which a specified market interest
rate is higher or lower than a defined rate applied to a notional amount.
Interest rate swaps, caps and floors that modify the interest rate
characteristics (such as from fixed to variable, variable to fixed, or one
variable index to another) of designated interest-bearing assets or liabilities
are accounted for under the accrual method. The net amount payable or receivable
from the derivative contract is accrued as an adjustment to interest income or
interest expense of the designated instrument. Premiums on contracts are
deferred and amortized over the life of the agreement as an adjustment to
interest income or interest expense of the designated instruments. Unamortized
premiums are included in other assets. Changes in fair value of financial
derivatives accounted for under the accrual method are not reflected in the
financial results. Realized gains and losses, except losses on terminated
interest rate caps and floors, are deferred as an adjustment to the carrying
amount of the designated instruments and amortized over the shorter of the
remaining original life of the agreements or the designated instruments. Losses
on terminated interest rate caps and floors are recognized immediately in the
results of operations. If the designated instruments are disposed of, the fair
value of the associated derivative contract and any unamortized deferred gains
or losses are included in the determination of gain or loss on the disposition
of such instruments. Contracts not qualifying for accrual accounting are marked
to market.
Forward contracts provide for the delivery of financial instruments at a
specified future date and at a specified price or yield. The Corporation uses
forward contracts primarily to manage risk associated with its mortgage banking
activities. Realized gains and losses on mandatory and optional delivery forward
commitments are recorded in mortgage banking income in the period settlement
occurs. Unrealized gains or losses are considered in the lower of cost or market
valuation of loans held for sale.
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
PNC BANK CORP.
59
<PAGE> 31
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
managed through transactions with other dealers. These positions are recorded
at estimated fair value and changes in value are included in other income.
FOREIGN CURRENCY TRANSLATION The Corporation has foreign currency exposures for
loans and deposits denominated in foreign currencies. These exposures are
managed by entering into currency swaps and currency forward contracts. Assets
and liabilities denominated in foreign currencies are translated into U.S.
dollars at the balance sheet date exchange rate. Resulting gains or losses are
included in the results of operations. Derivatives designated as hedges are
accounted for using the deferral method of accounting. Derivatives not
qualifying for deferral accounting are marked to market.
INCOME TAXES Income taxes are accounted for under the liability method.
Deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
STOCK OPTIONS For stock options granted at exercise prices not less than the
fair market value of common stock on the date of grant, no compensation expense
is recognized.
EARNINGS PER COMMON SHARE Effective December 31, 1997, the Corporation adopted
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share." The provisions of SFAS No. 128 required replacement of the previously
reported primary and fully diluted earnings per share amounts with basic and
diluted earnings per share for all periods presented.
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 In December 1996, SFAS No. 127 "Deferral of
the Effective Date of Certain Provisions of FASB Statement No. 125" was issued.
This statement defers certain provision of SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities,"
related to repurchase agreements, securities lending and other similar
transactions until January 1, 1998.
SFAS No. 130, "Reporting Comprehensive Income," is effective for fiscal years
beginning after December 15, 1997. This Statement establishes standards for
reporting and display of comprehensive income and its components. Comprehensive
income includes net income and all other changes in shareholders' equity except
those resulting from investments and distributions to owners.
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.
These standards, when implemented, are not expected to materially impact the
reported financial position or results of operations of the Corporation.
NOTE 2 MERGERS AND ACQUISITIONS
On December 31, 1995, Midlantic Corporation ("Midlantic") merged with the
Corporation. Each share of Midlantic common stock outstanding was converted into
2.05 shares of the Corporation's common stock. The Corporation issued
approximately 112 million shares of common stock and cash in lieu of fractional
shares in connection with the merger. In connection with the merger, PNC Bank
recorded $260 million of special charges for integration and consolidation and
to realign the interest rate risk profile of the combined companies. The
transaction was accounted for as a pooling of interests.
NOTE 3 CASH FLOWS
For the statement of cash flows, cash and cash equivalents are defined as cash
and due from banks.
The following table sets forth information pertaining to acquisitions and
divestitures which affect cash flows.
<TABLE>
<CAPTION>
Year ended December 31 - in millions 1996 1995
- ----------------------------------------------------------
<S> <C> <C>
Assets acquired $538 $3,932
Liabilities assumed 501 3,230
Cash paid 37 661
Cash and due from banks received 497 710
==========================================================
</TABLE>
The Corporation did not have acquisition or divestiture activity which affected
1997 cash flows.
PNC BANK CORP.
60
<PAGE> 32
NOTE 4 SECURITIES AVAILABLE FOR SALE
<TABLE>
<CAPTION>
1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
Amortized Unrealized Fair Amortized Unrealized Fair
-------------- --------------
December 31 - 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 $1,102 $4 $1 $1,105 $3,238 $20 $21 $3,237
Mortgage-backed 4,672 4 53 4,623 6,301 13 138 6,176
Asset-backed 2,079 5 1 2,083 1,609 7 1 1,615
State and municipal 170 7 177 218 9 227
Other debt 34 1 33 100 7 2 105
--------------------------------------------------------------------------
Total debt securities 8,057 20 56 8,021 11,466 56 162 11,360
Corporate stocks and other 501 3 3 501 554 3 557
-------------------------------------------------------------------------
Total securities available for sale $8,558 $23 $59 $8,522 $12,020 $59 $162 $11,917
===========================================================================================================================
</TABLE>
At December 31, 1996, $5.5 billion notional value of interest rate caps were
designated to securities available for sale. These contracts matured during 1997
and no financial derivatives were designated to securities available for sale at
December 31, 1997.
The following table presents the amortized cost, fair value and
weighted-average yield of debt securities at December 31, 1997 by remaining
contractual maturity.
CONTRACTUAL MATURITY OF DEBT SECURITIES
<TABLE>
<CAPTION>
December 31, 1997 - Within 1 to 5 to After 10
dollars in millions 1 Year 5 Years 10 Years Years Total
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. Treasury and
government
agencies $96 $536 $467 $3 $1,102
Mortgage-backed 1 155 4,516 4,672
Asset-backed 125 80 1,874 2,079
State and
municipal 30 25 59 56 170
Other debt 2 7 10 15 34
-------------------------------------------------------------
Total $128 $694 $771 $6,464 $8,057
-------------------------------------------------------------
Fair value $128 $695 $774 $6,424 $8,021
Weighted-average
yield 6.52% 6.19% 6.37% 6.19% 6.22%
=====================================================================================
</TABLE>
Based on current interest rates and expected prepayment speeds, the
weighted-average expected maturity of mortgage-backed and asset-backed
securities was approximately 2 years and 6 months at December 31, 1997.
Weighted-average yields are based on historical cost with effective yields
weighted for the contractual maturity of each security.
The carrying value of securities pledged to secure public and trust deposits,
repurchase agreements and for other purposes at December 31, 1997 was $4.5
billion.
Information relating to security sales, including the effects of related
financial derivatives, is set forth in the following table:
<TABLE>
<CAPTION>
Year ended December 31 - Gross Gross
in millions Proceeds Gains Losses
- --------------------------------------------------------
<S> <C> <C> <C>
1997 $10,223 $59 $10
1996 6,789 39 17
1995 8,125 12 292
========================================================
</TABLE>
PNC BANK CORP.
61
<PAGE> 33
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 LOANS AND COMMITMENTS TO EXTEND CREDIT
Loans outstanding were as follows:
<TABLE>
<CAPTION>
December 31 - in millions 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Consumer $11,205 $12,092 $12,535 $11,013 $10,214
Credit card 3,830 2,776 1,004 838 726
Residential mortgage 12,785 12,703 11,689 9,746 8,611
Commercial 19,989 18,588 17,446 16,347 16,163
Commercial real estate 3,974 4,098 4,280 4,261 4,527
Other 2,874 1,926 2,102 2,223 2,231
- --------------------------------------------------------------------------------------------
Total loans 54,657 52,183 49,056 44,428 42,472
Unearned income (412) (385) (403) (385) (359)
- --------------------------------------------------------------------------------------------
Total loans, net of unearned income $54,245 $51,798 $48,653 $44,043 $42,113
============================================================================================
</TABLE>
In connection with the Corporation's alliance with AAA, credit card portfolios
totaling $1.6 billion and $178 million were purchased during 1996 and 1997,
respectively.
Loan outstandings and unfunded commitments are concentrated in PNC Bank's
primary geographic markets. At December 31, 1997, no specific industry
concentration exceeded 4% of total outstandings and unfunded commitments.
NET UNFUNDED COMMITMENTS
<TABLE>
<CAPTION>
December 31 - in millions 1997 1996
- --------------------------------------------------------
<S> <C> <C>
Consumer $3,363 $3,741
Credit card 16,385 13,505
Residential mortgage 2,144 511
Commercial 29,707 27,087
Commercial real estate 1,167 764
Other 1,019 849
-----------------
Total $53,785 $46,457
========================================================
</TABLE>
Commitments to extend credit represent arrangements to lend funds provided there
is no violation of specified contractual conditions. Commercial commitments are
reported net of participations, assignments and syndications, primarily to
financial institutions, totaling $5.9 billion and $4.4 billion at December 31,
1997 and 1996, respectively. Commitments generally have fixed expiration dates,
may require payment of a fee, and contain termination clauses in the event the
customer's credit quality deteriorates. Based on the Corporation's historical
experience, most commitments expire unfunded and therefore cash requirements are
substantially less than the total commitment.
Net outstanding letters of credit totaled $4.7 billion and $4.5 billion at
December 31, 1997 and 1996, respectively, and consist primarily of standby
letters of credit which commit the Corporation to make payments on behalf of
customers when certain specified future events occur. Such instruments are
typically issued to support industrial revenue bonds, commercial paper, and bid
or performance related contracts. At year-end 1997, the largest industry
concentration within standby letters of credit was health care, which accounted
for approximately 16% of the total. Maturities for standby letters of credit
ranged from 1998 to 2020.
At December 31, 1997, $1.8 billion of loans were pledged to secure borrowings
and for other purposes.
Certain directors and executive officers of the Corporation and its
subsidiaries, as well as certain affiliated companies of these directors and
officers, were customers of and had loans with subsidiary banks in the ordinary
course of business. All such loans were on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with other customers and did not involve more than a
normal risk of collectibility. The aggregate dollar amounts of these loans were
$95 million and $265 million at December 31, 1997 and 1996, respectively.
PNC BANK CORP.
62
<PAGE> 34
NOTE 6 NONPERFORMING ASSETS
The following table sets forth nonperforming assets and related information:
<TABLE>
<CAPTION>
December 31 - in millions 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $276 $347 $335 $496 $656
Restructured loans 2 23 69 200
---------------------------------------------
Total nonperforming loans 276 349 358 565 856
---------------------------------------------
Foreclosed assets 57 110 178 192 268
Assets held for accelerated disposition 10 158
---------------------------------------------
Total nonperforming assets $333 $459 $536 $767 $1,282
---------------------------------------------
Nonperforming loans to period-end loans .51% .67% .74% 1.28% 2.03%
Nonperforming assets to period-end loans, foreclosed assets and
assets held for accelerated disposition .61 .88 1.10 1.73 3.01
Nonperforming assets to total assets .44 .63 .73 .99 1.69
---------------------------------------------
Interest on nonperforming loans
Computed on original terms $31 $35 $36 $54 $74
Recognized 6 10 10 14 19
---------------------------------------------
Past due loans
Accruing loans past due 90 days and more $288 $244 $225 $175 $171
As a percentage of total loans, net of unearned income .53% .47% .46% .40% .41%
===========================================================================================================================
</TABLE>
The Corporation had no material commitments as of December 31, 1997 to extend
credit to customers whose outstanding loans are nonperforming.
At December 31, 1997 and 1996, foreclosed assets are reported net of
valuation allowances of $13 million and $19 million, respectively. Gains on
sales of foreclosed assets resulted in net foreclosed asset income of $160
thousand, $9 million and $11 million in 1997, 1996 and 1995, respectively. Net
foreclosed asset income or expense is included in other noninterest expense.
NOTE 7 ALLOWANCE FOR CREDIT LOSSES
Changes in the allowance for credit losses were as follows:
<TABLE>
<CAPTION>
In millions 1997 1996 1995
- ---------------------------------------------------------
<S> <C> <C> <C>
January 1 $1,166 $1,259 $1,352
Charge-offs (385) (247) (240)
Recoveries 113 83 107
----------------------------
Net charge-offs (272) (164) (133)
Provision for credit losses 70 6
Acquisitions 8 71 34
----------------------------
December 31 $972 $1,166 $1,259
- ---------------------------------------------------------
</TABLE>
Impaired loans totaled $228 million and $292 million at December 31, 1997 and
1996, respectively. Impaired loans totaling $151 million and $190 million at the
end of 1997 and 1996, respectively, had a corresponding specific allowance for
credit losses of $38 million and $53 million. The average balance of impaired
loans was $271 million in 1997, $313 million in 1996 and $365 million in 1995.
Interest income recognized on impaired loans totaled $2 million, $5 million and
$6 million in 1997, 1996 and 1995, respectively.
NOTE 8 PREMISES, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Premises, equipment and leasehold improvements, stated at cost less accumulated
depreciation and amortization, were as follows:
<TABLE>
<CAPTION>
December 31 - in millions 1997 1996
- --------------------------------------------------------
<S> <C> <C>
Land $95 $95
Buildings 504 518
Equipment 1,133 996
Leasehold improvements 172 172
----------------
1,904 1,781
Accumulated depreciation
and amortization (1,010) (916)
----------------
Net book value $894 $865
========================================================
</TABLE>
Depreciation and amortization expense on premises, equipment and leasehold
improvements totaled $148 million in 1997, $143 million in 1996 and $135 million
in 1995.
PNC BANK CORP.
63
<PAGE> 35
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Certain facilities and equipment are leased under agreements expiring at
various dates until the year 2025. Substantially all such leases are accounted
for as operating leases. Rental expense on such leases amounted to $88 million
in 1997, $90 million in 1996 and $95 million in 1995.
At December 31, 1997 and 1996, required minimum annual rentals due on
noncancelable leases having terms in excess of one year aggregated $629 million
and $436 million, respectively. Minimum annual rentals for each of the years
1998 through 2002 are $70 million, $74 million, $67 million, $60 million and $55
million, respectively.
NOTE 9 GOODWILL AND OTHER
Goodwill and other amortizable assets, net of amortization, consisted of the
following:
<TABLE>
<CAPTION>
December 31 - in millions 1997 1996
- --------------------------------------------------------
<S> <C> <C>
Goodwill $898 $953
Mortgage servicing rights 377 313
Purchased credit cards 320 322
Other 37 34
----------------
Total $1,632 $1,622
- --------------------------------------------------------
</TABLE>
At December 31, 1997, the fair value of capitalized mortgage servicing rights
("MSR") was $389 million.
Amortization of goodwill and other amortizable assets was as follows:
<TABLE>
<CAPTION>
Year ended December 31 -
in millions 1997 1996 1995
- ----------------------------------------------------------
<S> <C> <C> <C>
Goodwill $53 $54 $39
Mortgage servicing rights 81 56 71
Purchased credit cards 34 3
Other 6 4 5
-----------------------
Total $174 $117 $115
- ----------------------------------------------------------
</TABLE>
NOTE 10 DEPOSITS
The aggregate amount of time deposits with a denomination greater than $100,000
was $7.0 billion and $4.9 billion at December 31, 1997 and 1996, respectively.
Remaining contractual maturities of time deposits are $14.3 billion, $3.3
billion, $835 million, $351 million and $1.4 billion for the years 1998 through
2002 and thereafter, respectively.
NOTE 11 BORROWED FUNDS
Most bank notes mature in 1998 and have interest rates that range from 5.22% to
6.50%. Obligations to the Federal Home Loan Bank have maturities ranging from
1998 to 2017 and interest rates that range from 1.25% to 7.91%. Subordinated
notes totaling $55 million are convertible into common stock at a conversion
price of $23.41 per share. Senior and subordinated notes consisted of the
following:
<TABLE>
<CAPTION>
December 31, 1997 -
dollars in millions Stated Rate Maturity Outstanding
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Senior 4.93% to 9.25% 1998 to 2000 $170
Subordinated
Nonconvertible 6.125% to 10.55% 1998 to 2007 1,642
Convertible 8.25% 2008 to 2010 55
-------
Total $1,867
- -----------------------------------------------------------------------------
</TABLE>
Borrowed funds have scheduled repayments for the years 1998 through 2002 and
thereafter of $14.5 billion, $683 million, $60 million, $206 million and $4.2
billion, respectively.
NOTE 12 CAPITAL SECURITIES OF
SUBSIDIARY TRUSTS
Mandatorily Redeemable Capital Securities of Subsidiary Trusts ("Capital
Securities") include preferred beneficial interests in the assets of PNC
Institutional Capital Trust A ("Trust A") and PNC Institutional Capital Trust B
("Trust B"). Trust A, formed in December 1996, holds $350 million aggregate
principal amount of certain 7.95% junior subordinated debentures, issued by PNC
Bank, N.A., a subsidiary of the Corporation, due December 15, 2026. Trust B,
formed in May 1997, holds $300 million aggregate principal amount of certain
8.315% junior subordinated debentures due May 15, 2027, issued by the
Corporation. Cash distributions on the Capital Securities are made to the extent
interest on the debentures is received by the Trusts. In the event of certain
changes or amendments to regulatory requirements or federal tax rules, the
Capital Securities are redeemable in whole. Otherwise, Trust A Capital
Securities are generally redeemable in whole or in part after December 15, 2006
at a declining redemption price ranging from 103.975% to 100% of par on or after
December 15, 2016. Trust B Capital Securities are generally redeemable in whole
or in part after May 15, 2017 at a declining redemption price ranging from
104.175% to 100% of par on or after May 15, 2017.
PNC BANK CORP.
64
<PAGE> 36
NOTE 13 SHAREHOLDERS' EQUITY
Information related to preferred stock is as follows:
<TABLE>
<CAPTION>
Shares Outstanding
Liquidation ------------------
December 31 Value per Share 1997 1996
- ---------------------------------------------------------
<S> <C> <C> <C>
Authorized
$1 par value 17,393,707 17,452,764
Issued and outstanding
Series A $40 15,364 16,479
Series B 40 4,384 4,667
Series C 20 304,939 327,013
Series D 20 406,220 441,805
Series F 50 6,000,000 6,000,000
-----------------------
Total 6,730,907 6,789,964
- --------------------------------------------------------
</TABLE>
Series A through D are cumulative and, except for Series B, are redeemable at
the option of the Corporation. Annual dividends on Series A, B and D preferred
stock total $1.80 per share and Series C preferred stock total $1.60 per share.
Holders of Series A through D preferred stock are entitled to a number of votes
equal to the number of full shares of common stock into which such preferred
stock is convertible. Series A through D preferred stock have the following
conversion privileges: (i) one share of Series A or Series B is convertible into
eight shares of common stock; and (ii) 2.4 shares of Series C or Series D are
convertible into four shares of common stock.
The Series F preferred stock is nonconvertible and nonvoting. Noncumulative
dividends are payable quarterly through September 30, 2001 at a rate of 6.05%.
Thereafter, the dividend rate will be indexed to certain market indices;
however, the rate paid will not be less than 6.55% or greater than 12.55%. The
Series F preferred stock is redeemable in whole until September 29, 2001 in the
event of certain amendments to the Internal Revenue Code relating to the
dividend received deduction at a declining redemption price from $52.50 to
$50.50 per share. After September 29, 2001, the Series F preferred stock may be
redeemed, in whole or in part, at $50 per share.
PNC Bank has a dividend reinvestment and stock purchase plan. Holders of
preferred stock and common stock may participate in the plan which provides that
additional shares of common stock may be purchased at market value with
reinvested dividends and voluntary cash payments. Common shares purchased
pursuant to this plan were: 765,760 shares in 1997; 1,097,597 shares in 1996;
and 1,177,481 shares in 1995.
The Corporation had reserved approximately 26.6 million common shares to be
issued in connection with certain stock plans and the conversion of certain debt
and equity securities.
The following table sets forth purchases and issuances of common stock held
in treasury.
TREASURY STOCK ACTIVITY
<TABLE>
<CAPTION>
Shares in thousands, dollars in millions Shares Amount
- ----------------------------------------------------------
<S> <C> <C>
January 1, 1995 2,815 $65
Shares purchased 10,252 236
Shares issued (5,578) (117)
Midlantic merger (7,489) (184)
----------------
December 31, 1995 -- --
Shares purchased 22,731 802
Shares issued (1,695) (51)
----------------
December 31, 1996 21,036 751
Shares purchased 29,323 1,303
Shares issued (2,341) (70)
----------------
December 31, 1997 48,018 $1,984
- ----------------------------------------------------------
</TABLE>
NOTE 14 REGULATORY MATTERS
The Corporation is subject to the regulations of certain federal and state
agencies and undergoes periodic examinations by such regulatory authorities.
Neither the Corporation nor any of its subsidiaries is subject to written
regulatory agreements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Corporation must meet specific capital guidelines that
involve quantitative measures of assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices.
Failure to meet minimum capital requirements can initiate certain mandatory and
possibly additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on PNC Bank's financial position. The
Corporation's capital amounts and classification are also subject to qualitative
judgments by regulatory agencies about components, risk weightings, and other
factors.
PNC BANK CORP.
65
<PAGE> 37
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth regulatory capital ratios for PNC Bank and the
Corporation's only significant bank subsidiary, PNC Bank, N.A.
REGULATORY CAPITAL
<TABLE>
<CAPTION>
Amount Ratios
December 31 - ----------------------------------
dollars in millions 1997 1996 1997 1996
- ---------------------------------------------------------
<S> <C> <C> <C> <C>
Risk-based capital
Tier I
PNC Bank Corp. $5,108 $5,283 7.43% 8.29%
PNC Bank, N.A. 4,865 3,848 7.53 7.52
Total
PNC Bank Corp. 7,635 7,427 11.11 11.65
PNC Bank, N.A. 6,786 5,343 10.50 10.44
Leverage
PNC Bank Corp. 5,108 5,283 7.30 7.70
PNC Bank, N.A. 4,865 3,848 7.45 7.09
- -------------------------------------------------------------
</TABLE>
Regulatory quantitative measures to ensure capital adequacy require the
Corporation to maintain minimum ratios of Tier I and total capital to
risk-weighted assets of 4% and 8%, respectively, and Tier I capital to average
assets (leverage) of 3%. To qualify as well capitalized, regulators require
capital ratios of 6% for Tier I, 10% for total risk-based and 5% for leverage.
As of the most recent notification from federal regulators, the Corporation and
each of its bank subsidiaries met the well capitalized ratio requirements under
the regulatory framework for prompt corrective action. There are no conditions
or events since that notification that management believes would change the
Corporation's category.
Dividends that may be paid by subsidiary banks to the parent company are
subject to certain legal limitations and also may be impacted by capital needs,
regulatory requirements, corporate policies, contractual restrictions and other
factors. Without regulatory approval, the amount available for payment of
dividends by all subsidiary banks was $237 million at December 31, 1997.
Under federal law, generally no bank subsidiary may extend credit to the
parent company or its nonbank subsidiaries on terms and under circumstances
which are not substantially the same as comparable extensions of credit to
nonaffiliates. No extension of credit may be made to the parent company or a
nonbank subsidiary which is in excess of 10% of the capital stock and surplus of
such bank subsidiary or in excess of 20% of the capital and surplus of such bank
subsidiary as to aggregate extensions of credit to the parent company and its
subsidiaries. In certain circumstances, federal regulatory authorities may
impose more restrictive limitations. Such extensions of credit, with limited
exceptions, must be fully collateralized. The maximum amount available under
statutory limitations for transfer from subsidiary banks to the parent company
in the form of loans and dividends approximated 17% of consolidated net assets
at December 31, 1997.
Federal Reserve Board regulations require depository institutions to maintain
cash reserves with the Federal Reserve Bank. During 1997, subsidiary banks
maintained reserves which averaged $208 million.
NOTE 15 FINANCIAL DERIVATIVES
FAIR VALUE OF FINANCIAL DERIVATIVES
<TABLE>
<CAPTION>
Positive Negative Total
Notional Fair Notional Fair Notional
December 31 - in millions Value Value Value Value Value
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997
Interest rate swaps $4,849 $106 $930 $(10) $5,779
Interest rate caps 542 4 542
Interest rate floors 3,500 6 145 (1) 3,645
Mortgage banking activities 1,470 26 2,987 (6) 4,457
----------------------------------------------
Total $10,361 $142 $4,062 $(17) $14,423
- -----------------------------------------------------------------------------------
1996
Interest rate swaps $7,290 $112 $650 $(15) $ 7,940
Interest rate caps 5,813 2 5,813
Interest rate floors 2,500 3 2,500
Mortgage banking activities 1,853 10 486 (1) 2,339
----------------------------------------------
Total $17,456 $127 $1,136 $(16) $18,592
- -----------------------------------------------------------------------------------
</TABLE>
PNC BANK CORP.
66
<PAGE> 38
The Corporation uses a variety of off-balance-sheet financial derivatives as
part of its overall interest rate risk management process and to manage risk
associated with mortgage banking activities. Financial derivatives involve, to
varying degrees, interest rate and credit risk in excess of the amount
recognized in the balance sheet but less than the notional amount of the
contract. For interest rate swaps and purchased interest rate caps and floors,
only periodic cash payments and, with respect to such caps and floors, premiums,
are exchanged. Therefore, cash requirements and exposure to credit risk are
significantly less than the notional value. The Corporation manages these risks
as part of its asset/liability management process and through credit policies
and procedures. The Corporation seeks to minimize the credit risk by entering
into transactions with only a select number of high-quality institutions,
establishing credit limits, requiring bilateral-netting agreements, and, in
certain instances, segregated collateral.
The Corporation uses interest rate swaps and purchased caps and floors to
modify the interest rate characteristics of designated interest-bearing assets
or liabilities from fixed to variable, variable to fixed, or one variable index
to another. At December 31, 1997, $7.8 billion of interest rate swaps, caps and
floors were designated to loans. No financial derivatives were designated to
securities available for sale at December 31, 1997. During 1997, derivative
contracts modified the average effective yield on interest-earning assets from
7.96% to 7.93%. At December 31, 1997, $1.8 billion of interest rate swaps were
designated to interest-bearing liabilities. During 1997, derivative contracts
modified the average rate on interest-bearing liabilities from 4.79% to 4.78%.
PNC Bank uses a combination of on-balance-sheet instruments and financial
derivatives to manage risk associated with its mortgage banking activities. The
inherent risk affecting the value of MSR is the potential for the related
mortgages to prepay, thereby eliminating the underlying servicing fee income
stream. Generally, derivatives used to hedge the value of MSR have been marked
to market and included in trading gains or losses.
Forward contracts are used to manage risk positions associated with mortgage
origination activities. Substantially all forward contracts mature within 90
days of origination. Forward contracts are traded in over-the-counter markets
and do not have standardized terms. Counterparties to the Corporation's forward
contracts are primarily U.S. government agencies and brokers and dealers in
mortgage-backed securities. In the event the counterparty is unable to meet its
contractual obligations, the Corporation may be exposed to selling or purchasing
mortgage loans at prevailing market prices.
At December 31, 1997 and 1996, the Corporation's exposure to credit losses
with respect to financial derivatives was not material.
CUSTOMER-RELATED DERIVATIVES The following schedule sets forth information
relating to positions associated with customer-related derivatives.
<TABLE>
<CAPTION>
Positive Negative
Notional Fair Fair Net Asset
December 31, 1997 - in millions Value Value Value (Liability)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest rate
Swaps $3,518 $15 $(14) $1
Caps/floors
Sold 1,340 (4) (4)
Purchased 1,215 4 4
Foreign exchange 1,700 23 (23)
Other 734 1 (1)
------------------------------------------------
Total $8,507 $43 $(42) $1
- --------------------------------------------------------------------------------
</TABLE>
NOTE 16 EMPLOYEE BENEFIT PLANS
INCENTIVE SAVINGS PLANS The Corporation sponsors incentive savings plans
covering substantially all employees. Under the plans, employee contributions up
to 6% of bi-weekly compensation, as defined in the plans, subject to Internal
Revenue Code limitations, are matched with cash or shares of PNC Bank common
stock. Contributions to the plans are matched primarily by shares of PNC Bank
common stock held by the Corporation's ESOP.
The Corporation makes annual contributions to the ESOP equal to the debt
service requirements on the ESOP borrowing less dividends received by the ESOP.
All dividends received by the ESOP are used to pay debt service. Dividends used
for debt service totaled $10 million in each of the years 1997, 1996 and 1995.
To satisfy additional debt service requirements, PNC Bank contributed $13
million in 1997, $11 million in 1996 and $9 million in 1995.
PNC BANK CORP.
67
<PAGE> 39
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
As the ESOP borrowing is repaid, shares are allocated to employees who made
contributions during the year based on the proportion of annual debt service to
total debt service. The Corporation includes all ESOP shares as common shares
outstanding in the earnings per share computation. Components of ESOP shares
are:
<TABLE>
<CAPTION>
As of or for the year ended
December 31 - in thousands 1997 1996
- --------------------------------------------------------
<S> <C> <C>
Shares
Unallocated 2,237 3,184
Allocated 3,413 3,057
Released for allocation 947 851
Retired (458) (495)
-----------------
Total 6,139 6,597
- --------------------------------------------------------
</TABLE>
Compensation expense related to the portion of contributions matched with ESOP
shares is determined based on the number of ESOP shares allocated. Compensation
expense related to these plans was $11 million for 1997, $9 million for 1996 and
$18 million for 1995.
PENSION PLANS The Corporation has a noncontributory, defined benefit pension
plan covering substantially all employees. Retirement benefits are based on
salary levels and length of service. Pension contributions are based on an
actuarially determined amount necessary to fund total benefits payable to
plan participants.
The following table sets forth the estimated status of the defined benefit
plan:
<TABLE>
<CAPTION>
December 31 - in millions 1997 1996
- ----------------------------------------------------------------------------------
<S> <C> <C>
Benefit obligation
Vested $618 $545
Nonvested 18 19
------------------
Accumulated benefit obligation 636 564
Effect of future compensation levels 118 113
------------------
Projected benefit obligation for
services rendered to date 754 677
Plan assets at fair value, primarily listed
common stocks, U.S. government and
agency securities, and collective funds 773 713
------------------
Plan assets in excess of projected benefit obligation (19) (36)
Unrecognized net gain due to experience
different from assumptions and the effects
of changes in assumptions 25 26
Unrecognized net asset 16 23
Unrecognized prior service cost (6) (8)
------------------
Accrued pension cost $16 $5
- ----------------------------------------------------------------------------------
</TABLE>
The components of net periodic pension cost were as follows:
<TABLE>
<CAPTION>
Year ended December 31 - in millions 1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost for benefits earned
during the period $29 $30 $23
Interest cost on projected benefit
obligations 53 46 45
Actual return on plan assets (117) (93) (112)
Net amortization and deferral 46 27 58
-----------------------------
Net periodic pension costs $11 $10 $14
- -------------------------------------------------------------------------------
</TABLE>
Assumptions used to measure the projected benefit obligation and the expected
return on assets included in net periodic pension costs are set forth in the
following table.
<TABLE>
<CAPTION>
Year ended December 31 1997 1996 1995
- -----------------------------------------------------------------
<S> <C> <C> <C>
Discount rate 7.20% 7.70% 7.15%
Increase in compensation levels 4.50 4.75 4.75
Expected long-term return on assets 9.50 9.50 9.50
- -----------------------------------------------------------------
</TABLE>
The Corporation also maintains nonqualified supplemental retirement plans for
certain employees. All retirement benefits provided under these plans are
unfunded and any payments to plan participants are made by the Corporation. At
December 31, 1997 and 1996 approximately $32 million and $27 million,
respectively, were included in other liabilities. Benefit expense related to
these plans was $8 million for 1997, $8 million for 1996 and $6 million for
1995.
POSTRETIREMENT BENEFIT PLANS The Corporation also provides certain health care
and life insurance benefits for retired employees ("postretirement benefits")
through various plans. A reconciliation of the accrued postretirement benefit
obligation is as follows:
<TABLE>
<CAPTION>
December 31 - in millions 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Accumulated postretirement benefit
Retirees $162 $160
Active employees 6 6
Other active plan participants 45 45
------------------
Total accumulated postretirement obligation 213 211
Unrecognized prior service cost credit 49 56
Unrecognized net loss (12) (16)
------------------
Accrued postretirement benefit obligation $250 $251
- --------------------------------------------------------------------------------
</TABLE>
PNC BANK CORP.
68
<PAGE> 40
The components of postretirement benefit expense are as follows:
<TABLE>
<CAPTION>
Year ended December 31 - in millions 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost for benefits earned
during the period $2 $3 $3
Interest cost on projected benefit
obligations 16 14 15
Amortization of prior service cost (4) (4) (4)
-----------------------------
Net postretirement benefit expense $14 $13 $14
- --------------------------------------------------------------------------------
</TABLE>
Assumptions used in accounting for the postretirement benefit plans were:
<TABLE>
<CAPTION>
December 31 1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate 7.20% 7.70% 7.15%
Expected health care cost trend rate
Medical 6.50 7.00 7.50
Dental 6.20 6.60 7.00
- -------------------------------------------------------------------------------
</TABLE>
The health care cost trend rate declines until it stabilizes at 4.7% beginning
in 2001. A one percent increase in the health care cost trend rate from that
assumed would not have a material impact on projected service and interest costs
or the accumulated postretirement obligation.
NOTE 17 STOCK-BASED COMPENSATION PLANS
The Corporation has a senior executive long-term incentive award plan
("Incentive Plan") that provides for the granting of incentive stock options,
nonqualified options, stock appreciation rights ("SAR"), performance units and
incentive shares. In any given year, the number of shares of common stock
available for grant under the Incentive Plan may range from 1.5% to 3% of total
issued shares of common stock determined at the end of the preceding calendar
year.
STOCK OPTIONS Options are granted at exercise prices not less than the market
value of common stock on the date of grant and are exercisable twelve months
after the grant date. Payment of the option price may be in cash or shares of
common stock at market value on the exercise date. The following table presents
stock option data related to the Incentive Plan, a similar predecessor plan and
other plans assumed in certain mergers.
<TABLE>
<CAPTION>
Per Option
---------------------------------
Weighted-
Average
Shares in thousands Exercise Price Exercise Price Shares
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
January 1, 1995 $1.59 - $30.13 $ 18.14 16,586
Granted 16.46 - 29.06 25.25 127
Exercised 1.59 - 29.25 13.20 (2,996)
Terminated 6.10 - 30.13 20.97 (420)
Options exchanged
for stock -
Midlantic merger 8.33 (3,457)
--------
December 31, 1995 11.38 - 29.88 23.00 9,840
Granted 31.13 - 37.31 31.23 2,697
Exercised 11.38 - 29.25 21.05 (3,258)
SAR exercised 19.13 (7)
Terminated 21.75 - 31.13 27.75 (242)
---------
December 31, 1996 11.38 - 37.31 26.03 9,030
Granted 43.31 - 43.75 43.75 2,912
Exercised 11.38 - 31.13 24.10 (2,969)
SAR exercised 17.13 (4)
Terminated 21.75 - 43.75 41.32 (178)
---------
December 31, 1997 11.38 - 43.75 32.25 8,791
- ---------------------------------------------------------------------------------
</TABLE>
At December 31, 1997, the weighted-average remaining contractual life of
outstanding options was 7 years, 3 months and options for 6,023,474 shares of
common stock were exercisable at a weighted-average price of $26.97 per share.
The grant-date fair value of options granted in 1997 was $9.24 per option.
Shares of common stock available for the granting of options under the Incentive
Plan and the predecessor plans were: 9,012,899 at December 31, 1997, 9,723,541
at December 31, 1996, and 10,314,610 at December 31, 1995.
INCENTIVE SHARE AWARDS In 1997 and 1995, 313,000 and 323,000 incentive shares
of common stock, respectively, were granted to certain senior executives
pursuant to the Incentive Plan. Issuance of such incentive shares is subject to
the market price of PNC Bank's common stock equaling or exceeding specified
levels for defined periods. At December 31, 1997 the shares granted in 1997 had
not met the specified levels required for issuance. The requirements for the
shares granted in 1995 were met on September 16, 1996 and November 4, 1996, and
302,700 shares of restricted common stock were issued. The restricted period
ends two years after the issue date. During the restricted period the recipient
receives dividends and can vote the shares. If the recipient leaves the
Corporation within the restricted period, the shares will be forfeited.
Forfeitures totaled 20,300 shares through December 31, 1997. Compensation
expense recognized for incentive share awards was $6 million, $3 million and $1
million in 1997, 1996 and 1995, respectively.
PNC BANK CORP.
69
<PAGE> 41
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
EMPLOYEE STOCK PURCHASE PLAN The Corporation's employee stock purchase plan
("ESPP") has approximately 4.2 million shares available for issuance. Persons
who have been continuously employed for at least one year are eligible to
participate. Participants purchase the Corporation's common stock at 85% of the
lesser of fair market value on the first or last day of each offering period. No
charge to earnings is recorded with respect to the ESPP. Shares issued pursuant
to the ESPP were as follows:
<TABLE>
<CAPTION>
Year ended December 31 Shares Price Per Share
- -----------------------------------------------------------------------
<S> <C> <C>
1997 367,494 $33.15 and $35.49
1996 389,738 25.29 and 25.82
1995 463,907 17.32 and 22.95
- ------------------------------------------------------------------------
</TABLE>
The following table sets forth pro forma net income and earnings per share as if
compensation expense was recognized for stock options and the ESPP.
PRO FORMA NET INCOME AND EPS
<TABLE>
<CAPTION>
Pro
Year ended December 31 Reported forma
- -----------------------------------------------------------
<S> <C> <C>
Net income (in millions)
1997 $1,052 $1,035
1996 992 980
1995 408 407
Diluted earnings per share
1997 $3.28 $3.23
1996 2.88 2.84
1995 1.19 1.19
- ------------------------------------------------------------
</TABLE>
For purposes of computing pro forma results PNC Bank estimated the fair value of
stock options and ESPP shares using the Black-Scholes option pricing model.
Black-Scholes is predominantly used to value traded options which differ from
PNC Bank's options. The model requires the use of numerous assumptions, many of
which are highly subjective in nature. Therefore, the pro forma results are
estimates of results of operations as if compensation expense had been
recognized for all stock-based compensation plans and are not indicative of the
impact on future periods. The following assumptions were used in the option
pricing model for purposes of estimating pro forma results. The dividend yield
represents average yields over the previous three-year period.
<TABLE>
<CAPTION>
Year ended December 31 1997 1996 1995
- -------------------------------------------------------------
<S> <C> <C> <C>
Risk-free interest rate 6.2% 5.3% 6.4%
Dividend yield 4.9 4.7 4.3
Volatility 27.6 32.1 32.3
Expected life 6 yrs. 6 yrs. 6 yrs.
- ---------------------------------------------------------------
</TABLE>
NOTE 18 INCOME TAXES
The components of income taxes were as follows:
<TABLE>
<CAPTION>
Year ended December 31 - in millions 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Current
Federal $380 $297 $ 77
State 53 48 14
----------------------------------
Total current 433 345 91
Deferred
Federal 126 172 84
State 7 18 44
----------------------------------
Total deferred 133 190 128
----------------------------------
Total $566 $535 $219
- --------------------------------------------------------------------------------
</TABLE>
Significant components of deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
December 31 - in millions 1997 1996
- ----------------------------------------------------------
<S> <C> <C>
Deferred tax assets
Allowance for credit losses $336 $382
Compensation and benefits 134 120
Net unrealized securities losses 12 38
Other 28 88
------------------
Total deferred tax assets 510 628
Deferred tax liabilities
Leasing 284 247
Depreciation 37 45
Other 112 100
------------------
Total deferred tax liabilities 433 392
------------------
Net deferred tax asset $77 $236
- ----------------------------------------------------------
</TABLE>
A reconciliation between the statutory and effective tax rates follows:
<TABLE>
<CAPTION>
Year ended December 31 1997 1996 1995
- ----------------------------------------------------------------
<S> <C> <C> <C>
Statutory tax rate 35.0% 35.0% 35.0%
Increases (decreases) resulting from
State taxes 2.4 2.8 6.0
Tax-exempt interest (1.1) (1.7) (4.5)
Goodwill .8 .9 1.7
Other (2.1) (2.0) (3.3)
----------------------------
Effective tax rate 35.0% 35.0% 34.9%
- -----------------------------------------------------------------
</TABLE>
PNC BANK CORP.
70
<PAGE> 42
NOTE 19 EARNINGS PER SHARE
The following table sets forth basic and diluted earnings per share
calculations.
<TABLE>
<CAPTION>
Year ended December 31 - in thousands, except per share data 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CALCULATION OF BASIC EARNINGS PER COMMON SHARE
Net income $1,052,468 $992,226 $408,060
Less: Preferred dividends declared 19,457 5,480 3,327
-------------------------------------
Net income applicable to basic earnings per common share $1,033,011 $986,746 $404,733
-------------------------------------
Basic weighted-average common shares outstanding 310,147 338,568 336,455
-------------------------------------
Basic Earnings Per Common Share $3.33 $2.91 $1.20
-------------------------------------
CALCULATION OF DILUTED EARNINGS PER COMMON SHARE
Net income $1,052,468 $992,226 $408,060
Add: Interest expense on convertible debentures (net of tax) 3,006 3,416 3,842
Less: Dividends declared on nonconvertible preferred stock 18,150 4,084 1,813
-------------------------------------
Net income applicable to diluted earnings per common share $1,037,324 $991,558 $410,089
-------------------------------------
Basic weighted-average common shares outstanding 310,147 338,568 336,455
Weighted-average common shares to be issued using average
market price and assuming:
Conversion of preferred stock Series A and B 163 173 198
Conversion of preferred stock Series C and D 1,237 1,321 1,431
Conversion of debentures 2,449 2,790 3,105
Exercise of stock options 1,914 1,610 2,679
Incentive share awards 311 114
-------------------------------------
Diluted weighted-average common shares outstanding 316,221 344,576 343,868
-------------------------------------
Diluted Earnings Per Common Share $3.28 $2.88 $1.19
=============================================================================================================
</TABLE>
NOTE 20 LITIGATION
A consolidated class action complaint is pending against the Corporation and
certain officers, alleging violations of federal securities laws and common law
relating to disclosures and seeking, among other things, unquantified damages on
behalf of purchasers of the Corporation's securities during specified portions
of 1994. The parties have reached an agreement in principle to settle this
action, which is subject to documentation and court approval. The proposed
settlement will not have a material impact on the Corporation's financial
position or results of operations.
The Corporation, in the normal course of business, is subject to various
other pending and threatened lawsuits in which claims for monetary damages are
asserted. Management, after consultation with legal counsel, does not anticipate
the ultimate aggregate liability, if any, arising out of such other lawsuits
will have a material adverse effect on the Corporation's financial position. At
the present time, management is not in a position to determine whether any such
pending or threatened litigation will have a material adverse effect on the
Corporation's results of operations in any future reporting period.
NOTE 21 OTHER FINANCIAL INFORMATION
Summarized financial information of the parent company is as follows:
PARENT COMPANY ONLY
BALANCE SHEET
<TABLE>
<CAPTION>
December 31 - in millions 1997 1996
- ----------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $1 $4
Securities available for sale 68 602
Investments in
Bank subsidiaries 6,192 6,078
Nonbank subsidiaries 386 276
Advances to subsidiary banks 8 9
Other assets 133 118
------------------
Total assets $6,788 $7,087
------------------
LIABILITIES
Borrowed funds $355 $363
Nonbank affiliate borrowings 738 332
Accrued expenses and other liabilities 311 523
------------------
Total liabilities 1,404 1,218
------------------
SHAREHOLDERS' EQUITY 5,384 5,869
------------------
Total liabilities and shareholders' equity $6,788 $7,087
=================================================================================
</TABLE>
PNC BANK CORP.
71
<PAGE> 43
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Borrowed funds have scheduled repayments of $200 million in 1999, $100 million
in 2001 and $55 million thereafter.
Commercial paper and all other debt issued by PNC Funding Corp., a
wholly-owned subsidiary, is guaranteed by the parent company. In addition, in
connection with certain affiliates' mortgage servicing operations, the parent
company has committed to maintain such affiliates' net worth above minimum
requirements.
PARENT COMPANY ONLY
STATEMENT OF INCOME
<TABLE>
<CAPTION>
Year ended December 31 -
in millions 1997 1996 1995
- --------------------------------------------------------
<S> <C> <C> <C>
OPERATING REVENUE
Dividends from
Bank subsidiaries $852 $924 $447
Nonbank subsidiaries 9 32 25
Interest income 14 7 4
Other income 2 1
------------------------
Total operating revenue 877 964 476
------------------------
OPERATING EXPENSE
Interest expense 76 56 73
Other expense 11 38 33
------------------------
Total operating expense 87 94 106
------------------------
Income before income taxes and
equity in undistributed net
income of subsidiaries 790 870 370
Income tax benefits (32) (30) (35)
-------------------------
Income before equity in
undistributed net income
of subsidiaries 822 900 405
Net equity in undistributed
net income (excess dividends)
Bank subsidiaries 144 63 (19)
Nonbank subsidiaries 86 29 22
-------------------------
Net income $1,052 $992 $408
- --------------------------------------------------------
</TABLE>
PARENT COMPANY ONLY
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31 - in millions 1997 1996 1995
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $1,052 $992 $408
Adjustments to reconcile net
income to net cash provided
by operating activities
Equity in undistributed net
earnings of subsidiaries (230) (92) (3)
Other 19 (6) 10
-----------------------------------
Net cash provided by
operating activities 841 894 415
-----------------------------------
INVESTING ACTIVITIES
Net change in interest-earning
deposits with subsidiary bank 1 (1) 4
Net capital returned from subsidiaries 57 657 594
Securities available for sale
Sales 3,321 1,296 646
Purchases (2,787) (1,850) (586)
Cash paid in acquisitions (527)
Other (8) (2)
-----------------------------------
Net cash provided by
investing activities 584 102 129
----------------------------------
FINANCING ACTIVITIES
Borrowings from nonbank subsidiary 656 275
Repayments on borrowings from
nonbank subsidiary (222) (353) (239)
Redemption of preferred stock (50)
Acquisition of treasury stock (1,532) (569) (236)
Cash dividends paid to shareholders (488) (488) (387)
Issuance of stock 155 416 88
Other 3
------------------------------------
Net cash used by
financing activities (1,428) (994) (549)
----------------------------------
Increase (decrease) in cash and
due from banks (3) 2 (5)
Cash and due from banks at
beginning of year 4 2 7
----------------------------------
Cash and due from banks at
end of year $1 $4 $2
- ---------------------------------------------------------------------------------
</TABLE>
During 1997, 1996 and 1995, the parent company received income tax refunds of
$35 million, $39 million and $20 million, respectively. Such refunds represent
the parent company's portion of consolidated income taxes. During 1997, 1996 and
1995, the parent company paid interest expense of $65 million, $60 million and
$68 million, respectively.
PNC BANK CORP.
72
<PAGE> 44
In connection with the Midlantic merger, borrowed funds of Midlantic in the
aggregate principal amount of $355 million at December 31, 1997 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
<TABLE>
<CAPTION>
December 31 - in millions 1997 1996
- --------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $4,302 $4,022
Securities 8,276 11,210
Loans, net of unearned income 54,126 51,736
Allowance for credit losses (971) (1,166)
-----------------
Net loans 53,155 50,570
Other assets 8,144 5,988
-----------------
Total assets $73,877 $71,790
LIABILITIES
Deposits $47,766 $46,290
Borrowed funds 18,437 18,077
Other liabilities 1,145 1,014
-----------------
Total liabilities 67,348 65,381
Mandatorily redeemable capital
securities of subsidiary trust 350 350
SHAREHOLDERS' EQUITY 6,179 6,059
-----------------
Total liabilities, capital securities
and shareholders' equity $73,877 $71,790
- --------------------------------------------------------
</TABLE>
PNC BANCORP, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Year ended December 31 -
in millions 1997 1996 1995
- ----------------------------------------------------------
<S> <C> <C> <C>
Interest income $5,005 $4,903 $5,117
Interest expense 2,466 2,404 2,941
----------------------------
Provision for credit losses 70 20
----------------------------
Net interest income less
provision for
credit losses 2,469 2,499 2,156
Noninterest income 1,596 1,249 871
Noninterest expense 2,520 2,230 2,409
----------------------------
Income before income taxes 1,545 1,518 618
Income taxes 556 539 217
----------------------------
Net income $989 $979 $401
- ----------------------------------------------------------
</TABLE>
NOTE 22 UNUSED LINE OF CREDIT
At December 31, 1997, the Corporation maintained a line of credit in the amount
of $500 million, none of which was drawn. This line is available for general
corporate purposes and expires in 2000.
NOTE 23 FAIR VALUE OF FINANCIAL INSTRUMENTS
<TABLE>
<CAPTION>
1997 1996
--------------------------------------------------------
Carrying Fair Carrying Fair
December 31 - in millions Amount Value Amount Value
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Cash and short-term assets $6,346 $6,346 $ 5,412 $ 5,412
Securities available for sale 8,522 8,522 11,917 11,917
Loans held for sale 2,324 2,324 941 941
Net loans (excludes leases) 51,409 52,983 49,281 50,212
LIABILITIES
Demand deposits 27,478 27,478 27,030 27,030
Time deposits 20,171 20,236 18,646 18,654
Borrowed funds 19,913 20,061 19,912 19,970
OFF-BALANCE-SHEET
Commitments to
extend credit (14) (14) (14) (14)
Letters of credit (9) (9) (4) (4)
Financial derivatives used for
Interest rate risk
management 59 105 81 102
Mortgage banking
activities 26 20 11 9
Customer-related derivatives 1 1
- ----------------------------------------------------------------------------------------------------
</TABLE>
Real and personal property, lease financings, loan customer relationships,
deposit customer intangibles, retail branch networks, fee-based businesses, such
as asset management, mortgage banking and brokerage, trademarks and brand names
are excluded from the amounts set forth above. Accordingly, the aggregate fair
value amounts presented do not represent the underlying value of the
Corporation.
Fair value is defined as the estimated amount at which a financial instrument
could be exchanged in a current transaction between willing parties, or other
than in a forced or liquidation sale. However, it is not management's intention
to immediately dispose of a significant portion of such financial instruments,
and unrealized gains or losses should not be interpreted as a forecast of future
earnings and cash flows. The derived fair values are subjective in nature,
involve uncertainties and matters of significant judgment and, therefore, cannot
be determined with precision. Changes in assumptions could significantly
impact the derived fair value estimates.
PNC BANK CORP.
73
<PAGE> 45
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
The following methods and assumptions were used in estimating fair value
amounts for financial instruments.
GENERAL For short-term financial instruments realizable in three months or
less, the carrying amount reported in the consolidated balance sheet
approximates fair value. Unless otherwise stated, the rates used in discounted
cash flow analyses are based on market yield curves.
CASH AND SHORT-TERM ASSETS The carrying amounts reported in the consolidated
balance sheet for cash and short-term investments approximate those assets' fair
values primarily due to their short-term nature. For purposes of this disclosure
only, short-term assets include due from banks, interest-earning deposits with
banks, federal funds sold and resale agreements, trading securities, customer's
acceptance liability and accrued interest receivable.
SECURITIES The fair value of securities available for sale are based on quoted
market prices, where available. If quoted market prices are not available, fair
value is estimated using the quoted market prices of comparable instruments.
NET LOANS AND LOANS HELD FOR SALE Fair values are estimated based on the
discounted value of expected net cash flows incorporating assumptions about
prepayment rates, credit losses and servicing fees and costs. For credit cards
and revolving home equity loans, this fair value does not include any amount for
new loans or the related fees that will be generated from the existing customer
relationships. In the case of nonaccrual loans, scheduled cash flows exclude
interest payments. For purposes of this disclosure only, the carrying value of
loans held for sale approximates fair value.
DEPOSITS The carrying amounts of noninterest-bearing demand and
interest-bearing, money market and savings deposits approximate fair values. For
time deposits, fair values are estimated based on the discounted value of
expected net cash flows taking into account current interest rates.
BORROWED FUNDS The carrying amounts of federal funds purchased, commercial
paper, acceptances outstanding and accrued interest payable are considered fair
value because of their short-term nature. For all other borrowed funds, fair
values are estimated based on the discounted value of expected net cash flows
taking into account current interest rates.
UNFUNDED LOAN COMMITMENTS AND LETTERS OF CREDIT Fair values for commitments to
extend credit and letters of credit are estimated based upon the amount of
deferred fees and the creditworthiness of the counterparties.
FINANCIAL DERIVATIVES The fair value of interest rate swaps are estimated based
on the discounted value of the expected net cash flows. The fair value of other
derivative instruments is based on dealer quotes. These fair values represent
the estimated amounts the Corporation would receive or pay to terminate the
contracts, taking into account current interest rates.
PNC BANK CORP.
74
<PAGE> 46
STATISTICAL
INFORMATION
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
Year ended December 31 - dollars in millions, except per
share data 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS
<S> <C> <C> <C> <C> <C>
Interest income $5,051 $4,938 $5,149 $4,724 $4,023
Interest expense 2,556 2,494 3,007 2,232 1,683
---------------------------------------------------------------
Net interest income 2,495 2,444 2,142 2,492 2,340
Provision for credit losses 70 6 84 350
Noninterest income before net securities gains (losses) 1,759 1,373 1,240 1,181 941
Net securities gains (losses) 49 22 (280) (142) 195
Noninterest expense 2,615 2,312 2,469 2,238 1,985
---------------------------------------------------------------
Income before income taxes and cumulative effect of
changes in accounting principles 1,618 1,527 627 1,209 1,141
Income taxes 566 535 219 318 262
---------------------------------------------------------------
Income before cumulative effect of changes in
accounting principles 1,052 992 408 891 879
Cumulative effect of changes in accounting principles,
net of tax benefits of $5 in 1994 and $5 in 1993 (7) 20
---------------------------------------------------------------
Net income $1,052 $992 $408 $884 $899
---------------------------------------------------------------
PER COMMON SHARE DATA
Book value $16.87 $17.13 $16.87 $16.59 $15.61
Cash dividends declared 1.50 1.42 1.40 1.31 1.175
Earnings
Basic before cumulative effect of changes in
accounting principles $3.33 $2.91 $1.20 $2.58 $2.59
Cumulative effect of changes in accounting principles (.02) .06
---------------------------------------------------------------
Basic $3.33 $2.91 $1.20 $2.56 $2.65
---------------------------------------------------------------
Diluted before cumulative effect of changes in
accounting principles $3.28 $2.88 $1.19 $2.54 $2.54
Cumulative effect of changes in accounting principles (.02) .06
---------------------------------------------------------------
Diluted $3.28 $2.88 $1.19 $2.52 $2.60
---------------------------------------------------------------
BALANCE SHEET HIGHLIGHTS (At December 31)
Total assets $75,120 $73,260 $73,404 $77,461 $76,012
Securities 8,522 11,917 15,839 23,670 25,496
Loans, net of unearned income 54,245 51,798 48,653 44,043 42,113
Deposits 47,649 45,676 46,899 45,818 44,703
Borrowed funds 19,622 19,604 19,063 24,320 22,308
Shareholders' equity 5,384 5,869 5,768 5,727 5,404
SELECTED RATIOS
Return on
Average common shareholders' equity 20.01% 17.18% 7.05% 16.09% 18.55%
Average assets 1.49 1.40 .54 1.19 1.40
Average common shareholders' equity to average assets 7.31 8.11 7.64 7.34 7.52
Dividend payout 45.39 48.89 94.76 37.42 30.79
Efficiency (excludes distributions on capital securities) 59.36 59.64 78.42 62.69 56.28
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
PNC BANK CORP.
75
<PAGE> 47
STATISTICAL
INFORMATION
SELECTED QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
Quarter - dollars in millions, 1997 1996
----------------------------------------------------------------------------------------
except per share data Fourth Third Second First Fourth Third Second First
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Interest income $1,281 $1,271 $1,257 $1,242 $1,223 $1,217 $1,243 $1,255
Interest expense 649 651 644 612 605 608 633 648
--------------------------------------------------------------------------------------
Net interest income 632 620 613 630 618 609 610 607
Provision for credit losses 25 20 15 10
Noninterest income before
net securities gains (losses) 482 448 420 409 381 341 333 318
Net securities gains (losses) 22 (2) 13 16 7 8 4 3
Noninterest expense 701 639 639 636 586 596 564 566
--------------------------------------------------------------------------------------
Income before income taxes 410 407 392 409 420 362 383 362
Income taxes 145 145 133 143 148 128 135 124
--------------------------------------------------------------------------------------
Net income $265 $262 $259 $266 $272 $234 $248 $238
--------------------------------------------------------------------------------------
PER COMMON SHARE DATA
Book value $16.87 $16.92 $16.51 $16.45 $17.13 $17.23 $17.07 $16.88
Earnings
Basic .86 .84 .82 .81 .80 .69 .73 .70
Diluted .85 .83 .81 .80 .79 .68 .72 .69
AVERAGE BALANCE SHEET
Total assets $70,869 $70,581 $70,821 $70,301 $69,536 $69,546 $72,440 $71,733
Securities 7,769 8,216 9,055 10,089 11,569 13,097 14,740 14,818
Loans, net of unearned income 53,663 53,202 52,813 51,922 49,973 48,713 49,191 48,625
Deposits 44,580 44,606 44,814 44,133 44,832 44,716 45,379 45,553
Borrowed funds 18,624 18,484 18,675 18,594 17,110 17,558 19,720 18,891
Shareholders' equity 5,414 5,381 5,360 5,758 6,017 5,766 5,767 5,764
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
PNC BANK CORP.
76
<PAGE> 48
ANALYSIS OF YEAR-TO-YEAR CHANGES IN NET INTEREST INCOME
<TABLE>
<CAPTION>
1997/1996 1996/1995
---------------------------------------------------------------------
Increase/(Decrease) in Income/ Increase/(Decrease) in Income/
Expense Due to Changes in: Expense Due to Changes in:
---------------------------------------------------------------------
Taxable-equivalent basis - in millions Volume Rate Total Volume Rate Total
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
Loans held for sale $23 $3 $26 $27 $(3) $24
Securities
U.S. Treasury, government agencies and corporations (247) (24) (271) (453) 106 (347)
Other debt (41) (4) (45) (70) (5) (75)
Other (2) (3) (5) (6) (4) (10)
-----------------------------------------------------------------
Total securities (297) (24) (321) (541) 109 (432)
Loans, net of unearned income
Consumer (82) 7 (75) 89 (19) 70
Credit card 309 (13) 296 41 2 43
Residential mortgage 78 78 92 (2) 90
Commercial 107 5 112 92 (51) 41
Commercial real estate (11) (4) (15) (11) (26) (37)
Other 5 6 11 (9) (2) (11)
-----------------------------------------------------------------
Total loans, net of unearned income 312 95 407 284 (88) 196
Other interest-earning assets (3) (2) (5) (6) (5) (11)
-----------------------------------------------------------------
Total interest-earning assets $(54) $161 $107 $(366) $143 $(223)
-----------------------------------------------------------------
INTEREST-BEARING LIABILITIES
Interest-bearing deposits
Demand and money market $23 $36 $59 $10 $(35) $(25)
Savings (11) (1) (12) (7) (14) (21)
Other time (47) 14 (33) 30 (33) (3)
Deposits in foreign offices 14 1 15 (63) (12) (75)
-----------------------------------------------------------------
Total interest-bearing deposits (14) 43 29 (22) (102) (124)
Borrowed funds
Bank notes and senior debt 56 13 69 103 (33) 70
Federal funds purchased (18) 5 (13) (113) (31) (144)
Repurchase agreements (66) (1) (67) (247) (41) (288)
Other borrowed funds 40 (7) 33 (33) (26) (59)
Subordinated debt 12 (1) 11 29 3 32
-----------------------------------------------------------------
Total borrowed funds 16 17 33 (289) (100) (389)
-----------------------------------------------------------------
Total interest-bearing liabilities (3) 65 62 (263) (250) (513)
-----------------------------------------------------------------
Change in net interest income $(27) $72 $45 $(159) $449 $290
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Changes attributable to rate/volume are prorated into rate and volume
components.
PNC BANK CORP.
77
<PAGE> 49
STATISTICAL
INFORMATION
AVERAGE CONSOLIDATED BALANCE SHEET AND NET INTEREST ANALYSIS
<TABLE>
<CAPTION>
Year ended December 31 - 1997 1996
-------------------------------------------------------------------------
Taxable-equivalent basis Average Average Average Average
Dollars in millions Balances Interest Yields/Rates Balances Interest Yields/Rates
- ---------------------------------------------------------------------------------------------------------------------------
ASSETS
Interest-earning assets
<S> <C> <C> <C> <C> <C> <C>
Loans held for sale $1,417 $104 7.31% $1,095 $78 7.09%
Securities
U.S. Treasury, government
agencies and corporations 6,101 364 5.97 10,225 635 6.21
Other debt 2,094 139 6.62 2,719 184 6.78
Other 579 43 7.45 606 48 7.91
-------------------- --------------------
Total securities 8,774 546 6.22 13,550 867 6.40
Loans, net of unearned income
Consumer 11,224 953 8.49 12,192 1,028 8.43
Credit card 3,558 459 12.92 1,165 163 13.94
Residential mortgage 13,105 976 7.45 12,049 898 7.45
Commercial 19,089 1,500 7.86 17,727 1,388 7.83
Commercial real estate 4,060 358 8.82 4,186 373 8.92
Other 1,871 130 6.94 1,797 119 6.63
-------------------- --------------------
Total loans, net of unearned income 52,907 4,376 8.27 49,116 3,969 8.08
Other interest-earning assets 919 54 5.88 964 59 6.12
-------------------- --------------------
Total interest-earning
assets/interest income 64,017 5,080 7.93 64,725 4,973 7.68
Noninterest-earning assets
Allowance for credit losses (1,077) (1,197)
Cash and due from banks 2,920 3,163
Other assets 4,784 4,116
-------- --------
Total assets $70,644 $70,807
-------- --------
LIABILITIES, CAPITAL SECURITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing liabilities
Interest-bearing deposits
Demand and money market $13,477 391 2.90 $12,619 332 2.63
Savings 2,852 57 1.97 3,445 69 2.02
Other time 17,441 948 5.44 18,307 981 5.36
Deposits in foreign offices 1,094 61 5.58 846 46 5.44
-------------------- --------------------
Total interest-bearing deposits 34,864 1,457 4.18 35,217 1,428 4.06
Borrowed funds
Bank notes and senior debt 9,130 523 5.72 8,139 454 5.57
Federal funds purchased 2,834 158 5.57 3,157 171 5.41
Repurchase agreements 812 43 5.36 2,030 110 5.41
Other borrowed funds 4,304 256 5.96 3,630 223 6.14
Subordinated debt 1,514 119 7.87 1,358 108 7.98
-------------------- --------------------
Total borrowed funds 18,594 1,099 5.91 18,314 1,066 5.82
-------------------- --------------------
Total interest-bearing
liabilities/interest
expense 53,458 2,556 4.78 53,531 2,494 4.66
Noninterest-bearing liabilities
and shareholders' equity
Demand and other noninterest-bearing deposits 9,670 9,900
Accrued expenses and other liabilities 1,501 1,529
Mandatorily redeemable capital securities of
subsidiary trusts 537 19
Shareholders' equity 5,478 5,828
-------- --------
Total liabilities, capital
securities and shareholders' equity $70,644 $70,807
-------------------------------------------------------------------------
Interest rate spread 3.15 3.02
Impact of noninterest-bearing liabilities .79 .81
----------------------- -----------------------
Net interest income/margin on earning assets $2,524 3.94% $2,479 3.83%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Nonaccrual loans are included in loans, net of unearned income. The impact of
financial derivatives used in interest rate risk management is included in the
interest income/expense and average yields/rates of the related assets and
liabilities. Average balances of securities are based on amortized historical
cost (excluding SFAS No. 115 adjustments to fair value).
PNC BANK CORP.
78
<PAGE> 50
<TABLE>
<CAPTION>
Year ended December 31 - 1995 1994
----------------------------------------------------------------------------
Taxable-equivalent basis Average Average Average Average
Dollars in millions Balances Interest Yields/Rates Balances Interest Yields/Rates
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS
Interest-earning assets
<S> <C> <C> <C> <C> <C> <C>
Loans held for sale $725 $54 7.50% $749 $52 6.84%
Securities
U.S. Treasury, government agencies and
corporations 17,706 982 5.55 20,915 1,200 5.74
Other debt 3,757 259 6.90 2,742 163 5.94
Other 677 58 8.46 698 58 8.30
-------------------- --------------------
Total securities 22,140 1,299 5.87 24,355 1,421 5.83
Loans, net of unearned income
Consumer 11,142 958 8.60 10,472 833 7.95
Credit card 871 120 13.76 720 97 13.50
Residential mortgage 10,812 808 7.47 8,806 603 6.85
Commercial 16,562 1,347 8.13 15,926 1,183 7.43
Commercial real estate 4,304 410 9.54 4,430 373 8.41
Other 1,933 130 6.70 2,245 124 5.52
-------------------- --------------------
Total loans, net of unearned income 45,624 3,773 8.27 42,599 3,213 7.54
Other interest-earning assets 1,046 70 6.64 1,724 76 4.42
-------------------- --------------------
Total interest-earning assets/interest income 69,535 5,196 7.47 69,427 4,762 6.86
Noninterest-earning assets
Allowance for credit losses (1,319) (1,391)
Cash and due from banks 3,044 2,951
Other assets 3,871 3,375
-------- --------
Total assets $75,131 $74,362
-------- --------
LIABILITIES, CAPITAL SECURITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing liabilities
Interest-bearing deposits
Demand and money market $12,254 357 2.91 $13,481 281 2.08
Savings 3,732 90 2.40 4,081 71 1.75
Other time 17,758 984 5.54 16,353 757 4.63
Deposits in foreign offices 1,974 121 6.13 1,083 51 4.69
-------------------- --------------------
Total interest-bearing deposits 35,718 1,552 4.34 34,998 1,160 3.31
Borrowed funds
Bank notes and senior debt 6,326 384 6.07 8,513 376 4.42
Federal funds purchased 5,200 315 6.06 3,573 162 4.53
Repurchase agreements 6,514 398 6.11 5,576 228 4.09
Other borrowed funds 4,138 282 6.81 5,021 231 4.59
Subordinated debt 998 76 7.64 939 75 8.02
-------------------- --------------------
Total borrowed funds 23,176 1,455 6.28 23,622 1,072 4.54
-------------------- --------------------
Total interest-bearing liabilities/interest
expense 58,894 3,007 5.10 58,620 2,232 3.81
Noninterest-bearing liabilities and shareholders'
equity
Demand and other noninterest-bearing deposits 9,112 8,939
Accrued expenses and other liabilities 1,341 1,272
Mandatorily redeemable capital securities of
subsidiary trusts
Shareholders' equity 5,784 5,531
-------- --------
Total liabilities, capital securities and
shareholders' equity $75,131 $74,362
--------------------------------------------------------------------------
Interest rate spread 2.37 3.05
Impact of noninterest-bearing liabilities .78 .59
---------------------- ----------------------
Net interest income/margin on earning assets $2,189 3.15% $2,530 3.64%
- -------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Year ended December 31 - 1993
-----------------------------------------
Taxable-equivalent basis Average Average
Dollars in millions Balances Interest Yields/Rates
- -----------------------------------------------------------------------------------------------
ASSETS
INTEREST-EARNING ASSETS
<S> <C> <C> <C>
Loans held for sale $402 $25 6.10%
Securities
U.S. Treasury, government agencies and
corporations 19,885 1,165 5.86
Other debt 1,818 90 4.93
Other 631 58 9.14
-------------------
Total securities 22,334 1,313 5.88
Loans, net of unearned income
Consumer 9,242 765 8.28
Credit card 682 94 13.74
Residential mortgage 3,834 309 8.07
Commercial 14,781 1,041 7.05
Commercial real estate 5,314 382 7.18
Other 1,688 84 4.97
-------------------
Total loans, net of unearned income 35,541 2,675 7.53
Other interest-earning assets 1,710 61 3.59
-------------------
Total interest-earning assets/interest income 59,987 4,074 6.79
Noninterest-earning assets
Allowance for credit losses (1,510)
Cash and due from banks 2,757
Other assets 2,819
--------
Total assets $64,053
--------
LIABILITIES, CAPITAL SECURITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing liabilities
Interest-bearing deposits
Demand and money market $12,685 213 1.68
Savings 3,760 56 1.49
Other time 15,571 730 4.69
Deposits in foreign offices 222 7 3.03
-------------------
Total interest-bearing deposits 32,238 1,006 3.12
Borrowed funds
Bank notes and senior debt 5,177 209 4.03
Federal funds purchased 1,844 57 3.09
Repurchase agreements 7,263 252 3.47
Other borrowed funds 2,696 102 3.79
Subordinated debt 670 57 8.50
-------------------
Total borrowed funds 17,650 677 3.84
-------------------
Total interest-bearing liabilities/interest
expense 49,888 1,683 3.37
Noninterest-bearing liabilities and shareholders'
equity
Demand and other noninterest-bearing deposits 7,986
Accrued expenses and other liabilities 1,293
Mandatorily redeemable capital securities of
subsidiary trusts
Shareholders' equity 4,886
--------
Total liabilities, capital securities and
shareholders' equity $64,053
--------------------------------------
Interest rate spread 3.42
Impact of noninterest-bearing liabilities .57
----------------------
Net interest income/margin on earning assets $2,391 3.99%
- --------------------------------------------------------------------------------------------
</TABLE>
PNC BANK CORP.
79
<PAGE> 51
STATISTICAL
INFORMATION
LOAN MATURITIES AND INTEREST SENSITIVITY
<TABLE>
<CAPTION>
December 31, 1997 - 1 Year 1 Through After 5 Gross
in millions or Less 5 Years Years Loans
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial $7,264 $8,524 $4,201 $19,989
Real estate project 947 894 285 2,126
-------------------------------------------
Total $8,211 $9,418 $4,486 $22,115
-------------------------------------------
Loans with
predetermined rate $1,155 $1,705 $789 $3,649
Loans with floating rate 7,056 7,713 3,697 18,466
-------------------------------------------
Total $8,211 $9,418 $4,486 $22,115
- --------------------------------------------------------------------------------
</TABLE>
At December 31, 1997, $7.8 billion of interest rate swaps, caps and floors
designated to commercial and commercial real estate loans altered the interest
rate characteristics of such loans. The impact of the interest rate swaps is not
reflected in the previous table.
ALLOWANCE FOR CREDIT LOSSES The allowance for credit losses is based on
periodic evaluations of the credit portfolio by management. These evaluations
consider, among other factors, historic losses within specific industries,
current economic conditions, loan portfolio trends, specific credit reviews and
estimates based on subjective factors. During 1997, 1996 and 1995, stronger
economic conditions combined with management's ongoing efforts to improve asset
quality resulted in lower nonperforming assets and a higher reserve coverage of
nonperforming loans.
<TABLE>
<CAPTION>
SUMMARY OF LOAN LOSS EXPERIENCE
Year ended December 31 - dollars in millions 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance at beginning of year $1,166 $1,259 $1,352 $1,372 $1,568
Charge-offs
Consumer 104 100 76 72 80
Credit card 208 66 31 20 22
Residential mortgage 9 9 10 16 8
Commercial 48 52 84 116 168
Commercial real estate
Commercial mortgage 8 10 23 15 49
Real estate project 4 8 14 37 186
Other 4 2 2 1 1
-----------------------------------------------------------------
Total charge-offs 385 247 240 277 514
Recoveries
Consumer 36 34 33 34 30
Credit card 25 7 6 6 6
Residential mortgage 1 2 2 1 1
Commercial 38 28 49 59 56
Commercial real estate
Commercial mortgage 10 6 9 5 4
Real estate project 2 4 6 10 8
Other 1 2 2 1 3
-----------------------------------------------------------------
Total recoveries 113 83 107 116 108
-----------------------------------------------------------------
Net charge-offs 272 164 133 161 406
Net charge-offs on bulk loan sales and assets
held for accelerated disposition (8) (182)
Provision for credit losses 70 6 84 350
Acquisitions/divestitures 8 71 34 65 42
-----------------------------------------------------------------
Allowance at end of year $972 $1,166 $1,259 $1,352 $1,372
-----------------------------------------------------------------
Allowance as a percent of period-end
Loans 1.79% 2.25% 2.59% 3.07% 3.26%
Nonperforming loans 351.79 334.40 351.68 239.29 160.28
As a percent of average loans
Net charge-offs including bulk loan sales
and assets held for accelerated disposition .51 .33 .29 .40 1.65
Net charge-offs excluding bulk loan sales
and assets held for accelerated disposition .51 .33 .29 .38 1.14
Provision for credit losses .13 .01 .20 .99
Allowance for credit losses 1.84 2.37 2.76 3.17 3.86
Allowance as a multiple of net charge-offs including bulk
loan sales and assets held for accelerated disposition 3.57x 7.11x 9.47x 8.00x 2.33x
Allowance as a multiple of net charge-offs excluding bulk
loan sales and assets held for accelerated disposition 3.57 7.11 9.47 8.40 3.38
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
PNC BANK CORP.
80
<PAGE> 52
ALLOCATION OF ALLOWANCE FOR CREDIT LOSSES
The following table presents the allocation of allowance for credit losses and
the categories of loans as a percentage of total loans.
ALLOCATION OF ALLOWANCE FOR CREDIT LOSSES*
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------------------------------------------------------------------
December 31 - LOANS TO Loans to Loans to
dollars in millions ALLOWANCE TOTAL LOANS Allowance Total Loans Allowance Total Loans
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial $406 36.9% $606 35.9% $585 34.5%
Commercial real estate 141 7.3 173 7.9 332 10.1
Consumer 107 20.7 139 23.3 158 25.8
Credit card 258 7.0 141 5.4 45 2.1
Residential mortgage 42 23.6 80 24.5 112 24.0
Other 18 4.5 27 3.0 27 3.5
---------------------------------------------------------------------------------------
Total $972 100.0% $1,166 100.0% $1,259 100.0%
===================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
1994 1993
----------------------------------------------------------
December 31 - Loans to Loans to
dollars in millions Allowance Total Loans Allowance Total Loans
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial $603 35.3% $572 36.9%
Commercial real estate 419 11.5 498 12.3
Consumer 157 25.0 175 24.2
Credit card 27 1.9 27 1.7
Residential mortgage 116 22.1 86 20.5
Other 30 4.2 14 4.4
----------------------------------------------------------
Total $1,352 100.0% $1,372 100.0%
======================================================================================
</TABLE>
* For purposes of this presentation, unallocated reserves have been assigned to
loan categories based on the relative specific allocation amounts.
TIME DEPOSITS OF $100,000 OR MORE
Time deposits in foreign offices totaled $3.0 billion, substantially all of
which are in denominations of $100,000 or more. The following table sets forth
remaining maturities of domestic time deposits of $100,000 or more.
DOMESTIC TIME DEPOSITS OF $100,000 OR MORE
Other
Certificates Time
December 31, 1997 - in millions of Deposit Deposits Total
- ------------------------------------------------------------------------------
Three months or less $1,488 $5 $1,493
Over three through six months 433 2 435
Over six through twelve months 616 616
Over twelve months 1,351 33 1,384
--------------------------------------
Total $3,888 $40 $3,928
==============================================================================
SHORT-TERM BORROWINGS
Most bank notes mature in 1998. Federal funds purchased include overnight
borrowings and term federal funds, which are payable on demand. Repurchase
agreements generally have maturities of 18 months or less. Other short-term
borrowings consist primarily of U.S. Treasury, tax and loan borrowings which
are payable on demand and commercial paper which is issued in maturities not to
exceed nine months. At December 31, 1997 and 1996, $997 million and $487
million, respectively, notional value of interest rate swaps were designated to
borrowed funds. The effect of these swaps is not included in the rates set
forth in the table.
SHORT-TERM BORROWINGS
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------------------------------------------------------------------
Dollars in millions Amount Rate Amount Rate Amount Rate
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Bank notes
Year-end balance $9,656 5.75% $7,905 5.46% $6,256 5.86%
Average during year 8,959 5.68 7,947 5.52 6,091 6.01
Maximum month-end balance during year 10,391 9,041 7,075
Federal funds purchased
Year-end balance 3,632 6.30 3,933 6.00 4,474 5.39
Average during year 2,834 5.57 3,157 5.41 5,200 6.06
Maximum month-end balance during year 4,459 4,837 7,413
Repurchase agreements
Year-end balance 714 6.03 645 5.54 2,851 5.89
Average during year 812 5.36 2,030 5.41 6,514 6.11
Maximum month-end balance during year 946 3,363 7,981
Other
Year-end balance 946 5.81 3,282 5.19 1,340 5.53
Average during year 1,671 6.57 1,466 6.79 1,671 7.20
Maximum month-end balance during year 2,574 3,395 3,057
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
PNC BANK CORP.
81
<PAGE> 53
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 www.pncbank.com.
STOCK LISTING
PNC Bank Corp. common stock is traded on the New York Stock Exchange ("NYSE")
under the symbol PNC. At the close of business on February 1, 1998, there were
64,247 common shareholders of record.
FINANCIAL INFORMATION
The Annual Report on Form 10-K is filed with the Securities and Exchange
Commission ("SEC"). Copies of this document and other filings, including
Exhibits thereto, may be obtained:
Electronically at the SEC's home page at www.sec.gov.
By writing to Michelle Sentner, Assistant Vice President,
Financial Reporting, at corporate headquarters.
By calling 412-762-1553 or via e-mail to
[email protected].
INQUIRIES
For Financial Services call 1-800-4-BANKER. Individual shareholders should
contact: Shareholder Relations at 800-843-2206 or the PNC Bank Hotline at
800-982-7652.
Analysts and institutional investors should contact: William H. Callihan, Vice
President, Investor Relations, at 412-762-8257.
News media representatives and others seeking general information should
contact: Jonathan Williams, Vice President, Media Relations, at 412-762-4550.
TRUST PROXY VOTING
Reports of 1997 nonroutine proxy voting by the trust divisions of PNC Bank
Corp. are available by writing to Thomas R. Moore, Vice President and Assistant
Corporate Secretary, at corporate headquarters.
ANNUAL SHAREHOLDERS MEETING
All shareholders are invited to attend the PNC Bank Corp. annual meeting on
Tuesday, April 28, 1998, at 11 a.m., Eastern Standard Time, on the 15th floor
of One PNC Plaza, 249 Fifth Avenue, Pittsburgh, Pennsylvania.
COMMON STOCK PRICES/DIVIDENDS DECLARED
The table below sets forth by quarter the range of high, low and quarter-end
closing sale prices for PNC Bank Corp. common stock and the cash dividends
declared per common share.
<TABLE>
<CAPTION>
Cash
Dividends
1997 QUARTER High Low Close Declared
- -------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
- -------------------------------------------------------------------
1996 Quarter
- -------------------------------------------------------------------
First $32.625 $28.375 $30.750 $.35
Second 31.500 28.375 29.750 .35
Third 33.875 27.500 33.375 .35
Fourth 39.750 33.125 37.625 .37
--------
Total $1.42
- -------------------------------------------------------------------
</TABLE>
REGISTRAR AND TRANSFER AGENT
The Chase Manhattan Bank
P.O. Box 590
Ridgefield Park, New Jersey 07660
800-982-7652
DIVIDEND POLICY
Holders of PNC Bank Corp. common stock are entitled to receive dividends when
declared by the board of directors out of funds legally available. The board
presently intends to continue the policy of paying quarterly cash dividends.
However, future dividends will depend upon earnings, the financial condition of
PNC Bank Corp. and other factors including applicable government regulations
and policies and contractual restrictions.
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.
82
<PAGE> 1
EXHIBIT 21
PNC BANK CORP.
SCHEDULE OF CERTAIN SUBSIDIARIES
(AS OF FEBRUARY 28, 1998)
<TABLE>
<CAPTION>
STATE OR OTHER JURISDICTION OF
NAME (1) INCORPORATION OR ORGANIZATION
- -----------------------------------------------------------------------------------------------------------------------
<S> <C>
PNC Bancorp, Inc. Delaware
PNC Bank, Delaware (2) Delaware
PNC Bank, FSB (2) United States
PNC Bank, National Association (2) United States
PNC Bank, New England (2) Massachusetts
PNC Holding Corp. Delaware
Alpine Indemnity Limited Grand Cayman, B.W.I.
CastleInternational Asset Management Limited United Kingdom
CastleInternational Asset Management, Inc. Delaware
Parkway Management Inc. New Jersey
PFPC International (Cayman) Ltd Grand Cayman, B.W.I.
PFPC International Ltd Dublin, Ireland
PFPC Trustee and Custodial Services Limited Dublin, Ireland
PNC Alliance Inc. Delaware
PNC Capital Corp. Delaware
PNC Capital Markets, Inc. Pennsylvania
PNC Capital Recovery Corp. Pennsylvania
PNC Commercial Corp Florida
PNC Equities Corp. Delaware
PNC Equity Management Corp (2) Pennsylvania
PNC ESOP Funding Corporation Delaware
PNC Funding Corp Pennsylvania
PNC GPI, Inc. Delaware
PNC Insurance Corp. Arizona
PNC Investment Corp. (2) Delaware
PNC Management Services Corp Delaware
PNC Network Holdings Corp. (2) Delaware
PNC Realty Company, Ohio Ohio
PNC Realty Holding Corp (2) Pennsylvania
PNC Venture Corp Delaware
</TABLE>
(1) All active first tier subsidiaries of the Corporation's two primary
subsidiary holding companies, PNC Bancorp, Inc. and PNC Holding Corp.,
have been listed. Not all of such subsidiaries are "significant
subsidiaries" within the meaning of Rule 1-02(v) of Regulation S-X.
(2) The names of the subsidiaries of the indicated entities are omitted
because such subsidiaries, considered in the aggregate as a single
subsidiary, would not constitute a significant subsidiary.
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference, in the Registration Statements
listed below, of our report dated January 23, 1998, with respect to the
consolidated financial statements of PNC Bank Corp. and subsidiaries
incorporated by reference in this Annual Report on Form 10-K of PNC Bank Corp.
for the year ended December 31, 1997.
Form S-3 relating to the Dividend Reinvestment and Stock Purchase Plan (No.
333-19003)
Form S-8 relating to the PNC Bank Corp. Supplemental Incentive Savings Plan and
PNC Bank Corp. and Affiliates Deferred Compensation Plan (No. 333-18069)
Form S-8 relating to the PNC Retirement Savings Plan (No. 333-03901)
Form S-8 relating the PNC Bank Corp. Employee Stock Purchase Plan (No. 33-62311)
Form S-3 relating to the Dividend Reinvestment and Stock Purchase Plan of PNC
Bank Corp. (No. 33-61083)
Post-Effective Amendment No. 1 to Form S-8 relating to the PNC Bank Corp. 1997
Long-Term Incentive Award Plan (No. 33-54960)
Post-Effective Amendment No. 1 on Form S-3 relating to the shelf registration of
$500 million of debt securities of PNC Funding Corp., unconditionally guaranteed
by PNC Bank Corp. (No. 33-42803)
Form S-8 relating to the 1987 Senior Executive Long-Term Award Plan of PNC Bank
Corp. (now known as the PNC Bank Corp. 1992 Long-Term Incentive Award Plan) (No.
33-28828)
Post-Effective Amendment No. 1 (on Form S-8) to Form S-4 relating to the
exercise of stock options assumed by PNC Bank Corp. in connection with the
merger of a wholly-owned subsidiary of PNC Bank Corp. with and into Bank of
Delaware Corporation (No. 33-25642)
Post-Effective Amendment No. 1 to Form S-8 relating to the PNC Bank Corp.
Incentive Savings Plan (No. 33-25140)
Post-Effective Amendment No. 1 on Form S-8 relating to the Stock Option Plan of
PNC Bank Corp. (No. 2-92181)
Post-Effective Amendment No. 2 on Form S-8 relating to the PNC Bank Corp.
Employee Stock Purchase Plan (No. 2-83510)
Form S-8 relating to PNC Bank Corp. Employee Stock Purchase Plan (No. 333-25867)
Form S-3 relating to the shelf registration of $1.3 billion of debt securities
of PNC Funding Corp., unconditionally guaranteed by PNC Bank Corp., and/or
common stock and/or preferred stock of PNC Bank Corp. (No.
333-34709 and No. 333-34709-01)
/s/ ERNST & YOUNG LLP
Pittsburgh, Pennsylvania
March 20, 1998
<PAGE> 1
EXHIBIT 24
POWER OF ATTORNEY
PNC BANK CORP.
ANNUAL REPORT ON FORM 10-K FOR YEAR ENDED DECEMBER 31, 1997
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned Directors and/or
Officers of PNC Bank Corp. (the "Corporation"), a Pennsylvania corporation,
hereby names, constitutes and appoints Walter E. Gregg, Jr., John F. Fulgoney
and Melanie S. Cibik, or each of them, with full power of substitution, such
person's true and lawful attorney-in-fact and agent to execute in such person's
name, place and stead, in any and all capacities, the Corporation's Annual
Report on Form 10-K for the year ended December 31, 1997.
And such persons hereby ratify and confirm all that any said attorney or
attorney-in-fact, or any substitute, shall lawfully do or cause to be done by
virtue hereof.
Witness the due execution hereof by the following persons in the capacities
indicated as of this February 19, 1998.
<TABLE>
<CAPTION>
Name/Signature Capacity
------------------------------------- -------------------------------------------
<S> <C>
Chairman, Chief Executive Officer
/s/ THOMAS H. O'BRIEN and Director
-------------------------------------
Thomas H. O'Brien
/s/ PAUL W. CHELLGREN Director
-------------------------------------
Paul W. Chellgren
/s/ ROBERT N. CLAY Director
-------------------------------------
Robert N. Clay
/s/ GEORGE A. DAVIDSON, JR. Director
-------------------------------------
George A. Davidson, Jr.
/s/ DAVID F. GIRARD-DICARLO Director
-------------------------------------
David F. Girard-diCarlo
/s/ C. G. GREFENSTETTE Director
-------------------------------------
C. G. Grefenstette
/s/ WILLIAM R. JOHNSON Director
-------------------------------------
William R. Johnson
/s/ BRUCE LINDSAY Director
-------------------------------------
Bruce Lindsay
/s/ THOMAS MARSHALL Director
-------------------------------------
Thomas Marshall
/s/ CRAIG MCCLELLAND Director
-------------------------------------
W. Craig McClelland
/s/ JANE G. PEPPER Director
-------------------------------------
Jane G. Pepper
/s/ JACKSON H. RANDOLPH Director
-------------------------------------
Jackson H. Randolph
</TABLE>
<PAGE> 2
<TABLE>
<S> <C>
/s/ JAMES E. ROHR President and Director
-------------------------------------
James E. Rohr
/s/ RODERIC H. ROSS Director
-------------------------------------
Roderic H. Ross
/s/ VINCENT A. SARNI Director
-------------------------------------
Vincent A. Sarni
/s/ GARRY J. SCHEURING Director
-------------------------------------
Garry J. Scheuring
/s/ RICHARD P. SIMMONS Director
-------------------------------------
Richard P. Simmons
/s/ THOMAS J. USHER Director
-------------------------------------
Thomas J. Usher
/s/ MILTON A. WASHINGTON Director
-------------------------------------
Milton A. Washington
/s/ HELGE H. WEHMEIER Director
-------------------------------------
Helge H. Wehmeier
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial information incorporated by reference to the 1997 Annual
Report on Form 10-K and is qualified in its entirety by reference to such
financial information.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 4,303
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 8,522
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 54,245
<ALLOWANCE> (972)
<TOTAL-ASSETS> 75,120
<DEPOSITS> 47,649
<SHORT-TERM> 14,948
<LIABILITIES-OTHER> 1,815
<LONG-TERM> 4,674
0
7
<COMMON> 1,742
<OTHER-SE> 3,635
<TOTAL-LIABILITIES-AND-EQUITY> 75,120
<INTEREST-LOAN> 4,354
<INTEREST-INVEST> 540
<INTEREST-OTHER> 157
<INTEREST-TOTAL> 5,051
<INTEREST-DEPOSIT> 1,457
<INTEREST-EXPENSE> 2,556
<INTEREST-INCOME-NET> 2,495
<LOAN-LOSSES> 70
<SECURITIES-GAINS> 49
<EXPENSE-OTHER> 2,615
<INCOME-PRETAX> 1,618
<INCOME-PRE-EXTRAORDINARY> 1,052
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,052
<EPS-PRIMARY> 3.33
<EPS-DILUTED> 3.28
<YIELD-ACTUAL> 3.94
<LOANS-NON> 276
<LOANS-PAST> 288
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 41
<ALLOWANCE-OPEN> 1,166
<CHARGE-OFFS> (385)
<RECOVERIES> 113
<ALLOWANCE-CLOSE> 972
<ALLOWANCE-DOMESTIC> 972
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule restates previously filed data relating to the adoption of
SFAS No. 128 "Earnings Per Share." The provisions of SFAS No. 128 required
replacement of primary and fully diluted earnings per share amounts with
basic and diluted earnings per share. This schedule also restates previously
filed data for short-term and long-term borrowings.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C> <C> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 9-MOS 6-MOS 3-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1996 JAN-01-1996 JAN-01-1996 JAN-01-1995
<PERIOD-END> DEC-31-1996 SEP-30-1996 JUN-30-1996 MAR-31-1996 DEC-31-1995
<CASH> 4,016 3,611 3,232 3,251 3,679
<INT-BEARING-DEPOSITS> 0 0 0 0 0
<FED-FUNDS-SOLD> 0 0 0 0 0
<TRADING-ASSETS> 0 0 0 0 0
<INVESTMENTS-HELD-FOR-SALE> 11,917 11,243 14,107 14,692 15,839
<INVESTMENTS-CARRYING> 0 0 0 0 0
<INVESTMENTS-MARKET> 0 0 0 0 0
<LOANS> 51,798 49,443 49,223 48,800 48,653
<ALLOWANCE> (1,166) (1,152) (1,189) (1,225) (1,259)
<TOTAL-ASSETS> 73,260 69,662 71,961 72,668 73,404
<DEPOSITS> 45,676 45,430 44,852 45,621 46,899
<SHORT-TERM> 15,765 13,052 15,779 15,898 14,921
<LIABILITIES-OTHER> 1,761 1,784 1,952 1,809 1,674
<LONG-TERM> 3,839 3,598 3,546 3,554 4,142
0 0 0 0 0
7 1 1 1 1
<COMMON> 1,726 1,717 1,711 1,709 1,704
<OTHER-SE> 4,136 4,080 4,120 4,076 4,063
<TOTAL-LIABILITIES-AND-EQUITY> 73,260 69,662 71,961 72,668 73,404
<INTEREST-LOAN> 3,943 2,932 1,953 981 3,743
<INTEREST-INVEST> 859 677 470 237 1,283
<INTEREST-OTHER> 136 106 76 37 124
<INTEREST-TOTAL> 4,938 3,715 2,498 1,255 5,150
<INTEREST-DEPOSIT> 1,428 1,074 723 371 1,552
<INTEREST-EXPENSE> 2,494 1,888 1,281 648 3,008
<INTEREST-INCOME-NET> 2,444 1,827 1,218 607 2,142
<LOAN-LOSSES> 0 0 0 0 6
<SECURITIES-GAINS> 22 15 7 3 (280)
<EXPENSE-OTHER> 2,312 1,725 1,130 566 2,469
<INCOME-PRETAX> 1,527 1,108 746 363 627
<INCOME-PRE-EXTRAORDINARY> 992 720 486 238 408
<EXTRAORDINARY> 0 0 0 0 0
<CHANGES> 0 0 0 0 0
<NET-INCOME> 992 720 486 238 408
<EPS-PRIMARY> 2.91 2.11 1.42 .70 1.20
<EPS-DILUTED> 2.88 2.09 1.41 .69 1.19
<YIELD-ACTUAL> 3.83 3.77 3.72 3.73 3.15
<LOANS-NON> 347 374 378 355 335
<LOANS-PAST> 244 231 191 209 225
<LOANS-TROUBLED> 2 3 3 17 23
<LOANS-PROBLEM> 151 0 0 0 176
<ALLOWANCE-OPEN> 1,259 1,259 1,259 1,259 1,352
<CHARGE-OFFS> (247) (168) (113) 55 240
<RECOVERIES> 83 61 43 21 107
<ALLOWANCE-CLOSE> 1,166 1,152 1,189 1,225 1,259
<ALLOWANCE-DOMESTIC> 1,166 1,152 1,189 1,225 1,259
<ALLOWANCE-FOREIGN> 0 0 0 0 0
<ALLOWANCE-UNALLOCATED> 0 0 0 0 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule restates previously filed data relating to the adoption of
SFAS No. 128 "Earnings Per Share." The provisions of SFAS No. 128 required
replacement of primary and fully diluted earnings per share amounts with basic
and diluted earnings per share. This schedule also restates previously filed
data for short-term and long-term borrowings.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C> <C> <C>
<PERIOD-TYPE> 9-MOS 6-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1997 JAN-01-1997 JAN-01-1997
<PERIOD-END> SEP-30-1997 JUN-30-1997 MAR-31-1997
<CASH> 3,460 3,676 3,096
<INT-BEARING-DEPOSITS> 0 0 0
<FED-FUNDS-SOLD> 0 0 0
<TRADING-ASSETS> 0 0 0
<INVESTMENTS-HELD-FOR-SALE> 8,000 8,396 9,593
<INVESTMENTS-CARRYING> 0 0 0
<INVESTMENTS-MARKET> 0 0 0
<LOANS> 53,651 53,497 52,575
<ALLOWANCE> (1,027) (1,075) (1,119)
<TOTAL-ASSETS> 71,828 71,973 71,166
<DEPOSITS> 44,788 45,216 44,902
<SHORT-TERM> 14,666 14,803 14,415
<LIABILITIES-OTHER> 1,862 1,657 1,889
<LONG-TERM> 4,386 4,263 4,132
0 0 0
7 7 7
<COMMON> 1,740 1,737 1,735
<OTHER-SE> 3,729 3,640 3,736
<TOTAL-LIABILITIES-AND-EQUITY> 71,828 71,973 71,166
<INTEREST-LOAN> 3,236 2,135 1,056
<INTEREST-INVEST> 421 295 156
<INTEREST-OTHER> 113 69 30
<INTEREST-TOTAL> 3,770 2,499 1,242
<INTEREST-DEPOSIT> 1,087 714 346
<INTEREST-EXPENSE> 1,907 1,256 612
<INTEREST-INCOME-NET> 1,863 1,243 630
<LOAN-LOSSES> 45 25 10
<SECURITIES-GAINS> 27 30 16
<EXPENSE-OTHER> 1,914 1,275 636
<INCOME-PRETAX> 1,209 802 409
<INCOME-PRE-EXTRAORDINARY> 787 525 266
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 787 525 266
<EPS-PRIMARY> 2.47 1.63 .81
<EPS-DILUTED> 2.44 1.61 .80
<YIELD-ACTUAL> 3.91 3.92 3.98
<LOANS-NON> 315 345 322
<LOANS-PAST> 289 230 251
<LOANS-TROUBLED> 2 1 1
<LOANS-PROBLEM> 0 0 0
<ALLOWANCE-OPEN> 1,166 1,166 1,166
<CHARGE-OFFS> (280) (185) (89)
<RECOVERIES> 88 66 29
<ALLOWANCE-CLOSE> 1,027 1,075 1,119
<ALLOWANCE-DOMESTIC> 1,027 1,075 1,119
<ALLOWANCE-FOREIGN> 0 0 0
<ALLOWANCE-UNALLOCATED> 0 0 0
</TABLE>
