<PAGE> 1
PNC BANK CORP.
Quarterly Report on Form 10-Q
For the quarterly period ended September 30, 1998
Page 1 represents a portion of the third quarter 1998 Financial Review which is
not required by the Form 10-Q report and is not "filed" as part of the Form
10-Q.
The Quarterly Report on Form 10-Q and cross reference index is on page 32.
<PAGE> 2
CONSOLIDATED FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
----------------------------------------------------------
1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL PERFORMANCE (in thousands, except per share data)
Revenue
Net interest income (taxable-equivalent basis) $ 652,532 $ 627,431 $1,933,748 $1,885,295
Noninterest income 675,870 459,247 1,825,988 1,336,917
Total revenue 1,328,402 1,086,678 3,759,736 3,222,212
Net income 280,588 261,595 830,259 786,979
Per common share
Basic earnings .92 .84 2.71 2.47
Diluted earnings .91 .83 2.68 2.44
Cash dividends declared .39 .37 1.17 1.11
SELECTED RATIOS
Return on
Average common shareholders' equity 20.52% 20.11% 21.00% 19.93%
Average assets 1.48 1.47 1.51 1.49
Net interest margin 3.81 3.89 3.86 3.91
Noninterest income to total revenue 50.88 42.26 48.57 41.49
After-tax profit margin 21.12 24.07 22.08 24.42
Efficiency ratio * 53.28 54.57 55.50 55.82
Net charge-offs to average loans .62 .54 .65 .49
</TABLE>
* Excluding amortization of intangibles, distributions on capital securities and
mortgage banking hedging activities
<TABLE>
<CAPTION>
September 30 June 30 March 31 December 31 September 30
1998 1998 1998 1997 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (in millions)
Assets $76,238 $75,873 $72,355 $75,120 $71,828
Earning assets 68,638 68,353 65,210 66,688 64,208
Loans, net of unearned income 56,752 56,237 54,511 54,245 53,651
Securities available for sale 7,152 7,540 7,511 8,522 8,000
Deposits 46,875 47,096 46,068 47,649 44,788
Borrowed funds 19,972 20,488 18,375 19,622 19,052
Shareholders' equity 5,793 5,633 5,487 5,384 5,476
Common shareholders' equity 5,479 5,318 5,173 5,069 5,161
CAPITAL RATIOS
Leverage 7.18% 7.18% 7.36% 7.30% 7.43%
Common shareholders' equity to assets 7.19 7.01 7.15 6.75 7.18
ASSET QUALITY RATIOS
Nonperforming assets to loans and foreclosed assets .58% .57% .61% .61% .73%
Allowance for credit losses to loans 1.44 1.53 1.67 1.79 1.91
Allowance for credit losses to nonperforming loans 289.02 315.09 320.96 351.79 324.25
Book value per common share $ 18.21 $ 17.64 $ 17.20 $ 16.87 $ 16.92
====================================================================================================================================
</TABLE>
PNC BANK CORP.
----
1
<PAGE> 3
FINANCIAL REVIEW
This Financial Review should be read in conjunction with the PNC Bank Corp. and
subsidiaries' ("Corporation" or "PNC Bank") unaudited Consolidated Financial
Statements and the Financial Review and audited Consolidated Financial
Statements included in the Corporation's 1997 Annual Report.
OVERVIEW
PNC BANK CORP. The Corporation is one of the largest diversified financial
services companies in the United States and operates eight lines of business:
Regional Community Banking, Corporate Banking, National Consumer Banking,
Private Banking, Mortgage Banking, Secured Lending, Asset Management and Mutual
Fund Servicing. Financial products and services are tailored to specific
customer segments and are offered nationally and in PNC Bank's primary
geographic markets in Pennsylvania, New Jersey, Delaware, Ohio and Kentucky.
SUMMARY FINANCIAL RESULTS The third quarter of 1998 was marked by significant
volatility in the financial markets. Although PNC Bank was affected by this
market volatility, the results for the quarter and first nine months continued
to be strong and primarily driven by fee-based businesses. Earnings for the
first nine months of 1998 from the Asset Management, Mutual Fund Servicing,
Private Banking and Mortgage Banking businesses all grew in excess of 20%
compared with the prior-year period.
PNC Bank's strategy has been to continue investing in businesses with greater
value creation potential, downsizing businesses where return opportunities are
less attractive and managing the Corporation's overall risk profile. Pursuant to
this strategy, the Corporation completed or announced a number of acquisitions
in 1998 including Hilliard-Lyons, Inc., a retail brokerage firm, and Midland
Loan Services, L.P., a commercial mortgage servicer. The Corporation also agreed
to sell its corporate trust and escrow business and approximately $1 billion of
non-relationship credit card outstandings.
Consolidated net income for the first nine months of 1998 was $830 million
compared with $787 million a year ago. Diluted earnings per share increased 10%
to $2.68 for the first nine months of 1998 from $2.44 in 1997. Returns on
average common shareholders' equity and average assets were 21.00% and 1.51% in
1998 compared with 19.93% and 1.49%, respectively, a year ago.
As a result of purchase acquisitions, earnings were reduced by non-cash charges
for goodwill and other intangible amortization. Excluding these charges, diluted
earnings per share for the first nine months of 1998 and 1997 were $2.88 and
$2.61, respectively.
Total revenue increased $538 million or 17% in the first nine months of 1998
driven by growth in noninterest income, which represented 49% of total revenue
compared with 41% in the prior-year period. Taxable-equivalent net interest
income increased $49 million from the first nine months of 1997. The net
interest margin was 3.86% compared with 3.91% in the prior year. Noninterest
income increased 37% to $1.8 billion in the first nine months of 1998 reflecting
significant growth in fee-based businesses.
The provision for credit losses was $110 million for the first nine months of
1998 compared with $45 million in the prior-year period.
Noninterest expense increased $419 million or 22% in the first nine months of
1998 commensurate with revenue growth, the impact of investments in the consumer
banking franchise and mortgage banking activities. The efficiency ratio,
computed excluding amortization of intangibles, distributions on capital
securities and mortgage banking hedging activities, was 55.5% compared with
55.8% a year ago.
Average earning assets increased $2.6 billion from the prior year to $66.6
billion as higher loans and loans held for sale more than offset reductions in
the securities portfolio. Loans represented 83% of average earning assets for
the nine months of 1998 compared with 82% in the first nine months of 1997.
Shareholders' equity totaled $5.8 billion at September 30, 1998 compared with
$5.4 billion at December 31, 1997. The leverage ratio was 7.18% and Tier I and
total risk-based capital ratios were 7.48% and 10.93%, respectively.
PNC Bank's overall credit risk profile remained stable with no direct credit
exposure to hedge funds or in Russia and nominal exposure in Latin America and
Asia.
The ratio of nonperforming assets to loans and foreclosed assets was .58% at
September 30, 1998 and .61% at December 31, 1997. The allowance for credit
losses was 289% of nonperforming loans and 1.44% of total loans at September 30,
1998 compared with 352% and 1.79%, respectively, at December 31, 1997. Net
charge-offs were .65% of average loans for the first nine months of 1998
compared with .49% a year ago. The increase was primarily associated with higher
credit card outstandings.
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.
PNC BANK CORP.
----
2
<PAGE> 4
Many of these traditional businesses have moderate growth expectations and
require significant capital to support balance sheet leverage that entails
credit and interest rate risk.
PNC Bank has responded to these challenges by transitioning to an organization
comprised of distinct lines of business with highly focused customer segments.
This approach provides the basis for differentiated businesses capable of
competing in today's environment where banks and other financial service
providers seek the same customers.
The Corporation has focused on altering its business mix by investing in
specialized financial services businesses including asset management, mutual
fund servicing, private banking, mortgage banking, corporate finance and capital
markets. These businesses are largely fee-based, less capital intensive and
provide growth opportunities on a national scale. More meaningful contributions
from these businesses, coupled with disciplined management of traditional
banking activities, expansion of national distribution capabilities and
reduction of wholesale leverage activities have allowed PNC Bank to
significantly improve the composition of its earnings stream.
REGIONAL COMMUNITY BANKING provides financial products and services to small
business and retail customers within PNC Bank's geographic footprint. Regional
Community Banking utilizes a sophisticated information database to develop
customer relationships based on their individual needs for PNC Bank's
traditional and technology-based array of products, services and distribution
channels.
CORPORATE BANKING provides credit, capital markets and treasury management
products and services to large and mid-sized businesses, institutions and
government entities. Teams of specialists focus on specific segments, including
large corporate, middle market, communications, health care, public finance,
energy, metals and mining and emerging growth.
NATIONAL CONSUMER BANKING provides consumer products and services through
technologically advanced cost efficient channels. National Consumer Banking
focuses on nationwide distribution of products and services through affinity
relationships.
PRIVATE BANKING offers personalized investment management, brokerage, personal
trust, estate planning and traditional banking services to affluent individuals;
investment management services to wealthy individuals through Hawthorn; and
investment management, trust and administrative services to pensions, 401(k)
plans and charitable organizations through its institutional trust group.
MORTGAGE BANKING originates and services residential mortgages. Mortgage Banking
focuses on expanding retail distribution channels, increasing the mortgage
servicing portfolio and expanding sales of related products including second
mortgages, home equity lines of credit and insurance.
SECURED LENDING is engaged in commercial real estate finance, including loan
origination, securitization, and servicing through Midland, asset-based
financing through PNC Business Credit and equipment leasing within PNC Bank's
primary geographic markets and nationally.
ASSET MANAGEMENT offers fixed income, domestic and international equity and
liquidity products. BlackRock, Inc. ("BlackRock") represents the recent
combination of PNC Bank's investment advisory and asset management capabilities
under a single organization and brand. This integration created one of the
largest asset managers in the country, leveraging the BlackRock Financial
Management reputation as an established fixed income manager. BlackRock is
focused on expanding marketing and delivery channels for a wide range of
institutional and retail investment products.
MUTUAL FUND SERVICING provides institutional money managers, brokerage firms,
pension managers and insurance companies a wide range of customized products,
including accounting and administration, transfer agency, custody, securities
lending and central asset account services. PFPC Inc. ("PFPC") is the second
largest mutual fund accounting agent and the fourth largest mutual fund transfer
agent in the United States and is focused on domestic, off-shore and alternative
pooled investment servicing capabilities.
FORWARD-LOOKING STATEMENTS
PNC Bank has made, and may continue to make, various written and oral
forward-looking statements with respect to financial performance and other
financial and business matters. The Corporation cautions that these
forward-looking statements are subject to numerous assumptions, risks and
uncertainties, all of which change over time and the Corporation assumes no duty
to update forward-looking statements. Actual results could differ materially
from forward-looking statements.
In addition to factors previously disclosed by the Corporation and those
identified elsewhere in this Financial Review, the following factors, among
others, could cause actual results to differ materially from forward-looking
statements: the inability of the Corporation or others to remediate Year 2000
concerns in a timely fashion; continued pricing pressures on loan and deposit
products; increased credit risk; the success and timing of business initiatives
and strategies, several of which are in early stages and therefore susceptible
to greater uncertainty than more mature businesses; competition; the ability to
realize cost savings or revenues and implement integration plans associated with
acquisitions and divestitures; changes in global
PNC BANK CORP.
----
3
<PAGE> 5
FINANCIAL REVIEW
and domestic economic conditions generally and in local markets in which the
Corporation conducts business; changes in interest rates and capital markets;
inflation; customer borrowing, repayment, investment and deposit practices;
continued customer disintermediation; customers' acceptance of PNC Bank's
products and services; and the impact, extent and timing of technological
changes, capital management activities, actions of the Federal Reserve Board and
legislative and regulatory actions and reforms.
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 assignments and transfers to measure business unit performance.
Assignments and transfers change from time to time as the management accounting
system is enhanced and business or product lines change. There is no
comprehensive, authoritative body of guidance for management accounting
equivalent to generally accepted accounting principles.
Financial statements for the lines of business do not necessarily use the same
classifications as the consolidated financial statements. The financial results
presented herein reflect each line of business as if it operated on a
stand-alone basis. Securities or borrowings and related interest rate spreads
have been assigned to the lines of business based on their net asset or
liability positions.
Total line of business financial results differ from consolidated financial
results primarily due to eliminations, different provision for credit loss
methodologies and corporate administration and other unassigned items.
Eliminations offset transactions between the lines of business which primarily
relate to assigned securities or borrowings. Corporate administration and other
unassigned includes holding company revenue, expenses and other items not
assigned in the management accounting process.
Capital is assigned to each business unit based on management's assessment of
inherent risks and equity levels at independent companies providing similar
products and services. As a result, total capital assigned will differ from
consolidated shareholders' equity.
The efficiency ratio for each line of business is computed excluding
amortization of intangibles and mortgage banking hedging activities, where
applicable.
LINE OF BUSINESS RESULTS
<TABLE>
<CAPTION>
Return on
Revenue Earnings (Loss) Assigned Capital Average Assets
Nine months ended September 30 - --------------------------------------------------------------------------------------------
dollars in millions 1998 1997 1998 1997 1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Regional Community Banking $1,277 $1,203 $337 $289 31% 27% $ 34,985 $ 35,188
Corporate Banking 553 489 155 149 19 18 15,224 14,733
National Consumer Banking 533 506 (27) 30 (5) 6 11,404 11,217
Private Banking 384 337 91 71 30 27 2,624 2,500
Mortgage Banking 299 228 41 26 16 11 11,576 10,146
Secured Lending 212 197 79 102 17 25 8,982 6,495
Asset Management 172 115 30 19 25 17 269 257
Mutual Fund Servicing 141 110 30 25 46 46 213 148
------------------------------------------ ---------------------
Total lines of business 3,571 3,185 736 711 85,277 80,684
Eliminations (100) (103) (75) (73) (14,995) (14,024)
Provision for credit losses 115 81
Corporate administration and other
unassigned 289 140 54 68 3,417 3,908
------------------------------------------ ---------------------
Total consolidated $3,760 $3,222 $830 $787 21% 20% $ 73,699 $ 70,568
=================================================================================================================================
</TABLE>
CORPORATE ACTIVITIES In the second quarter of 1998, the Asset Management and
Mutual Fund Servicing line of business was segregated into two distinct lines of
business. The institutional trust business and Hawthorn were realigned with
Private Banking and the corporate trust and escrow business was included in
corporate administration and other unassigned. On August 4, 1998, the
Corporation entered into an agreement to sell the corporate trust and escrow
business to Chase Manhattan Trust Company, N.A. The transaction will result in a
gain and is expected to close in the fourth quarter of 1998, subject to
regulatory approvals. Results for the first nine months of 1998 and 1997 are
presented consistent with this new structure. The benefit from the sale of an
equity interest to BlackRock management is also included in corporate
administration and other unassigned.
PNC BANK CORP.
----
4
<PAGE> 6
<TABLE>
<CAPTION>
REGIONAL COMMUNITY BANKING
Nine months ended September 30 -
dollars in millions 1998 1997
- -----------------------------------------------------------------
<S> <C> <C>
INCOME STATEMENT
Net interest income $ 973 $ 992
Noninterest income 304 211
-------------------
Total revenue 1,277 1,203
Provision for credit losses 24 22
Noninterest expense 695 697
-------------------
Pretax earnings 558 484
Income taxes 221 195
-------------------
Earnings $ 337 $ 289
-------------------
AVERAGE BALANCE SHEET
Loans
Consumer $5,178 $4,938
Commercial 2,632 2,043
Residential mortgage 1,266 1,250
Other 178 400
-------------------
Total loans 9,254 8,631
Assigned assets and other assets 25,731 26,557
-------------------
Total assets $34,985 $35,188
-------------------
Net deposits
Certificates $14,875 $15,633
Money market 7,109 6,337
Noninterest-bearing demand 4,867 4,810
Interest-bearing demand 3,985 3,989
Savings 2,581 2,857
-------------------
Total net deposits 33,417 33,626
Other liabilities 135 143
Assigned capital 1,433 1,419
-------------------
Total funds $34,985 $35,188
-------------------
PERFORMANCE RATIOS
Return on assigned capital 31% 27%
Noninterest income to total revenue 24 18
After-tax profit margin 26 24
Efficiency 52 56
=================================================================
</TABLE>
Regional Community Banking contributed 46% of total line of business earnings in
the first nine months of 1998 compared with 41% for the first nine months of
1997. Earnings of $337 million included $86 million of gains on the sales of 24
branches in Western Pennsylvania, Kentucky and Indiana that were offset by
one-time costs of $40 million related to consumer delivery initiatives, and
other one-time costs and valuation adjustments in other lines of business.
Excluding these items, earnings increased $21 million or 7% and performance
ratios improved due to strategies designed to respond to changing customer
preferences while improving the effectiveness and efficiency of the delivery
system. As a result of these strategies, noninterest expense before the one-time
costs in 1998 declined $42 million or 6% compared with the prior year. Net
interest income declined in the current period due to loan spread compression
and the impact of consumer migration to higher cost deposit products.
Regional Community Banking seeks to grow revenue through targeted marketing
efforts and will continue initiatives designed to leverage technology and reduce
the cost of the delivery system.
<TABLE>
<CAPTION>
CORPORATE BANKING
Nine months ended September 30 -
dollars in millions 1998 1997
- -------------------------------------------------------------------
<S> <C> <C>
INCOME STATEMENT
Credit-related revenue $ 249 $ 232
Noncredit revenue
Treasury management 150 144
Venture capital 73 58
Capital markets 54 41
Other 27 14
-------------------
Total noncredit revenue 304 257
-------------------
Total revenue 553 489
Provision for credit losses 44
Noninterest expense 267 259
-------------------
Pretax earnings 242 230
Income taxes 87 81
-------------------
Earnings $ 155 $ 149
-------------------
AVERAGE BALANCE SHEET
Loans
Middle market $ 5,125 $ 4,780
Specialized 4,546 4,029
Large corporate 4,143 4,448
Other 410 570
-------------------
Total loans 14,224 13,827
Other assets 1,000 906
-------------------
Total assets $15,224 $14,733
-------------------
Net deposits $ 2,514 $ 2,100
Assigned funds and other liabilities 11,593 11,533
Assigned capital 1,117 1,100
-------------------
Total funds $15,224 $14,733
-------------------
PERFORMANCE RATIOS
Return on assigned capital 19% 18%
Noncredit revenue to total revenue 55 53
After-tax profit margin 28 30
Efficiency 48 52
===================================================================
</TABLE>
Corporate Banking contributed 21% of total line of business earnings in the
first nine months of 1998 and 1997. Earnings for the first nine months of 1998
increased $6 million or 4%.
Credit-related revenue primarily represents net interest income from loans and
increased 7% in the comparison. Noncredit revenue, which includes noninterest
income and the benefit of compensating balances in lieu of fees, increased $47
million or 18% in the first nine months of 1998 reflecting growth in venture
capital, capital markets and treasury management income. Increases in noncredit
revenue and noninterest expense reflected strategies designed to expand revenue
from fee-based services while reducing reliance on balance sheet leverage.
PNC BANK CORP.
----
5
<PAGE> 7
FINANCIAL REVIEW
Expense levels reflect the investment in fee-based business offset by the
continued focus on operating efficiency in the traditional credit-related
business as the efficiency ratio declined to 48% in the first nine months of
1998 compared with 52% in the prior year.
The increase in the provision for credit losses related to credit exposure to
certain bankrupt affiliates of Allegheny Health, Education and Research
Foundation ("AHERF"), a portion of which became nonperforming in
the third quarter.
Corporate Banking engages in lending, venture capital and capital markets
activities, all of which are impacted by economic and financial market
conditions. Accordingly, a decline in the capital markets or an economic
slowdown could adversely impact results of operations.
<TABLE>
<CAPTION>
NATIONAL CONSUMER BANKING
Nine months ended September 30 -
dollars in millions 1998 1997
- ----------------------------------------------------------------
<S> <C> <C>
INCOME STATEMENT
Net interest income $ 354 $ 297
Noninterest income 179 209
------------------
Total revenue 533 506
Provision for credit losses 233 167
Noninterest expense 343 291
------------------
Pretax earnings (loss) (43) 48
Income taxes (benefit) (16) 18
------------------
Earnings (loss) $ (27) $ 30
------------------
AVERAGE BALANCE SHEET
Loans
Dealer finance $ 4,859 $ 5,312
Credit card 3,942 3,475
Education 1,149 1,302
Other 728 392
------------------
Total loans 10,678 10,481
Other assets 726 736
------------------
Total assets $11,404 $11,217
------------------
Net deposits $ 207 $ 84
Assigned funds and other liabilities 10,496 10,455
Assigned capital 701 678
------------------
Total funds $11,404 $11,217
------------------
PERFORMANCE RATIOS
Return on assigned capital (5)% 6%
Noninterest income to total revenue 34 41
After-tax profit margin (5) 6
Efficiency 59 52
================================================================
</TABLE>
National Consumer Banking incurred a loss of $27 million in the first nine
months of 1998 resulting from credit cards and the AAA affinity initiative which
have been unfavorably impacted by intense rate competition and changing consumer
credit conditions. Noninterest income for 1997 included $64 million of
nonrecurring gains. Excluding these gains, earnings declined $17 million in the
year-to-year comparison reflecting higher credit costs. The provision for credit
losses increased $66 million primarily as a result of higher credit card
outstandings.
On September 8, 1998, PNC Bank entered into an agreement with Direct Merchants
Credit Card Bank, National Association, a subsidiary of Metris Companies Inc.,
to sell approximately $1 billion of credit card outstandings to further reduce
the Corporation's risk profile. This portfolio accounts for one-third of credit
card net charge-offs. Management will continue taking aggressive actions
designed to enhance returns on the capital invested in this line of business.
<TABLE>
<CAPTION>
PRIVATE BANKING
Nine months ended September 30 -
dollars in millions 1998 1997
- ----------------------------------------------------------------
<S> <C> <C>
INCOME STATEMENT
Net interest income $ 92 $ 85
Noninterest income
Investment management and trust 234 200
Brokerage 50 46
Other 8 6
-----------------
Total noninterest income 292 252
-----------------
Total revenue 384 337
Provision for credit losses 1 3
Noninterest expense 236 219
-----------------
Pretax earnings 147 115
Income taxes 56 44
-----------------
Earnings $ 91 $ 71
-----------------
AVERAGE BALANCE SHEET
Loans
Residential mortgage $ 998 $ 1,066
Consumer 932 817
Commercial 595 479
Other 28 73
-----------------
Total loans 2,553 2,435
Other assets 71 65
-----------------
Total assets $ 2,624 $ 2,500
-----------------
Net deposits $ 2,181 $ 1,911
Assigned funds and other liabilities 36 241
Assigned capital 407 348
-----------------
Total funds $ 2,624 $ 2,500
-----------------
PERFORMANCE RATIOS
Return on assigned capital 30% 27%
Noninterest income to total revenue 76 75
After-tax profit margin 24 21
Efficiency 61 65
================================================================
</TABLE>
PNC BANK CORP.
----
6
<PAGE> 8
Private Banking contributed 12% of total line of business earnings in the first
nine months of 1998 compared with 10% a year ago. Earnings increased $20 million
or 28% in the first nine months of 1998 driven by revenue growth.
Net interest income increased 8% in the first nine months of 1998 due to loan
and deposit growth. Noninterest income increased $40 million or 16% from the
prior year due to an increase in assets under management resulting from new
business and an increase in brokerage accounts. Noninterest expense increased
$17 million supporting revenue growth and continuing investments in technology.
On August 20, 1998, the Corporation entered into an agreement to acquire
Hilliard-Lyons, Inc. ("Hilliard Lyons"), a retail brokerage firm with 90 offices
in 12 Midwestern and Southeastern states. Hilliard Lyons has focused on
delivering brokerage services and investment management expertise to affluent
clients. The transaction is expected to close in the fourth quarter of 1998,
subject to regulatory approvals.
Brokerage assets administered by Private Banking totaled $9 billion at September
30, 1998. As a result of the Hilliard Lyons acquisition these assets are
expected to increase to approximately $30 billion.
In addition to enhancing Private Banking's brokerage and investment management
capabilities, management expects the acquisition of Hilliard Lyons to expand the
retail distribution of capital markets products and provide customers with a
wider range of highly-regarded investment products.
<TABLE>
<CAPTION>
ASSETS UNDER MANAGEMENT
September 30 - in billions 1998 1997
- ----------------------------------------------------------------
<S> <C> <C>
Personal trust $35 $35
Institutional trust 6 6
Hawthorn 12 10
------------
Total $53 $51
================================================================
</TABLE>
Private Banking revenue is primarily affected by the volume of new business, the
value of assets managed, investment performance and financial market conditions.
Revenue may be positively affected by strong investment performance or improving
financial markets. Conversely, declining performance or deteriorating financial
markets may have an adverse effect on revenue.
<TABLE>
<CAPTION>
MORTGAGE BANKING
Nine months ended September 30 -
dollars in millions 1998 1997
- ----------------------------------------------------------------
<S> <C> <C>
INCOME STATEMENT
Residential mortgage servicing $ 142 $ 118
Origination and securitization 136 67
Sales of servicing and other 9 6
MSR amortization (214) (48)
Hedging activities 123
----------------
Net mortgage banking revenue 196 143
Net interest income 103 85
----------------
Total revenue 299 228
Operating expense 228 186
----------------
Pretax earnings 71 42
Income taxes 30 16
----------------
Earnings $ 41 $ 26
----------------
AVERAGE BALANCE SHEET
Residential mortgage loans $ 7,026 $ 7,701
Residential mortgages held for sale 2,608 1,306
Securities available for sale 945 428
Other assets 997 711
----------------
Total assets $11,576 $10,146
----------------
Escrow deposits $ 828 $ 587
Assigned funds and other liabilities 10,411 9,229
Assigned capital 337 330
----------------
Total funds $11,576 $10,146
----------------
PERFORMANCE RATIOS
Return on assigned capital 16% 11%
Net mortgage banking revenue to total revenue 66 63
After-tax profit margin 14 11
Efficiency 57 65
================================================================
</TABLE>
Mortgage Banking contributed 6% of total line of business earnings in the first
nine months of 1998 compared with 4% in the same period of 1997. Earnings
increased $15 million to $41 million in 1998 primarily due to higher business
volumes.
Revenue and expense growth resulted from higher loan origination volume and a
larger servicing portfolio. MSR amortization increased $166 million, reflecting
significant refinance activity and the larger servicing portfolio. Hedging
activities largely offset the impact of refinance activity on MSR amortization.
Securities available for sale increased $517 million and are part of Mortgage
Banking's hedging strategies.
PNC BANK CORP.
----
7
<PAGE> 9
FINANCIAL REVIEW
During the first nine months of 1998 Mortgage Banking funded $8.4 billion of
residential mortgages with 64% representing retail originations. The comparable
amounts were $4.1 billion and 73%, respectively, in the first nine months of
1997. The year-to-year increase reflects the combination of higher refinance
activity and initiatives to expand retail origination capabilities.
<TABLE>
<CAPTION>
RESIDENTIAL MORTGAGE SERVICING PORTFOLIO
In millions 1998 1997
- ----------------------------------------------------------------
<S> <C> <C>
January 1 $40,701 $39,543
Originations 8,371 4,068
Purchases 20,598 1,917
Repayments (8,330) (4,437)
Sales (1,066) (122)
------------------
September 30 $60,274 $40,969
================================================================
</TABLE>
During the third quarter, PNC Mortgage acquired servicing rights for
approximately 83,000 mortgages with an outstanding principal balance of $8.6
billion. With this acquisition, PNC Mortgage became the nation's 15th largest
servicer of home loans.
At September 30, 1998, the mortgage servicing portfolio totaled $60.3 billion,
including $51.8 billion of loans serviced for others, with a weighted-average
coupon of 7.75%. Capitalized MSR totaled $663 million at September 30, 1998 and
had an estimated fair value of $670 million.
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 as hedges designed to move in
the opposite direction of MSR value changes.
<TABLE>
<CAPTION>
SECURED LENDING
Nine months ended September 30 -
dollars in millions 1998 1997
- ----------------------------------------------------------------
<S> <C> <C>
INCOME STATEMENT
Net interest income $ 168 $ 154
Noninterest income
Commercial mortgage servicing 26
Origination and securitization (17)
----------------
Commercial mortgage banking 9
Corporate finance 15 11
Other 20 32
----------------
Total noninterest income 44 43
----------------
Total revenue 212 197
Provision for credit losses (10) (19)
Noninterest expense 107 56
----------------
Pretax earnings 115 160
Income taxes 36 58
----------------
Earnings $ 79 $ 102
----------------
AVERAGE BALANCE SHEET
Loans
Real estate $5,818 $4,570
Business credit 1,275 950
Leasing 1,077 878
----------------
Total loans 8,170 6,398
----------------
Commercial mortgages held for sale 238
Other assets 574 97
----------------
Total assets $8,982 $6,495
----------------
Net deposits $1,014 $ 761
Assigned funds and other liabilities 7,364 5,195
Assigned capital 604 539
----------------
Total funds $8,982 $6,495
----------------
PERFORMANCE RATIOS
Return on assigned capital 17% 25%
Noninterest income to total revenue 21 22
After-tax profit margin 37 52
Efficiency 42 28
================================================================
</TABLE>
Secured Lending contributed 11% of total line of business earnings in the first
nine months of 1998 compared with 14% in the prior-year period.
This line of business has made several acquisitions to provide additional
revenue growth opportunities reflecting the strategy to reduce balance sheet
leverage, increase noninterest income and expand nationally.
On April 3, 1998, PNC Bank acquired Midland Loan Services, L.P. ("Midland"), one
of the nation's largest servicers of commercial mortgages. This transaction
greatly expands PNC Bank's real estate financial services capabilities, which
now include origination, securitization, servicing, investment advisory and risk
management.
PNC BANK CORP.
----
8
<PAGE> 10
On April 15, 1998, the Corporation acquired the asset-based finance business of
BTM Capital Corp. The purchase included a $600 million portfolio of asset-based
loans and loan commitments and regional sales offices.
On July 31, 1998, PNC Bank acquired The Arcand Company, subsequently renamed
Columbia Housing Corporation ("Columbia"). Columbia is a leading tax credit
syndicator, principally engaged in the origination and distribution of
affordable housing limited partnerships.
The comparative results for the nine month periods reflected the impact of these
acquisitions. Earnings decreased $23 million primarily due to decreases in
commercial mortgage valuations in 1998 and $11 million of nonrecurring gains in
1997. The decline in commercial mortgage valuations reflected a significant
decrease in market liquidity for commercial mortgage-backed securities.
Management has taken actions to mitigate future exposure to this market
volatility by minimizing inventory exposure to valuation adjustments as well as
pricing in response to market conditions.
<TABLE>
<CAPTION>
COMMERCIAL MORTGAGE SERVICING PORTFOLIO
In millions 1998
- ----------------------------------------------------------------
<S> <C>
January 1
April 3 Acquisition $25,846
Originations 847
Purchases/additions 9,815
Repayments (4,210)
-------
September 30 $32,298
================================================================
</TABLE>
At September 30, 1998 the commercial mortgage servicing portfolio totaled $32.3
billion, including $31.9 billion serviced for others.
<TABLE>
<CAPTION>
ASSET MANAGEMENT
Nine months ended September 30 -
dollars in millions 1998 1997
- ----------------------------------------------------------------
<S> <C> <C>
INCOME STATEMENT
Revenue $172 $115
Operating expense 119 82
---------------
Pretax earnings 53 33
Income taxes 23 14
---------------
Earnings $30 $19
---------------
AVERAGE BALANCE SHEET
Total assets $269 $257
---------------
Liabilities $110 $109
Assigned capital 159 148
---------------
Total funds $269 $257
---------------
PERFORMANCE RATIOS
Return on assigned capital 25% 17%
After-tax profit margin 17 17
Efficiency 65 65
================================================================
</TABLE>
Asset Management contributed 4% of total line of business earnings in the first
nine months of 1998 compared with 3% for the first nine months of 1997. Earnings
increased 58% in the first nine months of 1998 driven by higher assets under
management reflecting new business generated by BlackRock.
In 1998 PNC Bank's fixed income, equity and liquidity businesses were
consolidated under BlackRock. This combination created one of the largest asset
managers in the United States. BlackRock's focus is on expanding marketing and
delivery channels for a wide range of institutional and retail investment
products.
<TABLE>
<CAPTION>
ASSETS UNDER MANAGEMENT
September 30 - in billions 1998 1997
- ----------------------------------------------------------------
<S> <C> <C>
Fixed income $ 63 $ 52
Liquidity 45 37
Equity and other 13 11
---------------
Total assets under management $121 $100
---------------
Proprietary mutual funds
BlackRock Funds $22 $ 14
Other 22 19
---------------
Total proprietary mutual funds $44 $33
================================================================
</TABLE>
At September 30, 1998 89% of assets under management were invested in fixed
income and liquidity funds which have historically been less volatile than
equity funds.
Asset Management revenue is primarily affected by the volume of new business,
the value of assets managed, investment performance and financial market
conditions. Revenue may be positively affected by strong investment performance
or improving financial markets. Conversely, declining performance or
deteriorating financial markets may have an adverse effect on revenue.
PNC BANK CORP.
----
9
<PAGE> 11
FINANCIAL REVIEW
<TABLE>
<CAPTION>
MUTUAL FUND SERVICING
Nine months ended September 30 -
dollars in millions 1998 1997
- ----------------------------------------------------------------
<S> <C> <C>
INCOME STATEMENT
Revenue $141 $110
Operating expense 92 70
---------------
Pretax earnings 49 40
Income taxes 19 15
---------------
Earnings $ 30 $ 25
---------------
AVERAGE BALANCE SHEET
Total assets $213 $148
---------------
Net deposits $107 $ 60
Other liabilities 19 16
Assigned capital 87 72
---------------
Total funds $213 $148
---------------
PERFORMANCE RATIOS
Return on assigned capital 46% 46%
After-tax profit margin 21 23
Efficiency 65 64
================================================================
</TABLE>
Mutual Fund Servicing contributed 4% of total line of business earnings in the
first nine months of 1998 and 1997. Earnings increased $5 million or 20% in the
year-to-year comparison. Revenue grew 28% as PFPC capitalized on its strong
capabilities as a provider of customized products and services.
Assets and accounts serviced by PFPC were as follows:
<TABLE>
<CAPTION>
September 30 1998 1997
- ----------------------------------------------------------------
<S> <C> <C>
Assets (billions)
Custody $287 $212
Accounting/administration 228 175
- ----------------------------------------------------------------
Accounts (millions)
Shareholder 4.8 4.2
Checking and credit/debit card 2.1 2.0
================================================================
</TABLE>
CONSOLIDATED INCOME STATEMENT REVIEW
<TABLE>
<CAPTION>
CONDENSED INCOME STATEMENT (taxable-equivalent basis)
Nine months ended September 30 -
in millions 1998 1997 Change
- ----------------------------------------------------------------
<S> <C> <C> <C>
Net interest income $1,934 $1,885 $ 49
Provision for credit losses 110 45 65
Noninterest income before
net securities gains 1,750 1,310 440
Net securities gains 76 27 49
Noninterest expense 2,365 1,946 419
Income taxes 455 444 11
-----------------------
Net income $ 830 $ 787 $ 43
================================================================
</TABLE>
NET INTEREST INCOME Taxable-equivalent net interest income increased $49 million
from the first nine months of 1997. The net interest margin was 3.86% compared
with 3.91% in the prior-year period. Changes in net interest income and margin
result from the interaction between the volume and composition of earning
assets, related yields and associated funding costs. Accordingly, portfolio
size, composition and related yields earned and funding costs can have a
significant impact on net interest income and margin.
The increase in net interest income was due to a $2.6 billion increase in
average earning assets which more than offset a narrower net interest margin.
Average loans grew 4.7% to $55.1 billion, a $2.5 billion increase from the prior
year. Growth in commercial loans and credit cards more than offset the impact of
loan securitizations and the downsizing of the indirect automobile lending
portfolio. The increase in average loans held for sale was $1.7 billion
reflecting higher residential mortgage originations and the commercial mortgage
inventory of Midland.
PNC BANK CORP.
----
10
<PAGE> 12
<TABLE>
<CAPTION>
NET INTEREST INCOME ANALYSIS
Taxable-equivalent basis Average Balances Interest Income/Expense Average Yields/Rates
------------------------------------------------------------------------------------------
Nine months ended September 30 -
dollars in millions 1998 1997 Change 1998 1997 Change 1998 1997 Change
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets
Loans held for sale $ 3,059 $ 1,329 $ 1,730 $ 162 $ 73 $ 89 7.03% 7.32% (29)bp
Securities available for sale 7,391 9,113 (1,722) 327 426 (99) 5.91 6.23 (32)
Loans, net of unearned income
Consumer (excluding credit card) 11,073 11,352 (279) 706 719 (13) 8.53 8.47 6
Credit card 3,942 3,475 467 407 329 78 13.81 12.68 113
Residential mortgage 12,598 13,152 (554) 687 735 (48) 7.26 7.45 (19)
Commercial 22,159 18,737 3,422 1,320 1,107 213 7.85 7.79 6
Commercial real estate 3,224 4,067 (843) 208 267 (59) 8.52 8.65 (13)
Other 2,133 1,868 265 112 96 16 7.01 6.90 11
---------------------------- -------------------------
Total loans, net of unearned income 55,129 52,651 2,478 3,440 3,253 187 8.29 8.21 8
Other 1,042 900 142 50 40 10 6.35 5.92 43
---------------------------- -------------------------
Total interest-earning assets/
interest income 66,621 63,993 2,628 3,979 3,792 187 7.94 7.87 6
Noninterest-earning assets 7,078 6,575 503
----------------------------
Total assets $73,699 $70,568 $3,131
============================
Interest-bearing liabilities
Deposits
Demand and money market $14,430 $13,318 $1,112 322 286 36 2.99 2.87 12
Savings 2,644 2,919 (275) 39 43 (4) 1.98 1.97 1
Other time 16,995 17,570 (575) 691 711 (20) 5.43 5.41 2
Deposits in foreign offices 1,017 1,127 (110) 43 47 (4) 5.57 5.49 8
---------------------------- -------------------------
Total interest-bearing deposits 35,086 34,934 152 1,095 1,087 8 4.17 4.16 1
Borrowed funds 21,501 18,584 2,917 950 820 130 5.83 5.84 (1)
---------------------------- -------------------------
Total interest-bearing
liabilities/interest expense 56,587 53,518 3,069 2,045 1,907 138 4.80 4.74 6
------------------------- ---------------------------
Noninterest-bearing liabilities,
capital securities and shareholders'
equity 17,112 17,050 62
----------------------------
Total liabilities and
shareholders' equity $73,699 $70,568 $3,131
============================
Interest rate spread 3.14 3.13
Impact of noninterest-bearing sources .72 .78 (5)
---------------------------
Net interest income/margin $1,934 $1,885 $ 49 3.86% 3.91% (5)bp
====================================================================================================================================
</TABLE>
The narrowing of the net interest margin was primarily due to a change in
balance sheet composition as well as declining spreads resulting from
competitive pressures on certain loan and deposit products. Partially offsetting
these unfavorable factors was a decrease of $1.7 billion in average securities
available for sale which represented 11% of average earning assets compared with
14% a year ago.
Funding cost is affected by the composition of funding sources as well as
related rates paid thereon. Average deposits comprised 60.3% and 63.1% of PNC
Bank's total sources of funding for the nine months ended September 30, 1998 and
1997, respectively, with the remainder primarily comprised of wholesale funding
obtained at prevailing market rates.
Management anticipates modest balance sheet growth and continued competitive
pressure on the net interest margin throughout the remainder of 1998.
PROVISION FOR CREDIT LOSSES The provision for credit losses was $110 million in
the first nine months of 1998 compared with $45 million in the prior-year
period. Management expects to further increase the provision for credit losses
in the fourth quarter taking into account the allowance for credit losses
relative to economic conditions, the status of credit exposure to affiliates of
AHERF and net charge-off levels, among other factors.
PNC BANK CORP.
----
11
<PAGE> 13
FINANCIAL REVIEW
NONINTEREST INCOME
<TABLE>
<CAPTION>
Change
Nine months ended September 30 - -----------------
dollars in millions 1998 1997 Amount Percent
- -------------------------------------------------------------------
<S> <C> <C> <C> <C>
Asset management $ 421 $ 333 $ 88 26.4%
Mutual fund servicing 134 104 30 28.8
Service charges on deposits 150 152 (2) (1.3)
Consumer services
Credit card 94 64 30 46.9
Brokerage 49 40 9 22.5
Insurance 32 29 3 10.3
Other 99 91 8 8.8
-------------------------
Total consumer services 274 224 50 22.3
Corporate finance and
capital markets
Capital markets 37 30 7 23.3
Commercial mortgage
servicing 26 26 NM
Other 112 113 (1) (.9)
-------------------------
Total corporate
finance and capital
markets 175 143 32 22.4
Mortgage banking
Residential mortgage
servicing 106 86 20 23.3
Origination 56 33 23 69.7
Marketing 78 35 43 NM
Sales of servicing 7 2 5 NM
-------------------------
Total mortgage banking 247 156 91 58.3
Net securities gains 76 27 49 NM
Other 349 198 151 76.3
-------------------------
Total $1,826 $1,337 $489 36.6%
====================================================================
</TABLE>
NM - not meaningful
NONINTEREST INCOME Noninterest income increased $489 million or 37% for the
first nine months of 1998 and included $86 million of gains from sales of 24
branches in Western Pennsylvania, Kentucky and Indiana, that were offset by
one-time costs related to consumer delivery initiatives, improvements in credit
card operations and the impact of valuation adjustments on certain
market-sensitive asset positions. Noninterest income also included $123 million
of trading and securities gains that resulted from mortgage banking hedging
activities and largely offset an increase in the amortization of residential
MSR.
Asset management fees increased 26% primarily due to new business. Assets under
management increased 20% to $152 billion at September 30, 1998 compared with
$127 billion a year ago. Mutual fund servicing fees grew 29% resulting from an
increase in assets and accounts serviced. At September 30, 1998, custody and
accounting/administration services were provided for $287 billion and $228
billion of mutual fund assets, respectively. The comparable amounts were $212
billion and $175 billion, respectively, a year ago.
Consumer services revenue increased 22% primarily due to higher credit card fees
related to growth in accounts. Corporate finance and capital markets fees
increased $32 million including $26 million of commercial mortgage servicing
revenue from Midland.
Mortgage banking revenue grew primarily due to higher marketing gains and
origination volume reflecting significant mortgage refinance activity and new
business in the first nine months of 1998.
Net securities gains were $76 million in the first nine months of 1998 including
$62 million resulting from MSR hedging activities. Other noninterest income
increased primarily due to the branch gains, trading gains from MSR hedging
activities and higher venture capital income.
NONINTEREST EXPENSE
<TABLE>
<CAPTION>
Change
Nine months ended September 30 - -----------------
dollars in millions 1998 1997 Amount Percent
- -------------------------------------------------------------------
<S> <C> <C> <C> <C>
Staff expense
Compensation $ 867 $ 762 $105 13.8%
Employee benefits 156 157 (1) (.6)
-------------------------
Total staff expense 1,023 919 104 11.3
Net occupancy and equipment
Net occupancy 148 140 8 5.7
Equipment 149 132 17 12.9
-------------------------
Total net occupancy
and equipment 297 272 25 9.2
Amortization
Mortgage servicing
rights 222 49 173 NM
Goodwill 49 40 9 22.5
Other 32 29 3 10.3
-------------------------
Total amortization 303 118 185 NM
Marketing 79 59 20 33.9
Distributions on
capital securities 44 30 14 46.7
Other 619 548 71 13.0
-------------------------
Total $2,365 $1,946 $419 21.5%
====================================================================
</TABLE>
NM - not meaningful
NONINTEREST EXPENSE Noninterest expense increased $419 million or 22% in the
first nine months of 1998. Higher MSR amortization of $173 million and
approximately $55 million of one-time costs for consumer delivery initiatives,
employee displacements and the streamlining of credit card operations
contributed to the increase. The remaining increase in noninterest expense was
primarily due to incentive compensation commensurate with revenue growth, the
impact of Midland and higher marketing costs associated with National Consumer
Banking initiatives. Average full-time equivalent employees totaled
approximately 25,300 in the first nine months of 1998 compared with 24,600 in
the prior-year period.
PNC BANK CORP.
----
12
<PAGE> 14
CONSOLIDATED BALANCE SHEET REVIEW
PERIOD-END BALANCE SHEET HIGHLIGHTS
<TABLE>
<CAPTION>
September 30 December 31
In millions 1998 1997 Change
- ------------------------------------------------------------------
<S> <C> <C> <C>
Assets $76,238 $75,120 $ 1,118
Earning assets 68,638 66,688 1,950
Loans, net of unearned income 56,752 54,245 2,507
Securities available for sale 7,152 8,522 (1,370)
Deposits 46,875 47,649 (774)
Borrowed funds 19,972 19,622 350
Shareholders' equity 5,793 5,384 409
==================================================================
</TABLE>
LOANS Loans outstanding increased $2.5 billion from year-end 1997 to $56.8
billion at September 30, 1998 primarily in Corporate Banking and Secured
Lending. Certain reclassifications of loan balances were made for the current
reporting period; however, prior-period amounts were not restated.
LOANS
<TABLE>
<CAPTION>
September 30 December 31
In millions 1998 1997
- ------------------------------------------------------------------
<S> <C> <C>
Consumer
Home equity $ 5,562 $ 4,848
Credit card 3,874 3,830
Automobile 2,685 3,221
Education 1,124 1,223
Other 1,749 1,913
---------------------
Total consumer 14,994 15,035
Residential mortgage 12,388 12,785
Commercial
Manufacturing 4,838 3,838
Retail/wholesale 4,175 3,575
Service providers 2,825 2,497
Real estate related 2,635 2,047
Communications 1,613 1,154
Health care 1,331 1,504
Financial services 1,807 1,027
Other 5,015 4,347
---------------------
Total commercial 24,239 19,989
Commercial real estate
Mortgage 812 1,848
Real estate project 2,026 2,126
---------------------
Total commercial real estate 2,838 3,974
Lease financing and other 2,738 2,874
Unearned income (445) (412)
---------------------
Total, net of unearned income $56,752 $54,245
==================================================================
</TABLE>
The loan portfolio remained relatively consistent in the comparison and
composition continues to be geographically diversified among numerous industries
and types of businesses. As the Corporation's businesses evolve, the loan
portfolio is expected to remain diversified.
NET UNFUNDED COMMITMENTS
<TABLE>
<CAPTION>
September 30 December 31
In millions 1998 1997
- ------------------------------------------------------------------
<S> <C> <C>
Consumer (excluding credit card) $ 3,653 $ 3,363
Credit card 16,812 16,385
Residential mortgage 4,882 2,144
Commercial 31,785 29,707
Commercial real estate 906 1,167
Other 701 1,082
----------------------
Total $58,739 $53,848
==================================================================
</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 $5.4 billion and $5.9 billion of participations, assignments and
syndications, primarily to financial institutions, at September 30, 1998 and
December 31, 1997, respectively.
Net outstanding letters of credit totaled $4.6 billion and $4.7 billion at
September 30, 1998 and December 31, 1997, respectively, and consisted primarily
of standby letters of credit which commit the Corporation to make payments on
behalf of customers when certain specified future events occur.
SECURITIES AVAILABLE FOR SALE The securities portfolio declined $1.4 billion
from year-end 1997 to $7.2 billion at September 30, 1998. The expected
weighted-average life of the securities portfolio was 3 years and 9 months at
September 30, 1998 compared with 2 years and 9 months at year-end 1997.
SECURITIES AVAILABLE FOR SALE
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
-------------------- --------------------
Amortized Fair Amortized Fair
In millions Cost Value Cost Value
- ------------------------------------------------------------------
<S> <C> <C> <C> <C>
Debt securities
U.S. Treasury and
government agencies
$1,573 $1,632 $1,102 $1,105
Mortgage-backed 3,761 3,751 4,672 4,623
Asset-backed 983 989 2,079 2,083
State and municipal 132 138 170 177
Other debt 33 35 34 33
Corporate stocks and other 644 607 501 501
-------------------------------------
Total $7,126 $7,152 $8,558 $8,522
==================================================================
</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.
Unrealized gains and losses are reflected in other comprehensive income. No
financial derivatives were designated to securities available for sale at
September 30, 1998 and December 31, 1997.
PNC BANK CORP.
----
13
<PAGE> 15
FINANCIAL REVIEW
FUNDING SOURCES Deposits were $46.9 billion at September 30, 1998, a decline of
$774 million from December 31, 1997. Liquidity was strengthened as 42% of
wholesale liabilities had a maturity beyond one year at September 30, 1998
compared with 32% at September 30, 1997. A $350 million increase in borrowed
funds from $19.6 billion at year-end 1997 was primarily the result of increases
in bank notes and senior debt, repurchase agreements and other borrowed funds
partially offset by a decline in federal funds purchased. During the first nine
months of 1998, the Corporation continued to expand funding sources by issuing
$800 million of bank notes under the Euro medium-term bank note program.
FUNDING SOURCES
<TABLE>
<CAPTION>
September 30 December 31
In millions 1998 1997
- ------------------------------------------------------------------
<S> <C> <C>
Deposits
Demand, savings and money market $26,677 $27,475
Time 17,173 17,125
Foreign 3,025 3,049
----------------------
Total deposits 46,875 47,649
Borrowed funds
Bank notes and senior debt 10,558 9,826
Federal funds purchased 771 3,632
Repurchase agreements 1,041 714
Other borrowed funds 5,759 3,753
Subordinated debt 1,843 1,697
----------------------
Total borrowed funds 19,972 19,622
----------------------
Total $66,847 $67,271
==================================================================
</TABLE>
CAPITAL The access to and cost of funding new business initiatives including
acquisitions, ability to pay dividends, deposit insurance costs, 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 September 30, 1998, the Corporation and each bank subsidiary met
the well capitalized capital ratio requirements.
RISK-BASED CAPITAL
<TABLE>
<CAPTION>
September 30 December 31
Dollars in millions 1998 1997
- ------------------------------------------------------------------
<S> <C> <C>
Capital components
Shareholders' equity
Common $ 5,479 $ 5,069
Preferred 314 315
Trust preferred capital securities 850 650
Goodwill and other (1,305) (949)
Net unrealized securities losses (17) 23
--------------------
Tier I risk-based capital 5,321 5,108
Subordinated debt 1,640 1,666
Eligible allowance for credit losses 816 861
--------------------
Total risk-based capital $ 7,777 $ 7,635
====================
Assets
Risk-weighted assets and
off-balance-sheet instruments $71,178 $68,756
Average tangible assets 74,065 69,948
====================
Capital ratios
Tier I risk-based 7.48% 7.43%
Total risk-based 10.93 11.11
Leverage 7.18 7.30
==================================================================
</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 April 1998, the Corporation issued $140 million of 6.5% subordinated notes
that qualify as Tier II risk-based capital. In June 1998, the Corporation issued
$200 million of floating rate mandatorily redeemable capital securities bearing
interest at a rate per annum equal to 3-month LIBOR plus 57 basis points. The
rate in effect at September 30, 1998 was 6.195%. These mandatorily redeemable
capital securities qualify as Tier I risk-based capital.
In May 1998, the Corporation called $39 million of 8.25% convertible
subordinated debentures at par redeemable in June. Prior to the redemption date,
these debentures were converted into common stock at a conversion price of
$23.41. The conversion of these debentures resulted in a corresponding increase
in shareholders' equity.
PNC BANK CORP.
----
14
<PAGE> 16
During the first nine months of 1998, PNC Bank repurchased 4.8 million shares of
common stock. The Corporation's board of directors authorized in April 1998 the
repurchase of up to 10 million shares of common stock through April 30, 1999.
Approximately 9.0 million shares remain under this authorization.
YEAR 2000 READINESS
The Corporation has been working since 1995 to prepare its computer systems and
applications to meet the year 2000 challenge. This process involves reviewing,
modifying and replacing existing hardware, software and embedded chip technology
systems, as necessary, and communicating with external service providers and
customers as to whether they are addressing their year 2000 issues. The
Corporation is also assessing the potential for computer systems of third
parties such as vendors, customers, governmental entities and others to impact
the Corporation's business operations. The Corporation has not identified any
material third party problems to date, but continues to assess the situation.
Given the Corporation's common technology infrastructure and the progress made
to date, management estimates that the review and modification of its computer
systems and applications will be substantially completed by December 31, 1998.
As of October 31, 1998, approximately 90% of the Corporation's internally
supported mainframe, mid-range and PC client-server systems have been tested and
returned to production as year 2000 ready. Also, approximately 90% of the
Corporation's non-PC related hardware and systems software have been tested and
determined to be year 2000 ready.
The Corporation has also undertaken an organization-wide assessment of year 2000
issues relating to its mission critical systems which utilize embedded chip
technologies. As of October 31, 1998, the assessment of embedded chip technology
systems is approximately 90% complete. No significant problems have been
identified to date with respect to embedded chip technology systems.
The Corporation is taking steps designed to determine the year 2000 preparedness
of its 1,300 identified mission critical service providers and approximately
3,000 largest lending relationships. The assessment of the year 2000
preparedness of critical service providers is scheduled for completion by
year-end 1998. The assessment of the Corporation's largest lending relationships
is ongoing; PNC Bank intends to follow up with inquiries during the remainder of
1998 and in 1999.
During the spring of 1999, PNC Bank plans to conduct fully integrated testing of
its systems and applications to determine whether its mission critical
application systems will perform their functions in coordination with one
another. The mission critical applications systems will be tested on year
2000-compliant hardware and software using dates of December 31, 1999, January
3, 2000, February 29, 2000 and additional dates, if determined to be
appropriate. The Corporation also intends to conduct testing during 1999 with
those mission critical vendors that provide systems-related services.
The estimated total cost to become year 2000 compliant, which is being expensed
as incurred, is approximately $30 million. Through September 30, 1998, the
Corporation has expensed approximately $18 million related to the year 2000
effort and anticipates that approximately 25% of the remaining costs will be
incurred in the fourth quarter of 1998. Of the projected total year 2000
expenses, approximately 45% relate to internally allocated information
technology costs. No significant outlays have been made to replace existing
systems solely for year 2000 compliance reasons. The costs and the timetable in
which the Corporation plans to complete the Year 2000 readiness activities are
based on management's best estimates, which were derived using numerous
assumptions of future events including the continued availability of certain
resources, third party readiness plans and other factors. The Corporation can
make no guarantee that these estimates will be achieved, and actual results
could differ from such plans.
Contingency plans have been completed for all systems and applications that were
not remediated and tested by October 31, 1998. Contingency plans are also being
developed for critical service providers as determined appropriate based on
their responses to the Corporation's year 2000 readiness inquiries.
Additionally, the Corporation is presently reviewing and finalizing business
continuity and disaster recovery plans for each line of business. All
contingency plans will be subject to review during the next 15 months and
modified when necessary or appropriate. Certain contingency plans will be tested
during 1999.
PNC Bank's year 2000 remedial efforts and contingency plans are subject to
oversight and regulation by certain federal bank regulatory authorities.
It is not possible to predict with certainty all of the adverse effects that
could result from a failure of the Corporation or of third parties to become
fully year 2000 compliant or whether such effects could have a material impact
on the Corporation. However, if the Corporation were to fail to correct its
internal year 2000 problems, or if one or more of its third party providers are
unable due to year 2000 issues to provide services required by the Corporation,
a disruption of operations, resulting in increased operating costs and other
adverse effects, could result. In addition, to the extent customers' financial
positions are weakened due to year 2000 issues, credit quality could be
adversely affected.
PNC BANK CORP.
----
15
<PAGE> 17
FINANCIAL REVIEW
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,
requiring collateral or selling participations to third parties and purchasing
credit-related derivatives.
NONPERFORMING ASSETS
<TABLE>
<CAPTION>
September 30 December 31
Dollars in millions 1998 1997
- ----------------------------------------------------------------
<S> <C> <C>
Nonperforming loans
Commercial $148 $128
Commercial real estate
Mortgage 44 84
Real estate project 29 10
Residential mortgage 56 44
Consumer 5 10
-----------------
Total nonperforming loans 282 276
Foreclosed assets
Commercial real estate 20 27
Residential mortgage 18 21
Other 9 9
-----------------
Total foreclosed assets 47 57
-----------------
Total nonperforming assets $329 $333
=================
Nonperforming loans to loans .50% .51%
Nonperforming assets to loans and
foreclosed assets .58 .61
Nonperforming assets to assets .43 .44
================================================================
</TABLE>
The amount of nonperforming loans that were current as to principal and interest
was $30 million at September 30, 1998 and $34 million at December 31, 1997.
There were no restructured loans outstanding as of either period end presented.
The increase in nonperforming loans from December 31, 1997 reflected $40 million
related to AHERF that became nonperforming in the third quarter while all other
nonperforming loans declined $34 million.
<TABLE>
<CAPTION>
CHANGE IN NONPERFORMING ASSETS
In millions 1998 1997
- ----------------------------------------------------------------
<S> <C> <C>
January 1 $ 333 $ 459
Transferred from accrual 216 232
Returned to performing (11) (20)
Principal reductions (139) (154)
Sales (40) (73)
Charge-offs and valuation adjustments (30) (50)
------------------
September 30 $ 329 $ 394
================================================================
</TABLE>
<TABLE>
<CAPTION>
ACCRUING LOANS PAST DUE 90 DAYS OR MORE
Amount Percent of Loans
--------------------------- ---------------------------
September 30 December 31 September 30 December 31
Dollars in millions 1998 1997 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Consumer
Guaranteed education $ 22 $ 26 1.96% 2.32%
Credit card 70 69 1.81 1.80
Other 31 32 .31 .33
------------------
Total consumer 123 127 .82 .87
Residential mortgage 56 60 .45 .47
Commercial 58 78 .22 .39
Commercial real estate 30 23 1.06 .59
------------------
Total $267 $288 .47 .53
===============================================================================
</TABLE>
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, national and global 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.
<TABLE>
<CAPTION>
ALLOWANCE FOR CREDIT LOSSES
In millions 1998 1997
- ----------------------------------------------------------------
<S> <C> <C>
January 1 $ 972 $1,166
Charge-offs (321) (280)
Recoveries 54 88
------------------
Net charge-offs (267) (192)
Provision for credit losses 110 45
Acquisitions 1 8
------------------
September 30 $ 816 $1,027
================================================================
</TABLE>
The allowance as a percent of nonperforming loans and period-end loans was 289%
and 1.44%, respectively, at September 30, 1998. The comparable year-end 1997
amounts were 352% and 1.79%.
PNC BANK CORP.
----
16
<PAGE> 18
<TABLE>
<CAPTION>
CHARGE-OFFS AND RECOVERIES
Nine months ended Net Percent of
September 30 - Charge- Charge- Average
dollars in millions offs Recoveries offs Loans
- --------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998
Consumer (excluding
credit card) $ 67 $27 $ 40 .48%
Credit card 220 12 208 7.05
Residential mortgage 6 1 5 .05
Commercial 21 12 9 .05
Commercial real estate 7 2 5 .21
--------------------------
Total $321 $54 $267 .65
- --------------------------------------------------------------------
1997
Consumer (excluding
credit card) $ 80 $27 $ 53 .62%
Credit card 154 20 134 5.16
Residential mortgage 8 1 7 .07
Commercial 31 34 (3) (.02)
Commercial real estate 7 6 1 .03
--------------------------
Total $280 $88 $192 .49
====================================================================
</TABLE>
LIQUIDITY RISK Liquidity represents an institution's ability to obtain funds at
reasonable rates to satisfy commitments to borrowers, demands of depositors and
debtholders and to invest in strategic initiatives. Liquidity risk represents
the possibility that the Corporation would be unable to generate, or otherwise
obtain, funds at reasonable rates to satisfy such obligations or investments.
Key factors affecting the Corporation's liquidity include the availability and
distribution of funding by type and maturity, asset quality, current and future
earnings expectations, market factors, and management and business outlooks and
strategies.
Liquidity risk is centrally managed by Asset & Liability Management. The
Corporation manages liquidity risk considering the trend of overnight funding
and upcoming asset and liability maturities, product, customer and industry
concentrations of wholesale funding, securities portfolio liquidity, market
factors such as interest rate swap, bank note and subordinated debt spreads and
the Corporation's earnings expectations.
Liquidity risk management is complemented by the Corporation's ability to raise
funds in the capital markets through asset securitizations or sales. 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 short-term investments, loans held for sale and
securities available for sale. At September 30, 1998, such assets totaled $12
billion, with $3.7 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 September 30, 1998, approximately $4.5 billion of
residential mortgages were available as collateral for borrowings from the FHLB.
Liquidity for the parent company and subsidiaries is also generated through the
issuance of securities in public or private markets and lines of credit. The
Corporation has unused capacity under effective shelf registration statements of
approximately $1.3 billion of debt and equity securities and $400 million of
trust preferred capital securities. During the first nine months of 1998, the
Corporation issued $140 million of subordinated debt and $200 million of trust
preferred capital securities. In addition, the Corporation has $500 million
unused line of credit.
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 $876 million at September 30, 1998. Dividends
may also be impacted by capital needs, regulatory requirements, corporate
policies, contractual restrictions and other factors.
Management believes the Corporation has sufficient liquidity to meet current
obligations to borrowers, depositors, debtholders and others. The impact of
replacing maturing liabilities is reflected in the income simulation model used
in the overall asset/liability management process.
INTEREST RATE RISK Interest rate risk arises primarily through the Corporation's
core business activities of extending loans and accepting deposits. Many
factors, including economic and financial conditions, movements in market
interest rates and consumer preferences affect the spread between interest
earned on assets and interest paid on liabilities. In managing interest rate
risk, the Corporation seeks to minimize its reliance on a particular interest
rate scenario as a source of earnings, while maximizing net interest income and
net interest margin. To achieve these objectives, the Corporation uses
securities purchases and sales, long-term and short-term funding vehicles,
financial derivatives and other capital markets instruments.
Interest rate risk is centrally managed by Asset and Liability ("A&L")
Management. The Corporation actively measures and monitors all components of
interest rate risk including term structure or repricing risk, yield curve or
nonparallel rate shift risk, basis risk and options risk. Senior management's
Corporate Asset & Liability Committee ("ALCO") provides strategic direction to
A&L Management and, in doing so, reviews capital markets activities and interest
rate risk exposures. The Finance Committee of the Board of Directors
PNC BANK CORP.
----
17
<PAGE> 19
FINANCIAL REVIEW
is responsible for overseeing the Corporation's interest rate risk management
process.
The Corporation measures and manages both the short-term and long-term effects
of changing interest rates. A net interest income simulation model is used to
measure the sensitivity of net interest income to changing interest rates over
the next twenty-four month period; and an economic value of equity model is used
to measure the sensitivity of the value of existing on-balance-sheet and
off-balance-sheet positions to changing interest rates.
The income simulation model is the primary tool used to measure the direction
and magnitude of changes in net interest income resulting from changes in
interest rates. Forecasting net interest income and its sensitivity to changes
in interest rates requires that the Corporation make assumptions about the
volume and characteristics of new business and the behavior of existing
positions. These business assumptions are based on the Corporation's experience,
line of business plans and published industry experience with input by key line
of business managers. Any significant changes in major assumptions are reviewed
by ALCO. This review includes an assessment of the motivation for the change and
its effect on the simulated results. Key assumptions employed in the model
include prepayment speeds on mortgage-related assets and consumer loans, loan
volumes and pricing, deposit volumes and pricing, the expected life and
repricing characteristics of nonmaturity loans and deposits and management's
financial and capital plans.
Because these assumptions are inherently uncertain, the model cannot precisely
estimate net interest income or precisely predict the effect of higher or lower
interest rates on net interest income. Actual results will differ from simulated
results due to timing, magnitude and frequency of interest rate changes, the
difference between actual experience and the assumed volume and characteristics
of new business and the behavior of existing positions, and changes in market
conditions and management strategies, among other factors.
The Corporation's interest rate risk management policies provide that net
interest income should not decrease by more than 3% if interest rates gradually
increase or decrease from current rates by 100 basis points over a twelve-month
period. Through the first nine months of 1998, the Corporation's interest rate
risk exposures were consistently within policy limits. At September 30, 1998, if
interest rates were to increase by 100 basis points over the next twelve months,
net interest income would increase by 0.3%. If interest rates were to decrease
by 100 basis points over the next twelve months, net interest income would
decline by 0.4%.
The Corporation models additional interest rate scenarios covering a wider range
of rate movements to identify yield curve, term structure and basis risk
exposures. These scenarios are developed based on historical rate relationships
or management's expectations regarding the future direction and level of
interest rates. Depending on market conditions and other factors, these
scenarios may be modeled more or less frequently. Such analyses are used in
conjunction with the income simulation model and economic value of equity model
to identify inherent risk and develop appropriate strategies.
The Corporation measures the sensitivity of the value of its balance sheet and
off-balance sheet positions to movements in interest rates using an economic
value of equity sensitivity model. The model computes the value of all current
on- balance-sheet and off-balance-sheet positions under a range of instantaneous
interest rate changes. The resulting change in the value of equity is the
measure of overall long-term interest rate risk inherent in the Corporation's
existing on-balance-sheet and off-balance-sheet positions. The Corporation uses
the economic value of equity model to complement the income simulation modeling
process.
The Corporation's risk management policies provide that the change in economic
value of equity should not decline by more than 1.5% as a percentage of the book
value of assets for a 200 basis point instantaneous increase or decrease in
interest rates.
Based on the results of the economic value of equity model at September 30,
1998, if interest rates were to increase by 200 basis points, the economic value
of existing on-balance-sheet and off-balance-sheet positions would decline by
0.12% of assets. If interest rates were to decrease by 200 basis points, the
economic value of existing on-balance-sheet and off-balance-sheet positions
would decline by 0.19% of assets.
MARKET RISK Most of PNC Bank's trading activities are designed to provide
capital markets services for Corporate Banking and Private Banking customers.
While some market risk exposure is a necessary outgrowth of providing services
to customers. The performance of PNC Bank's trading operations is predominantly
based on providing services to customers and not on positioning the
Corporation's portfolio for gains from market movements.
PNC Bank's market risk is predominantly related to interest rate risk associated
with normal loan and deposit taking. Market risk associated with trading,
capital markets and foreign exchange activities is managed using a value-at-risk
approach that combines interest rate risk, foreign exchange rate risk, spread
risk and volatility risk. Exposure is measured as the maximum loss due to a two
standard deviation one day move. The combined period-end value-at-risk of all
trading operations was less than $400 thousand at September 30, 1998.
PNC BANK CORP.
----
18
<PAGE> 20
FINANCIAL DERIVATIVES
A variety of off-balance-sheet financial derivatives are used as part of the
overall risk management process to manage interest rate and credit 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
interest rate risk management 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.
Credit-related derivatives provide, for a fee, a guarantee of a portion of the
credit risk associated with the underlying financial instruments. Such contracts
are primarily used to manage credit risk and regulatory capital associated with
commercial lending 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 risk management during the first nine months of 1998.
<TABLE>
<CAPTION>
FINANCIAL DERIVATIVES ACTIVITY Weighted-
Average
1998 - dollars in millions January 1 Additions Maturities Terminations September 30 Maturity
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest rate risk management
Interest rate swaps
Receive fixed $ 4,320 $ 5,155 $ (1,547) $(1,040) $ 6,888 2 yr. 6 mo.
Pay fixed 448 301 (94) (636) 19 11 mo.
Basis swaps 1,011 810 (67) 1,754 4 yr. 9 mo.
Interest rate caps 542 227 (116) (5) 648 4 yr. 3 mo.
Interest rate floors 3,645 3,404 (2,100) (100) 4,849 1 yr. 7 mo.
---------------------------------------------------------------
Total interest rate risk management 9,966 9,897 (3,924) (1,781) 14,158
Mortgage banking activities
Residential
Forward contracts
Commitments to purchase loans 1,652 15,343 (13,808) 3,187 2 mo.
Commitments to sell loans 1,335 20,598 (18,928) 3,005 2 mo.
Options 58 663 (490) 231 2 mo.
Interest rate floors - MSR 1,470 3,875 (950) 4,395 4 yr. 9 mo.
---------------------------------------------------------------
Total residential 4,515 40,479 (33,226) (950) 10,818
Commercial 598 (100) 498 7 yr.
---------------------------------------------------------------
Total mortgage banking activities 4,515 41,077 (33,226) (1,050) 11,316
Credit-related activities
Credit default swaps 4,305 4,305 3 yr.
---------------------------------------------------------------
Total $14,481 $55,279 $(37,150) $(2,831) $29,779
===================================================================================================================================
</TABLE>
During the first nine months of 1998, financial derivatives used in interest
rate risk management increased net interest income by $9 million compared with
an $8 million decrease in the prior-year period.
PNC BANK CORP.
----
19
<PAGE> 21
FINANCIAL REVIEW
The following table sets forth by designated assets and liabilities the notional
value and the estimated fair value of financial derivatives used for risk
management. Weighted-average interest rates presented are those expected to be
in effect based on the implied forward yield curve.
<TABLE>
<CAPTION>
FINANCIAL DERIVATIVES
Weighted-Average Interest Rates
Notional Estimated -------------------------------
September 30, 1998 - dollars in millions Value Fair Value Paid Received
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest rate risk management
Asset rate conversion
Interest rate swaps (1)
Receive fixed designated to loans $ 5,550 $119 4.82% 5.98%
Pay fixed designated to loans 5 6.23 4.77
Basis swaps designated to other earning assets 300 5 4.29 4.98
Interest rate caps designated to loans (2) 648 3
Interest rate floors designated to loans (3) 4,849 12
--------------------------
Total asset rate conversion 11,352 139
Liability rate conversion
Interest rate swaps (1)
Receive fixed designated to:
Interest-bearing deposits 325 19 4.87 6.32
Borrowed funds 1,013 68 4.98 6.19
Pay fixed designated to borrowed funds 14 1 5.62 5.50
Basis swaps designated to borrowed funds 1,454 9 4.89 4.89
--------------------------
Total liability rate conversion 2,806 97
--------------------------
Total interest rate risk management 14,158 236
Mortgage banking activities
Residential
Forward contracts
Commitments to purchase loans 3,187 (1)
Commitments to sell loans 3,005 (13)
Options 231 3
Interest rate floors - MSR (3) 4,395 78
--------------------------
Total residential 10,818 67
Commercial 498 (12)
--------------------------
Total mortgage banking activities 11,316 55
Credit-related activities
Credit default swaps 4,305
--------------------------
Total financial derivatives $29,779 $291
===================================================================================================================================
</TABLE>
(1) The floating rate portion of interest rate contracts is based on
money-market indices. As a percent of notional value, 48% were based on
1-month LIBOR, 47% on 3-month LIBOR and the remainder on other short-term
indices.
(2) Interest rate caps with notional values of $228 million, $187 million and
$230 million require the counterparty to pay the excess, if any, of 3-month
LIBOR over a weighted-average strike of 6.32%, 1-month LIBOR over a
weighted-average strike of 5.94% and Prime over a weighted-average strike of
8.85%, respectively. At September 30, 1998, 3-month LIBOR was 5.31%, 1-month
LIBOR was 5.38% and Prime was 8.5%.
(3) Interest rate floors with notional values of $4.5 billion, $2.6 billion and
$1.8 billion require the counterparty to pay the Corporation the excess, if
any, of the weighted-average strike of 5.00% over 3-month LIBOR and the
weighted-average strike of 5.39% over 10-year CMT and weighted-average
strike of 5.18% over 10-year CMS, respectively. At September 30, 1998,
3-month LIBOR was 5.31%, 10-year CMT was 4.44% and 10-year CMS was 5.30%.
OTHER DERIVATIVES To accommodate customer needs, PNC Bank enters into
customer-related financial derivatives transactions primarily consisting of
interest rate swaps, caps, floors and foreign exchange contracts. Risk exposure
from customer positions is managed through transactions with other dealers.
Additionally, the Corporation enters into other derivatives transactions for
risk management purposes. These positions are recorded at estimated fair value
and changes in value are included in results of operations.
<TABLE>
<CAPTION>
OTHER DERIVATIVES
Positive Negative
Notional Fair Fair Net Asset
September 30, 1998 - in millions Value Value Value (Liability)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Customer-related
Interest rate
Swaps $ 9,227 $ 88 $(109) $(21)
Caps/floors
Sold 2,477 (6) (6)
Purchased 1,996 14 14
Foreign exchange 2,379 25 (16) 9
Other 1,794 8 (7) 1
----------------------------------------
Total customer-related 17,873 135 (138) (3)
Other 727 1 1
----------------------------------------
Total other derivatives $18,600 $136 $(138) $ (2)
================================================================================
</TABLE>
PNC BANK CORP.
----
20
<PAGE> 22
THIRD QUARTER 1998 VS. THIRD QUARTER 1997
Net income for the third quarter of 1998 totaled $281 million or $.91 per
diluted share compared with $262 million or $.83 per diluted share a year ago.
Returns on average common shareholders' equity and average assets were 20.52%
and 1.48%, respectively, in the third quarter of 1998 compared with 20.11% and
1.47% in the prior-year quarter.
Taxable-equivalent net interest income increased $25 million to $653 million in
the third quarter of 1998. The net interest margin was 3.81% compared with 3.89%
in the year-earlier period and 3.81% in the second quarter of 1998.
The provision for credit losses was $45 million in the third quarter of 1998
compared with $20 million last year.
Noninterest income was $676 million in the third quarter of 1998, an increase of
47% compared with the third quarter of 1997. Asset management, mutual fund
servicing, consumer services, corporate finance and capital markets, and
mortgage banking revenues each grew 20% or more compared with the prior year
quarter. In addition, noninterest income included $30 million of gains from the
sales of eight branches in Kentucky and Indiana that offset the impact of
valuation adjustments on certain market-sensitive asset positions. Noninterest
income also included $55 million of trading gains and $51 million of net
securities gains resulting from mortgage banking hedging activities that offset
an increase in the amortization of residential MSR.
Asset management and mutual fund servicing fees grew 24% and 33%, respectively,
from the third quarter of 1997 reflecting significant new business.
Consumer services revenue increased $20 million or 25% compared with the third
quarter of 1997 primarily due to growth in credit card accounts.
Corporate finance and capital markets fees increased 25% to $57 million in the
third quarter of 1998 resulting from higher treasury management and capital
markets fees.
Mortgage banking revenue grew $14 million or 20% from the prior-year quarter
primarily due to higher servicing income reflecting the impact of servicing
portfolio acquisitions and significant mortgage refinance activity. Residential
mortgage originations totaled $3.1 billion compared with $1.7 billion in the
year-earlier period. At September 30, 1998, approximately $60.3 billion of
mortgages were serviced compared with $41.0 billion in the prior-year period.
Noninterest expense of $843 million increased $191 million compared with the
third quarter of 1997. The increase was primarily due to higher amortization of
residential MSR, the impact of the Midland acquisition and incentive
compensation commensurate with revenue growth.
Total assets were $76.2 billion at September 30, 1998. Average earning assets
increased $4.0 billion from the prior-year quarter to $68.0 billion primarily
due to higher loans and loans held for sale. Average loans grew $2.7 billion to
$55.9 billion, a 5.1% increase from the prior year. Growth in commercial loans
more than offset a decline in residential mortgages and downsizing of the
indirect automobile lending portfolio. The increase in commercial loans was
primarily in middle market and secured lending. Loans represented 82.3% of
average earning assets in the third quarter of 1998 compared with 83.2% a year
ago. Average loans held for sale increased $2.3 billion reflecting higher
residential mortgage originations and the commercial mortgage inventory of
Midland. Average securities available for sale decreased $1.1 billion to $7.1
billion or 10.4% of average earning assets.
Net charge-offs were $88 million in the third quarter of 1998 compared with $73
million in the third quarter of last year. The corresponding ratios of net
charge-offs as a percentage of average loans were 0.62% and 0.54%, respectively.
Average deposits decreased slightly to $44.5 billion in comparison with the
prior-year period and represented 59.1% of total sources of funds.
Shareholders' equity totaled $5.8 billion at the end of the third quarter. At
September 30, 1998 the leverage ratio was 7.18% and Tier I and Total risk-based
capital ratios were 7.48% and 10.93%, respectively.
PNC BANK CORP.
----
21
<PAGE> 23
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
----------------------------------------------------
In thousands, except per share data 1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans and fees on loans $1,166,728 $1,101,508 $3,424,186 $3,236,193
Securities available for sale 102,569 125,347 323,816 420,587
Other 84,989 43,489 210,758 112,880
---------------------------------------------------
Total interest income 1,354,286 1,270,344 3,958,760 3,769,660
INTEREST EXPENSE
Deposits 371,563 372,860 1,095,409 1,087,015
Borrowed funds 336,676 277,567 949,450 819,628
---------------------------------------------------
Total interest expense 708,239 650,427 2,044,859 1,906,643
---------------------------------------------------
Net interest income 646,047 619,917 1,913,901 1,863,017
Provision for credit losses 45,000 20,000 110,000 45,000
---------------------------------------------------
Net interest income less provision for credit losses 601,047 599,917 1,803,901 1,818,017
NONINTEREST INCOME
Asset management 143,018 115,197 420,969 332,596
Mutual fund servicing 47,373 35,608 133,900 103,799
Service charges on deposits 52,598 50,899 150,307 152,231
Consumer services 97,966 78,260 273,638 224,421
Corporate finance and capital markets 57,414 45,987 174,733 143,012
Mortgage banking 85,988 71,956 246,873 155,453
Net securities gains (losses) 50,842 (2,657) 76,574 27,139
Other 140,671 63,997 348,994 198,266
---------------------------------------------------
Total noninterest income 675,870 459,247 1,825,988 1,336,917
NONINTEREST EXPENSE
Staff expense 335,260 308,492 1,023,230 918,757
Net occupancy and equipment 98,928 90,704 297,164 271,769
Amortization 175,068 48,459 303,350 117,817
Marketing 14,407 11,376 78,531 59,653
Distributions on capital securities 16,396 13,192 43,503 30,015
Other 203,121 179,932 619,301 548,327
---------------------------------------------------
Total noninterest expense 843,180 652,155 2,365,079 1,946,338
---------------------------------------------------
Income before income taxes 433,737 407,009 1,264,810 1,208,596
Income taxes 153,149 145,414 434,551 421,617
---------------------------------------------------
Net income $ 280,588 $ 261,595 $ 830,259 $ 786,979
===================================================
EARNINGS PER COMMON SHARE
Basic $.92 $.84 $2.71 $2.47
Diluted .91 .83 2.68 2.44
==========================================================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
PNC BANK CORP.
----
22
<PAGE> 24
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
September 30 December 31
Dollars in millions, except par value 1998 1997
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 1,982 $ 4,303
Short-term investments 832 1,526
Loans held for sale 3,833 2,324
Securities available for sale 7,152 8,522
Loans, net of unearned income of $445 and $412 56,752 54,245
Allowance for credit losses (816) (972)
----------------------
Net loans 55,936 53,273
Other 6,503 5,172
----------------------
Total assets $76,238 $75,120
======================
LIABILITIES
Deposits
Noninterest-bearing $ 9,136 $10,158
Interest-bearing 37,739 37,491
----------------------
Total deposits 46,875 47,649
Borrowed funds
Bank notes and senior debt 10,558 9,826
Federal funds purchased 771 3,632
Repurchase agreements 1,041 714
Other borrowed funds 5,759 3,753
Subordinated debt 1,843 1,697
----------------------
Total borrowed funds 19,972 19,622
Other 2,750 1,815
----------------------
Total liabilities 69,597 69,086
----------------------
Mandatorily redeemable capital securities of subsidiary trusts 848 650
SHAREHOLDERS' EQUITY
Preferred stock 7 7
Common stock - $5 par value
Authorized: 450,000,000 shares
Issued: 352,822,767 and 348,447,600 shares 1,764 1,742
Capital surplus 1,178 1,042
Retained earnings 5,105 4,641
Deferred benefit expense (54) (41)
Accumulated other comprehensive income (loss) 17 (23)
Common stock held in treasury at cost: 51,937,391 and 48,017,641 shares (2,224) (1,984)
----------------------
Total shareholders' equity 5,793 5,384
----------------------
Total liabilities, capital securities and shareholders' equity $76,238 $75,120
======================================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
PNC BANK CORP.
----
23
<PAGE> 25
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Nine months ended September 30 - in millions 1998 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 830 $ 787
Adjustments to reconcile net income to net cash provided (used) by operating activities
Provision for credit losses 110 45
Depreciation, amortization and accretion 431 256
Deferred income taxes 73 93
Net securities gains (76) (27)
Net gain on sales of assets (235) (136)
Changes in
Loans held for sale (1,509) (457)
Other (621) 77
--------------------
Net cash (used) provided by operating activities (997) 638
INVESTING ACTIVITIES
Net change in loans (4,070) (3,862)
Repayment of securities available for sale 1,599 1,344
Sales
Securities available for sale 9,786 7,307
Loans 1,503 2,144
Foreclosed assets 47 85
Purchases
Securities available for sale (9,243) (4,698)
Loans (79) (421)
Net cash paid for acquisitions/divestitures (1,074)
Other 203 (408)
--------------------
Net cash (used) provided by investing activities (1,328) 1,491
FINANCING ACTIVITIES
Net change in
Noninterest-bearing deposits (1,022) (1,023)
Interest-bearing deposits 890 147
Federal funds purchased (2,861) (2,194)
Sale/issuance
Bank notes and senior debt 8,228 7,288
Repurchase agreements 84,509 60,301
Other borrowed funds 76,483 74,026
Subordinated debt 140 350
Capital securities 198 300
Common stock 114 131
Repayment/maturity
Bank notes and senior debt (7,496) (4,910)
Repurchase agreements (84,182) (60,057)
Other borrowed funds (74,358) (75,451)
Subordinated debt (2)
Acquisition of treasury stock (270) (1,228)
Cash dividends paid (367) (365)
--------------------
Net cash provided (used) by financing activities 4 (2,685)
--------------------
DECREASE IN CASH AND DUE FROM BANKS (2,321) (556)
Cash and due from banks at beginning of year 4,303 4,016
--------------------
Cash and due from banks at end of period $ 1,982 $ 3,460
================================================================================================================
CASH PAID FOR
Interest $ 2,047 $ 1,929
Income taxes 262 303
NONCASH ITEMS
Transfers from loans to other assets 33 57
Conversion of debt to equity 55 7
================================================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
PNC BANK CORP.
----
24
<PAGE> 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BUSINESS PNC Bank Corp. ("Corporation" or "PNC Bank") is one of the largest
diversified financial services organizations in the United States. The
Corporation's major businesses include Regional Community Banking, Corporate
Banking, National Consumer Banking, Private Banking, Mortgage Banking, Secured
Lending, Asset Management and Mutual Fund Servicing. Financial products and
services are tailored to specific customer segments and offered nationally and
in PNC Bank's primary geographic markets in Pennsylvania, New Jersey, Delaware,
Ohio and Kentucky. PNC Bank is subject to intense competition from other
financial services companies with respect to these businesses and is subject to
the regulations of certain federal and state agencies and undergoes periodic
examinations by certain regulatory authorities.
ACCOUNTING POLICIES
BASIS OF FINANCIAL STATEMENT PRESENTATION The unaudited consolidated interim
financial statements have been prepared in accordance with generally accepted
accounting principles and include the accounts of PNC Bank and its subsidiaries,
most of which are wholly owned. In the opinion of management, the financial
statements reflect all adjustments, which are of a normal recurring nature,
necessary for a fair statement of the results for the interim periods presented.
Certain prior period amounts have been reclassified to conform to reporting
classifications utilized for the current reporting period. These
reclassifications did not impact the Corporation's financial condition or
results of operations.
In preparing the unaudited consolidated interim financial statements, management
is required to make estimates and assumptions that affect the amounts reported
in the financial statements. Actual results will differ from such estimates and
such differences may be material to the financial statements.
The notes included herein should be read in conjunction with the audited
consolidated financial statements included in PNC Bank's 1997 Annual Report.
ALLOWANCE FOR CREDIT LOSSES The allowance for credit losses is a reserve for
estimated credit losses established through provisions charged against income.
Loans deemed to be uncollectible are charged against the allowance account and
recoveries of previously charged-off loans are credited to the allowance.
The allowance is maintained at a level management believes is sufficient to
absorb estimated potential credit losses. Management's determination of the
adequacy of the allowance is based on evaluations of the credit portfolio and
other relevant factors. This evaluation is inherently subjective as it requires
material estimates including, among others, the amounts and timing of expected
future cash flows on impaired loans, estimated losses on consumer loans and
residential mortgages, and general amounts for historical loss experience,
economic conditions, uncertainties in estimating losses and inherent risks in
the various credit portfolios, all of which may be susceptible to significant
change.
SOFTWARE COSTS Effective January 1, 1998, the Corporation adopted Statement of
Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use." SOP 98-1 requires the capitalization of certain
costs incurred in connection with developing or obtaining software for internal
use. Qualifying software costs are capitalized and amortized over the estimated
useful life of the software. Prior to the adoption of SOP 98-1, software costs
were expensed as incurred. Restatement of prior year financial statements was
not required. The adoption of SOP 98-1 did not have a material impact on the
Corporation's financial position or results of operations.
FINANCIAL DERIVATIVES The Corporation uses off-balance-sheet financial
derivatives as part of the overall asset/liability management process and in
residential and commercial mortgage banking activities. Substantially all such
instruments are used to manage risk related to changes in interest rates.
Financial derivatives primarily consist of interest rate swaps, purchased
interest rate caps and floors, forward contracts and foreign exchange contracts.
To accommodate customer needs, PNC Bank also enters into financial derivative
transactions primarily consisting of interest rate swaps, caps, floors and
foreign exchange contracts. Interest rate risk exposure from customer positions
is managed through transactions with other dealers.
Additionally, the Corporation enters into other derivatives transactions for
risk management purposes that are recorded at estimated fair value and changes
in value are included in results of operations.
Credit-related derivatives are entered into to manage credit risk and regulatory
capital associated with commercial lending activities. If the credit-related
derivative qualifies for hedge accounting treatment, the premium paid to enter
the credit-related derivative is recorded in other assets and is deferred and
amortized to noninterest income over the life of the agreement. Changes in the
fair value of credit-related derivatives qualifying for hedge accounting
treatment are reflected in the Corporation's financial position and have no
impact on results of operations.
If the credit-related derivative does not qualify for hedge accounting treatment
or if the Corporation is the seller of credit protection, the credit-related
derivative is marked to market with gains or losses included in results of
operations.
PNC BANK CORP.
----
25
<PAGE> 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMPREHENSIVE INCOME Effective January 1, 1998, the Corporation adopted
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." SFAS No. 130 established new rules for the reporting and
display of comprehensive income and its components. SFAS No. 130 requires
unrealized gains or losses on securities available for sale to be included in
other comprehensive income. Prior to the adoption of SFAS No. 130, unrealized
gains or losses were reported separately in shareholders' equity. Prior year
financial statements have been reclassified to conform to the requirements of
SFAS No. 130. The adoption of SFAS No. 130 had no impact on net income or
shareholders' equity. Comprehensive income was $313 million in the third quarter
and $870 million in the first nine months of 1998 compared with $311 million and
$820 million, respectively, in 1997.
EARNINGS PER COMMON SHARE Basic earnings per common share is calculated by
dividing net income adjusted for preferred stock dividends declared by the
weighted-average number of shares of common stock outstanding.
Diluted earnings per common share is based on net income adjusted for interest
expense, net of tax, on outstanding convertible debentures and dividends
declared on nonconvertible preferred stock. The weighted-average number of
shares of common stock outstanding is increased by the assumed conversion of
outstanding convertible preferred stock and convertible debentures from the
beginning of the year or date of issuance, if later, and the number of shares of
common stock which would be issued assuming the exercise of stock options. Such
adjustments to net income and the weighted-average number of shares of common
stock outstanding are made only when such adjustments dilute earnings per common
share.
RECENT ACCOUNTING PRONOUNCEMENTS SFAS No. 131 "Disclosures About Segments of an
Enterprise and Related Information," is effective for financial statements for
periods beginning after December 15, 1997. This statement requires financial and
descriptive information about an entity's operating segments to be included in
the annual financial statements. This standard, when implemented, will impact
financial statement footnote disclosure only and will not impact the reported
financial position or results of operations of the Corporation.
SFAS No. 132 "Employer's Disclosures About Pensions and Other Postretirement
Benefits," is effective for fiscal years beginning after December 15, 1997. This
statement standardizes and combines the disclosure requirements for pension and
other postretirement benefits to the extent practicable, requires additional
information on changes in the benefit obligations and fair values of plan
assets, and eliminates certain disclosures. This standard, when implemented,
will impact financial statement footnote disclosure only and will not impact the
reported financial position or results of operations of the Corporation.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," is
required to be adopted in years beginning after June 15, 1999, although early
adoption is permitted. The Corporation expects to adopt the new statement
effective January 1, 2000. This statement requires the Corporation to recognize
all financial derivatives on the balance sheet at fair value. Derivatives that
are not hedges must be adjusted to fair value through income. If the derivative
is a hedge as defined by the statement, changes in the fair value of derivatives
will either be offset against the change in fair value of the hedged assets,
liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings based on
the nature of the hedge. The ineffective portion of a derivative's change in
fair value will be immediately recognized in earnings. Management has not yet
determined what effect this statement will have on results of operations and the
financial position of the Corporation.
SFAS 134, Accounting for Mortgage-Backed Securities Retained After the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise
(an amendment of SFAS 65), is effective January 1, 1999, although early
application is permitted. This statement requires the Corporation to classify
all mortgage-backed securities or other interests retained after a
securitization of mortgage loans held for sale based on its ability and intent
to sell or hold those investments. Any retained mortgage-backed securities that
the Corporation commits to sell before or during the securitization process must
be classified as trading securities. At the time of implementation, this
standard permits a one-time reclassification of mortgage-backed securities and
other beneficial interests retained after the securitization of mortgage loans
held for sale from the trading category. Management does not believe that this
statement will have a material impact on results of operations or the financial
position of the Corporation.
CASH FLOWS
During the first nine months of 1998, net acquisition and divestiture activity
which affected cash flows consisted of $539 million in acquired assets, $535
million in divested liabilities, cash payments totaling $1.1 million and receipt
of $30 million in cash and due from banks. The Corporation did not have any
acquisition or divestiture activity which affected cash flows during the first
nine months of 1997.
PNC BANK CORP.
----
26
<PAGE> 28
SECURITIES AVAILABLE FOR SALE
The following table sets forth the amortized cost and fair value of the
Corporation's securities portfolio, all of which is available for sale.
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------------------------------------------------------------------------
Unrealized Unrealized
Amortized --------------- Fair Amortized ---------------- Fair
In millions Cost Gains Losses Value Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------------------------
Debt securities
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury and government agencies $1,573 $59 $1,632 $1,102 $ 4 $ 1 $1,105
Mortgage backed 3,761 6 $16 3,751 4,672 4 53 4,623
Asset backed 983 6 989 2,079 5 1 2,083
State and municipal 132 6 138 170 7 177
Other debt 33 5 3 35 34 1 33
--------------------------------------------------------------------------------
Total debt securities 6,482 82 19 6,545 8,057 20 56 8,021
Corporate stocks and other 644 37 607 501 3 3 501
--------------------------------------------------------------------------------
Total securities available for sale $7,126 $82 $56 $7,152 $8,558 $23 $59 $8,522
===================================================================================================================================
</TABLE>
NONPERFORMING ASSETS
Nonperforming assets were as follows:
<TABLE>
<CAPTION>
September 30 December 31
In millions 1998 1997
- ----------------------------------------------------------------
<S> <C> <C>
Nonperforming loans $282 $276
Foreclosed assets 47 57
-----------------
Total nonperforming assets $329 $333
================================================================
</TABLE>
ALLOWANCE FOR CREDIT LOSSES
Changes in the allowance for credit losses were as follows:
<TABLE>
<CAPTION>
In millions 1998 1997
- ----------------------------------------------------------------
<S> <C> <C>
Allowance at January 1 $ 972 $1,166
Charge-offs
Consumer (excluding credit card) (67) (80)
Credit card (220) (154)
Residential mortgage (6) (8)
Commercial (21) (31)
Commercial real estate (7) (7)
-----------------
Total charge-offs (321) (280)
Recoveries
Consumer (excluding credit card) 27 27
Credit card 12 20
Residential mortgage 1 1
Commercial 12 34
Commercial real estate 2 6
-----------------
Total recoveries 54 88
-----------------
Net charge-offs (267) (192)
Provision for credit losses 110 45
Acquisitions 1 8
-----------------
Allowance at September 30 $ 816 $1,027
================================================================
</TABLE>
FINANCIAL DERIVATIVES
The notional and fair values of financial derivatives used for risk management
were as follows:
<TABLE>
<CAPTION>
Positive Negative
Notional Fair Notional Fair
In millions Value Value Value Value
- -----------------------------------------------------------------
<S> <C> <C> <C> <C>
SEPTEMBER 30, 1998
Interest rate
Swaps $ 8,156 $221 $ 505
Caps 648 3
Floors 4,500 20 349 $ (8)
-----------------------------------------
Total interest rate
risk management 13,304 244 854 (8)
Mortgage banking
activities 4,626 81 6,690 (26)
Credit default swaps 4,305
-----------------------------------------
Total $22,235 $325 $7,544 $(34)
=================================================================
DECEMBER 31, 1997
Interest rate
Swaps $ 4,849 $106 $ 930 $(10)
Caps 542 4
Floors 3,500 6 145 (1)
-----------------------------------------
Total interest rate
risk management 8,891 116 1,075 (11)
Mortgage banking
activities 1,528 28 2,987 (6)
-----------------------------------------
Total $10,419 $144 $4,062 $(17)
=================================================================
</TABLE>
PNC BANK CORP.
----
27
<PAGE> 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Other derivatives were as follows:
<TABLE>
<CAPTION>
Positive Negative
Notional Fair Fair Net Asset
In millions Value Value Value (Liability)
- ----------------------------------------------------------------------
<S> <C> <C> <C> <C>
SEPTEMBER 30, 1998
Customer-related
Interest rate
Swaps $ 9,227 $ 88 $(109) $(21)
Caps/floors
Sold 2,477 (6) (6)
Purchased 1,996 14 14
Foreign exchange 2,379 25 (16) 9
Other 1,794 8 (7) 1
-----------------------------------------
Total customer-related 17,873 135 (138) (3)
Other 727 1 1
-----------------------------------------
Total other
derivatives $18,600 $136 $(138) $ (2)
=====================================================================
DECEMBER 31, 1997
Customer-related
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 customer-related $ 8,507 $ 43 $ (42) $ 1
=====================================================================
</TABLE>
CAPITAL SECURITIES OF SUBSIDIARY TRUSTS
Mandatorily Redeemable Capital Securities of Subsidiary Trusts ("Capital
Securities") include preferred beneficial interests in the assets of PNC Capital
Trust C ("Trust C"). Trust C holds $200 million aggregate principal amount of
certain junior subordinated debentures due June 1, 2028 issued by the
Corporation bearing interest at a floating rate per annum equal to 3-Month LIBOR
plus 57 basis points. The rate in effect at September 30, 1998 was 6.195%. Cash
distributions on the Capital Securities are made to the extent interest on the
debentures is received by Trust C. In the event of certain changes or amendments
to regulatory requirements or federal tax rules, the Capital Securities are
redeemable in whole. Otherwise, the Capital Securities are generally redeemable
in whole or in part on or after June 1, 2008, at 100% of par.
EARNINGS PER COMMON SHARE
The following table sets forth basic and diluted earnings per common share
calculations.
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
-------------------------------------------------
In thousands, except per share data 1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CALCULATION OF BASIC EARNINGS PER COMMON SHARE
Net income $280,588 $261,595 $830,259 $786,979
Less: Preferred dividends declared 4,837 4,860 14,529 14,604
------------------------------------------------
Net income applicable to basic earnings per common share $275,751 $256,735 $815,730 $772,375
------------------------------------------------
Basic weighted-average common shares outstanding 300,640 305,920 300,521 312,485
------------------------------------------------
BASIC EARNINGS PER COMMON SHARE $.92 $.84 $2.71 $2.47
================================================
CALCULATION OF DILUTED EARNINGS PER COMMON SHARE
Net income $280,588 $261,595 $830,259 $786,979
Add: Interest expense on convertible debentures (net of tax) 4 755 876 2,282
Less: Dividends declared on nonconvertible preferred stock 4,538 4,537 13,613 13,612
------------------------------------------------
Net income applicable to diluted earnings per common share $276,054 $257,813 $817,522 $775,649
------------------------------------------------
Basic weighted-average common shares outstanding 300,640 305,920 300,521 312,485
Weighted-average common shares to be issued using average market price and
assuming:
Conversion of preferred stock Series A and B 147 162 151 164
Conversion of preferred stock Series C and D 1,134 1,227 1,153 1,252
Conversion of debentures 26 2,444 1,009 2,471
Exercise of stock options 1,606 1,785 1,966 1,787
Incentive share awards 633 309 502 306
------------------------------------------------
Diluted weighted-average common shares outstanding 304,186 311,847 305,302 318,465
------------------------------------------------
DILUTED EARNINGS PER COMMON SHARE $.91 $.83 $2.68 $2.44
=================================================================================================================================
</TABLE>
PNC BANK CORP.
----
28
<PAGE> 30
LITIGATION
The Corporation's Annual Report on Form 10-K for the year ended December 31,
1997 included a description of a consolidated class action complaint against the
Corporation and certain officers, alleging violations of federal securities laws
and related common law claims. The parties entered into a settlement agreement,
which received final approval of the court on September 26, 1998. The settlement
did not have a material impact on the Corporation's financial position or
results of operations.
OTHER FINANCIAL INFORMATION
In connection with the Midlantic Corporation ("Midlantic") merger, borrowed
funds of Midlantic in the aggregate principal amount of $300 million at
September 30, 1998 were jointly and severally assumed by the parent company and
its wholly-owned subsidiary, PNC Bancorp, Inc.
Summarized financial information for PNC Bancorp, Inc. and subsidiaries is as
follows:
<TABLE>
<CAPTION>
PNC BANCORP, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
September 30 December 31
In millions 1998 1997
- --------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $1,982 $4,302
Securities available for sale 6,943 8,276
Loans, net of unearned income 56,602 54,126
Allowance for credit losses (816) (971)
----------------------
Net loans 55,786 53,155
Other assets 9,954 8,144
----------------------
Total assets $74,665 $73,877
======================
LIABILITIES
Deposits $46,945 $47,766
Borrowed funds 18,755 18,437
Other liabilities 1,924 1,145
----------------------
Total liabilities 67,624 67,348
Mandatorily redeemable capital
securities of subsidiary trusts 350 350
SHAREHOLDER'S EQUITY 6,691 6,179
----------------------
Total liabilities, capital
securities and shareholder's
equity $74,665 $73,877
====================================================================
</TABLE>
<TABLE>
<CAPTION>
PNC BANCORP, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
Nine months ended September 30 - in millions 1998 1997
- --------------------------------------------------------------------------
<S> <C> <C>
Interest income $3,923 $3,735
Interest expense 1,970 1,840
--------------------
Net interest income 1,953 1,895
Provision for credit losses 110 45
--------------------
Net interest income less provision
for credit losses 1,843 1,850
Noninterest income 1,671 1,174
Noninterest expense 2,273 1,851
--------------------
Income before income taxes 1,241 1,173
Income taxes 438 416
--------------------
Net income $ 803 $ 757
==========================================================================
</TABLE>
The amount of dividends that may be paid by bank subsidiaries to PNC Bancorp,
Inc., a first-tier holding company, and in turn to the parent company, are
subject to certain legal limitations. Without regulatory approval, the amount
available for payment of dividends by all subsidiary banks to PNC Bancorp, Inc.
was $876 million at September 30, 1998. Dividends may also be impacted by
capital needs, regulatory requirements, corporate policies, contractual
restrictions and other factors.
PNC BANK CORP.
----
29
<PAGE> 31
STATISTICAL INFORMATION
CONSOLIDATED AVERAGE BALANCE SHEET AND NET INTEREST ANALYSIS
<TABLE>
<CAPTION>
Nine months ended September 30
--------------------------------------------------------------------------
1998 1997
--------------------------------------------------------------------------
Average balances in millions, interest in thousands Average Average Average Average
Taxable-equivalent basis Balances Interest Yields/Rates Balances Interest Yields/Rates
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS
Interest-earning assets
<S> <C> <C> <C> <C> <C> <C>
Loans held for sale $ 3,059 $ 161,386 7.03% $ 1,329 $ 72,910 7.32%
Securities available for sale
U.S. Treasury and government agencies 5,179 220,032 5.67 6,389 286,726 5.99
Other debt 1,672 80,956 6.46 2,143 106,048 6.60
Other 540 26,240 6.49 581 32,767 7.53
-------------------- --------------------
Total securities available for sale 7,391 327,228 5.91 9,113 425,541 6.23
Loans, net of unearned income
Consumer (excluding credit card) 11,073 706,157 8.53 11,352 718,838 8.47
Credit card 3,942 407,307 13.81 3,475 329,478 12.68
Residential mortgage 12,598 686,313 7.26 13,152 734,829 7.45
Commercial 22,159 1,319,889 7.85 18,737 1,106,748 7.79
Commercial real estate 3,224 208,249 8.52 4,067 266,849 8.65
Other 2,133 112,246 7.01 1,868 96,575 6.90
-------------------- --------------------
Total loans, net of unearned income 55,129 3,440,161 8.29 52,651 3,253,317 8.21
Other interest-earning assets 1,042 49,832 6.35 900 40,170 5.92
-------------------- --------------------
Total interest-earning assets/interest income 66,621 3,978,607 7.94 63,993 3,791,938 7.87
Noninterest-earning assets
Allowance for credit losses (887) (1,100)
Cash and due from banks 2,274 2,896
Other assets 5,691 4,779
------- -------
Total assets $73,699 $70,568
------- -------
LIABILITIES, CAPITAL SECURITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities
Interest-bearing deposits
Demand and money market $14,430 322,408 2.99 $13,318 285,676 2.87
Savings 2,644 39,196 1.98 2,919 43,030 1.97
Other time 16,995 690,807 5.43 17,570 711,423 5.41
Deposits in foreign offices 1,017 42,998 5.57 1,127 46,886 5.49
-------------------- --------------------
Total interest-bearing deposits 35,086 1,095,409 4.17 34,934 1,087,015 4.16
Borrowed funds
Bank notes and senior debt 10,827 466,434 5.68 8,732 372,032 5.62
Federal funds purchased 2,663 112,094 5.55 2,959 122,821 5.47
Repurchase agreements 1,624 59,187 4.81 819 33,129 5.33
Other borrowed funds 4,603 209,073 5.99 4,622 205,573 5.93
Subordinated debt 1,784 102,662 7.67 1,452 86,073 7.91
-------------------- --------------------
Total borrowed funds 21,501 949,450 5.83 18,584 819,628 5.84
-------------------- --------------------
Total interest-bearing liabilities/interest expense 56,587 2,044,859 4.80 53,518 1,906,643 4.74
-------------------- --------------------
Noninterest-bearing liabilities, capital securities and
shareholders' equity
Demand and other noninterest-bearing deposits 9,353 9,585
Accrued expenses and other liabilities 1,518 1,469
Mandatorily redeemable capital securities
of subsidiary trusts 733 498
Shareholders' equity 5,508 5,498
------- -------
Total liabilities, capital securities and
shareholders' equity $73,699 $70,568
------- ----- ------- -----
Interest rate spread 3.14 3.13
Impact of noninterest-bearing liabilities .72 .78
----- -----
Net interest income/margin $1,933,748 3.86% $1,885,295 3.91%
====================================================================================================================================
</TABLE>
Nonaccrual loans are included in loans, net of unearned income. The impact of
financial derivatives used in interest rate risk management is included in the
interest and average yields/rates of the related assets and liabilities. Average
balances of securities available for sale are based on amortized historical cost
(excluding SFAS No. 115 adjustments to fair value).
PNC BANK CORP.
----
30
<PAGE> 32
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Third Quarter 1998 Second Quarter 1998 Third Quarter 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Average Average Average Average Average Average
Balances Interest Yields/Rates Balances Interest Yields/Rates Balances Interest Yields/Rates
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 3,850 $ 67,387 7.00% $ 2,948 $ 51,719 7.02% $ 1,555 $ 29,046 7.47%
4,714 66,008 5.58 5,252 73,741 5.62 5,823 85,530 5.86
1,842 29,233 6.35 1,531 24,710 6.46 1,824 30,155 6.61
517 8,356 6.43 540 8,673 6.44 569 11,368 7.95
------------------------ --------------------- ----------------------
7,073 103,597 5.85 7,323 107,124 5.86 8,216 127,053 6.17
11,038 235,510 8.47 10,995 234,621 8.56 10,996 235,885 8.51
4,029 141,534 13.94 4,048 132,887 13.17 3,871 122,537 12.56
12,455 224,636 7.21 12,560 228,036 7.26 13,503 252,315 7.47
23,359 468,335 7.84 22,425 444,909 7.85 18,839 373,402 7.76
2,850 62,978 8.65 3,206 66,593 8.22 4,041 89,227 8.64
2,207 38,972 7.06 2,114 37,038 7.01 1,952 33,884 6.94
------------------------ --------------------- ----------------------
55,938 1,171,965 8.28 55,348 1,144,084 8.23 53,202 1,107,250 8.23
1,097 17,822 6.41 1,069 16,576 6.18 981 14,509 5.82
------------------------ --------------------- ----------------------
67,958 1,360,771 7.92 66,688 1,319,503 7.89 63,954 1,277,858 7.92
(830) (885) (1,059)
2,022 2,020 2,878
6,140 5,809 4,808
------- ------- -------
$75,290 $73,632 $70,581
------- ------- -------
$14,787 113,212 3.04 $14,344 105,649 2.95 $13,715 103,872 3.00
2,610 12,991 1.97 2,675 13,227 1.98 2,773 13,850 1.98
16,896 230,355 5.41 16,749 226,830 5.43 17,336 238,948 5.47
1,060 15,005 5.54 1,188 16,618 5.53 1,128 16,190 5.62
------------------------ --------------------- ----------------------
35,353 371,563 4.17 34,956 362,324 4.15 34,952 372,860 4.23
11,845 171,626 5.67 10,643 152,880 5.68 9,337 135,910 5.70
2,496 35,689 5.60 3,089 43,055 5.51 2,342 33,220 5.55
1,587 19,407 4.79 1,762 21,177 4.75 935 12,600 5.27
4,871 74,815 6.01 4,524 68,227 5.97 4,221 63,686 6.03
1,843 35,139 7.63 1,826 34,854 7.64 1,649 32,151 7.80
------------------------ --------------------- ----------------------
22,642 336,676 5.83 21,844 320,193 5.81 18,484 277,567 5.92
------------------------ --------------------- ----------------------
57,995 708,239 4.82 56,800 682,517 4.79 53,436 650,427 4.82
------------------------ --------------------- ----------------------
9,169 9,213 9,654
1,632 1,445 1,460
848 698 650
5,646 5,476 5,381
------- ------- -------
$75,290 $73,632 $70,581
------- -------------------- ------------------- -----
3.10 3.10 3.10
.71 .71 .79
----- ----- -----
$ 652,532 3.81% $ 636,986 3.81% $ 627,431 3.89%
====================================================================================================================================
</TABLE>
PNC BANK CORP.
----
31
<PAGE> 33
QUARTERLY REPORT ON FORM 10-Q
Securities and Exchange Commission
Washington, D.C. 20549
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the quarterly period ended September 30, 1998.
Commission File Number 1-9718
PNC BANK CORP.
Incorporated in the Commonwealth of Pennsylvania
IRS Employer Identification No. 25-1435979
Address: One PNC Plaza
249 Fifth Avenue
Pittsburgh, Pennsylvania 15222-2707
Telephone: (412) 762-1553
As of October 30, 1998, PNC Bank Corp. had 300,900,627 shares of common stock
($5 par value) outstanding.
PNC Bank Corp. (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and
(2) has been subject to such filing requirements for the past 90 days.
The following sections of the Financial Review set forth in the cross-reference
index are incorporated in the Quarterly Report on Form 10-Q.
<TABLE>
<CAPTION>
Cross-Reference Page(s)
----------------------------------------------------
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1 Consolidated Statement of Income for the
three months and nine months ended
September 30, 1998 and 1997 22
Consolidated Balance Sheet as of
September 30, 1998 and December 31, 23
1997
Consolidated Statement of Cash Flows for
the nine months ended September 30,
1998 and 1997 24
Notes to Consolidated Financial 25-29
Statements
Consolidated Average Balance Sheet and
Net Interest Analysis 30-31
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of
Operations 2-21
Item 3 Quantitative and Qualitative Disclosures
About Market Risk 17-18
- ---------------------------------------------------------------
</TABLE>
PART II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K
The following exhibit index lists Exhibits to this Quarterly Report on Form
10-Q:
<TABLE>
<S> <C>
12.1 Computation of Ratio of Earnings to Fixed Charges
12.2 Computation of Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividends
27 Financial Data Schedule
99 Tax Opinion of Arnold & Porter
- ---------------------------------------------------------------
</TABLE>
Copies of these Exhibits may be accessed electronically at the Securities and
Exchange Commission's home page at www.sec.gov. Exhibits will also be furnished
without charge by writing to Lynn F. Evans, Director, Financial Reporting, at
corporate headquarters. Requests may also be directed to (412) 762-1553 or to
[email protected].
Since June 30, 1998, the Corporation filed the following Current Reports on Form
8-K:
Form 8-K dated as of July 16, 1998, reporting the Corporation's consolidated
financial results for the three months and six months ended June 30, 1998, filed
pursuant to Item 5.
Form 8-K dated as of October 15, 1998, reporting the Corporation's consolidated
financial results for the three months and nine months ended September 30, 1998,
filed pursuant to Item 5.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on November 16, 1998, on its
behalf by the undersigned thereunto duly authorized.
PNC Bank Corp.
Robert L. Haunschild
Senior Vice President and
Chief Financial Officer
PNC BANK CORP.
----
32
<PAGE> 34
CORPORATE INFORMATION
CORPORATE HEADQUARTERS
PNC Bank Corp.
One PNC Plaza
249 Fifth Avenue
Pittsburgh, Pennsylvania 15222-2707
STOCK LISTING
PNC Bank Corp. common stock is traded on the New York Stock Exchange ("NYSE")
under the symbol PNC.
INQUIRIES
Individual shareholders should contact: Shareholder Relations at 800-843-2206.
Analysts and institutional investors should contact: William H. Callihan, Vice
President, Investor Relations, at 412-762-8257 or [email protected].
News media representatives and others seeking general information should
contact: Jonathan Williams, Vice President, Media Relations, at 412-762-4550 or
[email protected].
FINANCIAL INFORMATION
Copies of the Corporation's filings with the Securities and Exchange Commission
("SEC"), including Exhibits thereto, may be obtained:
Electronically at the SEC's home page at www.sec.gov.
By writing to Lynn F. Evans, Director, Financial Reporting, at corporate
headquarters.
By calling (412) 762-1553 or via e-mail to [email protected].
INTERNET INFORMATION
Information about PNC Bank Corp.'s financial results and its products and
services is available on the Internet at http://www.pncbank.com.
COMMON STOCK PRICES/DIVIDENDS DECLARED
The table below sets forth by quarter the range of high and low sale and
quarter-end closing prices for PNC Bank Corp. common stock and the cash
dividends declared per common share.
<TABLE>
<CAPTION>
Cash
Dividends
1998 Quarter High Low Close Declared
- ---------------------------------------------------------------
<S> <C> <C> <C> <C>
First $61.625 $49.500 $59.938 $ .39
Second 66.750 53.813 53.875 .39
Third 60.000 41.625 45.000 .39
-----
Total $1.17
===============================================================
Cash
Dividends
1997 Quarter High Low Close Declared
- ---------------------------------------------------------------
First $45.000 $36.500 $40.000 $ .37
Second 44.750 37.375 41.750 .37
Third 49.750 41.125 48.813 .37
Fourth 58.750 42.875 56.938 .39
-----
Total $1.50
===============================================================
</TABLE>
Subsequent to quarter end the Corporation's Board of Directors increased the
quarterly dividend on common stock to $.41 per share.
REGISTRAR AND TRANSFER AGENT
The Chase Manhattan Bank
P.O. Box 590
Ridgefield Park, New Jersey 07660
800-982-7652
DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN
The PNC Bank Corp. dividend reinvestment and stock purchase plan enables holders
of common and preferred stock to purchase additional shares of common stock
conveniently and without paying brokerage commissions or service charges. A
prospectus and enrollment card may be obtained by writing to Shareholder
Relations at corporate headquarters.
PNC BANK CORP.
----
33
<PAGE> 1
PNC BANK CORP. AND SUBSIDIARIES EXHIBIT 12.1
COMPUTATION OF RATIO OF EARNINGS
TO FIXED CHARGES
<TABLE>
<CAPTION>
Year ended December 31
Nine months ended ----------------------------------------------------------------
Dollars in thousands September 30, 1998 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
EARNINGS
Income before taxes and cumulative effect of
changes in accounting principles $1,264,810 $1,618,599 $1,527,551 $ 627,012 $1,209,916 $1,140,487
Fixed charges excluding interest on deposits 1,019,134 1,171,648 1,096,893 1,487,279 1,104,573 704,228
---------------------------------------------------------------------------
Subtotal 2,283,944 2,790,247 2,624,444 2,114,291 2,314,489 1,844,715
Interest on deposits 1,095,409 1,456,587 1,428,771 1,551,816 1,159,242 1,005,658
---------------------------------------------------------------------------
Total $3,379,353 $4,246,834 $4,053,215 $3,666,107 $3,473,731 $2,850,373
===========================================================================
FIXED CHARGES
Interest on borrowed funds $948,749 $1,098,365 $1,064,847 $1,455,069 $1,070,565 $ 676,319
Interest component of rentals 26,181 29,312 29,839 31,283 32,247 26,491
Amortization of borrowed funds 701 833 816 927 1,761 1,418
Distributions on capital securities 43,503 43,138 1,391
---------------------------------------------------------------------------
Subtotal 1,019,134 1,171,648 1,096,893 1,487,279 1,104,573 704,228
Interest on deposits 1,095,409 1,456,587 1,428,771 1,551,816 1,159,242 1,005,658
---------------------------------------------------------------------------
Total $2,114,543 $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 2.24x 2.38x 2.39x 1.42x 2.10x 2.62x
Including interest on deposits 1.60 1.62 1.60 1.21 1.53 1.67
====================================================================================================================================
</TABLE>
<PAGE> 1
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
Nine months ended ---------------------------------------------------------------
Dollars in thousands September 30, 1998 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
EARNINGS
Income before taxes and cumulative effect of
changes in accounting principles $1,264,810 $1,618,599 $1,527,551 $ 627,012 $1,209,916 $1,140,487
Fixed charges and preferred stock dividends
excluding interest on deposits 1,041,486 1,201,582 1,105,324 1,492,391 1,112,564 712,339
---------------------------------------------------------------------------
Subtotal 2,306,296 2,820,181 2,632,875 2,119,403 2,322,480 1,852,826
Interest on deposits 1,095,409 1,456,587 1,428,771 1,551,816 1,159,242 1,005,658
---------------------------------------------------------------------------
Total $3,401,705 $4,276,768 $4,061,646 $3,671,219 $3,481,722 $2,858,484
===========================================================================
FIXED CHARGES
Interest on borrowed funds $ 948,749 $1,098,365 $1,064,847 $1,455,069 $1,070,565 $ 676,319
Interest component of rentals 26,181 29,312 29,839 31,283 32,247 26,491
Amortization of borrowed funds 701 833 816 927 1,761 1,418
Distributions on capital securities 43,503 43,138 1,391
Preferred stock dividends 22,352 29,934 8,431 5,112 7,991 8,111
---------------------------------------------------------------------------
Subtotal 1,041,486 1,201,582 1,105,324 1,492,391 1,112,564 712,339
Interest on deposits 1,095,409 1,456,587 1,428,771 1,551,816 1,159,242 1,005,658
---------------------------------------------------------------------------
Total $2,136,895 $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 2.21x 2.35x 2.38x 1.42x 2.09x 2.60x
Including interest on deposits 1.59 1.61 1.60 1.21 1.53 1.66
===================================================================================================================================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial information incorporated by reference to the 1998 Third
Quarter Financial Review and is qualified in its entirety by reference to such
financial information.
</LEGEND>
<CIK> 0000713676
<NAME> PNC BANK CORP. AND SUBSIDIARIES
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,982
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 7,152
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 56,752
<ALLOWANCE> (816)
<TOTAL-ASSETS> 76,238
<DEPOSITS> 46,875
<SHORT-TERM> 12,560
<LIABILITIES-OTHER> 2,750
<LONG-TERM> 7,412
0
7
<COMMON> 1,764
<OTHER-SE> 4,022
<TOTAL-LIABILITIES-AND-EQUITY> 76,238
<INTEREST-LOAN> 3,424
<INTEREST-INVEST> 324
<INTEREST-OTHER> 211
<INTEREST-TOTAL> 3,959
<INTEREST-DEPOSIT> 1,095
<INTEREST-EXPENSE> 2,045
<INTEREST-INCOME-NET> 1,914
<LOAN-LOSSES> 110
<SECURITIES-GAINS> 77
<EXPENSE-OTHER> 2,365
<INCOME-PRETAX> 1,265
<INCOME-PRE-EXTRAORDINARY> 830
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 830
<EPS-PRIMARY> 2.71
<EPS-DILUTED> 2.68
<YIELD-ACTUAL> 3.86
<LOANS-NON> 282
<LOANS-PAST> 267
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 972
<CHARGE-OFFS> 321
<RECOVERIES> 54
<ALLOWANCE-CLOSE> 816
<ALLOWANCE-DOMESTIC> 816
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<PAGE> 1
EXHIBIT 99
October 9, 1998
PNC Bank Corp.
One PNC Plaza
Fifth Avenue and Wood Street
Pittsburgh, Pennsylvania 15265
Hilliard-Lyons Corp.
Hilliard Lyons Center
Louisville, Kentucky 40202
Ladies and Gentlemen:
Reference is made to the information set forth under the heading
"PROPOSED MERGER - Certain U.S. Federal Income Tax Consequences" contained in
the Proxy Statement/Prospectus, which is included in the Registration Statement
on Form S-4 (the "Registration Statement"), filed by PNC Bank Corp. ("PNC") with
the Securities and Exchange Commission (the "SEC"), at File No. 333-64595, and
which is being furnished to shareholders of Hilliard-Lyons Corp. ("Hilliard
Lyons") in connection with the solicitation of proxies by the Board of Directors
of Hilliard Lyons for their use at Hilliard Lyons' special meeting of
stockholders, at which stockholders of Hilliard Lyons will be asked to approve
an Agreement and Plan of Merger, dated August 20, 1998. Subject to the
representations, assumptions and other conditions described or referenced in
this letter or under that heading, it is our opinion that the discussion of
certain anticipated material federal income tax consequences contained under
that heading is accurate in all material respects.
Our opinion is based on the case law, Internal Revenue Code, Treasury
Regulations and Internal Revenue Service rulings as they exist at the date
hereof. These authorities are all subject to change, and any such change may be
made with retroactive effect. We can give no assurance that, after such change,
our opinion would not be different. We undertake no responsibility to update or
supplement our opinion following the effective date of the Registration
Statement.
We hereby consent to the filing with the SEC of this opinion as an
exhibit to PNC's Quarterly Report on Form 10-Q for the quarter ended September
30, 1998 and to the reference to our firm under the heading "PROPOSED MERGER -
Certain Federal Income Tax Consequences" in the prospectus contained in the
Registration Statement. In giving such consent, we do not thereby admit that we
are in the category of persons whose consent is required under Section 7 of the
Securities Act of 1933.
Very truly yours,
/s/ ARNOLD & PORTER
Arnold & Porter
