<PAGE> 1
PNC BANK
Quarterly Report on Form 10-Q
For the quarterly period ended June 30, 1999
Page 1 represents a portion of the second quarter 1999 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 35.
<PAGE> 2
Consolidated Financial Highlights
<TABLE>
<CAPTION>
Three months ended June 30 Six months ended June 30
-------------------------------------------------------------
Dollars in millions, except per share data 1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL PERFORMANCE
Revenue
Net interest income (taxable-equivalent basis) $612 $637 $1,276 $1,281
Noninterest income 664 569 1,395 1,075
Total revenue 1,276 1,206 2,671 2,356
Net income 315 280 640 549
Per common share
Basic earnings 1.04 .92 2.10 1.80
Diluted earnings 1.03 .90 2.08 1.77
Cash dividends declared .41 .39 .82 .78
- -----------------------------------------------------------------------------------------------------------------------------
SELECTED RATIOS
Return on
Average common shareholders' equity 22.38% 21.42% 22.66% 21.26%
Average assets 1.68 1.53 1.70 1.52
Net interest margin 3.64 3.81 3.75 3.88
Noninterest income to total revenue 52.04 47.18 52.23 45.63
Efficiency * 54.60 56.27 54.01 56.65
* Excluding amortization, distributions on capital securities and residential mortgage banking hedging activities
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
June 30 March 31 December 31 September 30 June 30
Dollars in millions, except per share data 1999 1999 1998 1998 1998
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Assets $75,558 $74,868 $77,207 $76,238 $75,873
Earning assets 66,889 66,710 69,027 68,638 68,353
Loans, net of unearned income 52,075 52,800 57,650 56,752 56,237
Securities available for sale 8,856 9,170 7,074 7,152 7,540
Deposits 47,685 45,799 47,496 46,875 47,096
Borrowed funds 18,464 19,935 20,946 19,972 20,488
Shareholders' equity 5,755 5,931 6,043 5,793 5,633
Common shareholders' equity 5,442 5,617 5,729 5,479 5,318
Book value per common share 18.40 18.78 18.86 18.21 17.64
CAPITAL RATIOS
Leverage 7.47% 7.28% 7.22% 7.18% 7.18%
Common shareholders' equity to total assets 7.20 7.50 7.42 7.19 7.01
ASSET QUALITY RATIOS
Nonperforming assets to total loans, loans held for sale
and foreclosed assets .59% .58% .55% .54% .55%
Allowance for credit losses to total loans 1.29 1.27 1.31 1.44 1.53
Allowance for credit losses to nonaccrual loans 224.33 230.93 255.25 289.36 315.81
Net charge-offs to average loans .18 .56 1.24 .62 .64
- -----------------------------------------------------------------------------------------------------------------------------
</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 included herein and the Financial Review and audited Consolidated
Financial Statements included in the Corporation's 1998 Annual Report.
OVERVIEW
PNC BANK CORP. The Corporation is one of the largest diversified financial
services companies in the United States operating retail banking, asset
management and wholesale businesses that provide products and services
nationally and in PNC Bank's primary geographic markets in Pennsylvania, New
Jersey, Delaware, Ohio and Kentucky.
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 has responded to these challenges by transitioning to an organization
managed as separate businesses with highly focused customer segments. This style
of management provides the basis for differentiated businesses capable of
competing in today's environment where banks and other financial service
providers target the same customers. This business model also allows the
Corporation to enhance consolidated value by leveraging technology, information,
branding and marketing resources.
The Corporation has altered its business mix by investing in specialized
financial services businesses, including asset management, mutual fund
servicing, investment advisory, mortgage banking and corporate services. 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 have allowed PNC Bank to significantly improve the composition of its
revenue stream.
Pursuant to this strategy, on July 20, 1999, the Corporation announced an
agreement to acquire First Data Investor Services Group, Inc. ("ISG"), the
mutual fund servicing subsidiary of First Data Corporation for $1.1 billion in
cash. The transaction is expected to close in the fourth quarter of 1999,
subject to regulatory approvals and satisfaction of customary closing
conditions. Also, during the first quarter of 1999, the Corporation completed
the sale of its credit card business and made the decision to exit certain
out-of-footprint large corporate, national healthcare and other non-strategic
institutional lending businesses.
Additionally, on May 13, 1999, BlackRock, Inc., a subsidiary of PNC Bank, filed
a registration statement for an initial public offering of its common stock
with PNC Bank retaining a majority ownership position. The transaction is
expected to result in a gain for the Corporation.
SUMMARY FINANCIAL RESULTS Consolidated net income for the first six months of
1999 was $640 million or $2.08 per diluted share. Results for the first six
months of 1999 included $331 million of pretax gains on the sales of PNC Bank's
credit card business, and equity interests in Electronic Payment Services, Inc.
("EPS") and the Concord EFS, Inc. ("Concord") stock received in the EPS
transaction. The first six months of 1999 also included $142 million of
valuation adjustments associated with exiting certain institutional lending
businesses, $98 million of costs related to efficiency initiatives and a $30
million contribution to the PNC Bank Foundation. Excluding these items, earnings
for the first six months of 1999 were $592 million or $1.92 per diluted share,
return on average common shareholders' equity was 20.92% and the return on
average assets was 1.57%. Earnings for the first six months of 1998 were $549
million or $1.77 per diluted share. Excluding the credit card business and
assuming the provision for credit losses was equal to net charge-offs in 1998,
diluted earnings per share for the first six months of 1999 increased 15%
compared with the prior-year period.
Taxable-equivalent net interest income was $1.276 billion in the first six
months of 1999, a $5 million decrease compared with the first six months of
1998. The net interest margin was 3.75% in the first six months of 1999 compared
with 3.88% in the prior-year period. These declines were primarily due to the
sale of the credit card business in the first quarter of 1999. Excluding the
credit card business, net interest income was $1.211 billion for the first six
months of 1999, an increase of $83 million or 7% compared with the first six
months of 1998, and the net interest margin was 3.63% in both periods.
Noninterest income was $1.395 billion for the first six months of 1999, a $320
million increase compared with the first six months of 1998. Excluding the
gains and valuation adjustments from 1999 and $56 million of branch gains from
1998, noninterest income increased $187 million or 18% in the period-to-period
comparison primarily due to growth in fee-based revenue.
PNC BANK CORP.
----
2
<PAGE> 4
Financial Review
The provision for credit losses was $103 million for the first six months of
1999 compared with $65 million a year ago. Net charge-offs were $102 million or
.38% of average loans for the first six months of 1999 compared with $179
million or .66%, respectively, for the first six months of 1998. The decreases
were due to the sale of the credit card business in the first quarter of 1999.
Noninterest expense was $1.590 billion for the first six months of 1999 compared
with $1.447 billion for the first six months of 1998. Excluding $98 million of
costs related to efficiency initiatives and a $30 million contribution to the
PNC Bank Foundation from 1999 and $55 million of costs primarily for consumer
delivery initiatives from 1998, noninterest expense increased $70 million or 5%
compared with the prior-year period commensurate with revenue growth in
fee-based businesses. The efficiency ratio improved to 54.01% for the first six
months of 1999 compared with 56.65% in the prior year due to a continued focus
on improving returns in traditional businesses.
Total assets were $75.6 billion at June 30, 1999, compared with $77.2 billion at
December 31, 1998. The decline was primarily due to the sale of the credit card
business in the first quarter of 1999. Shareholders' equity totaled $5.8 billion
at June 30, 1999, compared with $6.0 billion at December 31, 1998. The leverage
ratio was 7.47% and Tier I and total risk-based capital ratios were 8.16% and
11.72%, respectively, at June 30, 1999.
The ratio of nonperforming assets to total loans, loans held for sale and
foreclosed assets was .59% at June 30, 1999 and .55% at December 31, 1998. The
allowance for credit losses was 224% of nonaccrual loans and 1.29% of total
loans at June 30, 1999, compared with 255% and 1.31%, respectively, at December
31, 1998.
FORWARD-LOOKING STATEMENTS
This report includes forward-looking statements with respect to financial
performance and other financial and business matters. Forward-looking statements
are typically identified by words or phrases such as "believe," "expect,"
"anticipate," "intend," "estimate," "may increase," "may fluctuate," and
variations of such words and similar expressions, or future or conditional verbs
such as "will," "should," "would," and "could." 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 those anticipated in these forward-looking statements.
In addition to factors previously disclosed by the Corporation and those
identified elsewhere herein, 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 and adequate fashion; continued pricing pressures on loan and deposit
products; increased credit risk; the introduction, withdrawal, 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 and domestic economic conditions generally and in local
markets in which the Corporation conducts business; changes in interest rates
and financial 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.
REVIEW OF BUSINESSES
PNC Bank operates seven major businesses engaged in retail banking, asset
management and wholesale banking activities: PNC Regional Bank, PNC Advisors,
BlackRock, PFPC Worldwide, PNC Institutional Bank, PNC Secured Finance and PNC
Mortgage.
Business results are based on PNC Bank's management accounting practices. There
is no comprehensive, authoritative body of guidance for management accounting
equivalent to generally accepted accounting principles; therefore, PNC Bank's
results are not necessarily comparable with similar information for any other
financial services institution. Financial results are presented as if each
business operated on a stand-alone basis.
PNC BANK CORP.
----
3
<PAGE> 5
The presentation of business results was changed during the first quarter of
1999 to reflect the Corporation's operating strategy. PNC Regional Bank reflects
the combination of PNC Regional Community Bank and PNC National Consumer Bank.
Branch-based brokerage activities (previously included in PNC Advisors), the
middle market customer segment (previously included in PNC Corporate Bank) and
regional real estate lending and leasing activities in PNC Bank's geographic
footprint (previously included in PNC Secured Finance) were also combined with
PNC Regional Bank. Additionally, residential mortgages (that were previously
included in PNC Mortgage) were realigned with PNC Regional Bank. Certain
out-of-footprint large corporate, national healthcare and other non-strategic
institutional lending businesses as well as venture capital activities
(previously in PNC Corporate Bank) are included in Other. The remaining
activities that were previously in PNC Corporate Bank, comprise PNC
Institutional Bank. BlackRock reflects total legal entity results for BlackRock,
Inc. Financial results for 1999 and 1998 are presented consistent with this
structure.
The management accounting process uses various balance sheet and income
statement assignments and transfers to measure performance of the businesses.
Methodologies change from time-to-time as management accounting practices are
enhanced and businesses change. Securities or borrowings and related net
interest income are assigned based on the net asset or liability position of
each business. Capital is assigned based on management's assessment of inherent
risks and equity levels at independent companies providing similar products and
services. Support areas not directly aligned with the businesses are allocated
primarily based on the utilization of these services.
Total business financial results differ from consolidated financial results
primarily due to differences between management accounting practices and
generally accepted accounting principles, divested and exited businesses,
venture capital activities, sales of equity interests in subsidiaries,
eliminations and unassigned items, the impact of which is reflected in Other.
The Corporation is managed as a portfolio of distinct businesses that are
positioned to compete as stand-alone companies while enhancing PNC Bank's
consolidated value by leveraging technology, information, branding and
marketing resources. Total business earnings were $579 million for the first six
months of 1999, a 16% increase compared with the prior-year period. The
contribution from asset management businesses increased to 21% of total business
results while the regional bank and wholesale businesses accounted for 56% and
23% of total business results, respectively.
RESULTS OF BUSINESSES
<TABLE>
<CAPTION>
Return on
Earnings Revenue Assigned Capital Average Assets *
Six months ended June 30 - ----------------------------------------------------------------------------------------
dollars in millions 1999 1998 1999 1998 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PNC Regional Bank $321 $296 $1,152 $1,159 22% 21% $39,441 $38,806
Asset Management
PNC Advisors 75 58 365 228 27 31 3,304 2,654
BlackRock 26 14 180 131 44 37 403 315
PFPC Worldwide 22 18 111 91 42 42 263 214
- ------------------------------------------------------------------------------------ ----------------------
Total asset management 123 90 656 450 32 34 3,970 3,183
Wholesale
PNC Institutional Bank 53 53 202 181 16 18 9,622 8,321
PNC Secured Finance 58 44 153 104 21 20 8,086 6,203
PNC Mortgage 24 15 217 159 11 11 7,050 4,166
- ------------------------------------------------------------------------------------ ----------------------
Total wholesale 135 112 572 444 16 18 24,758 18,690
- ------------------------------------------------------------------------------------ ----------------------
Total businesses 579 498 2,380 2,053 21 21 68,169 60,679
Other 13 51 102 303 7,834 12,212
- ------------------------------------------------------------------------------------ ----------------------
592 549 2,482 2,356 21 21 76,003 72,891
Gain on sale of credit card business 125 193
Gain on sale of equity interest in EPS 63 97
Gain on sale of Concord stock net of
PNC Bank Foundation contribution 16 41
Valuation adjustments (92) (142)
Costs related to efficiency initiatives (64)
- ------------------------------------------------------------------------------------ ----------------------
Total consolidated $640 $549 $2,671 $2,356 23 21 $76,003 $72,891
=================================================================================================================================
</TABLE>
* BlackRock's assets are presented as of period end.
PNC BANK CORP.
----
4
<PAGE> 6
Financial Review
<TABLE>
<CAPTION>
PNC REGIONAL BANK
Six months ended June 30 - dollars in millions 1999 1998
- ----------------------------------------------------------------------------
<S> <C> <C>
INCOME STATEMENT
Net interest income $866 $845
Noninterest income 286 314
- ----------------------------------------------------------------------------
Total revenue 1,152 1,159
Provision for credit losses 22 30
Noninterest expense 608 640
- ----------------------------------------------------------------------------
Pretax earnings 522 489
Income taxes 201 193
- ----------------------------------------------------------------------------
Earnings $321 $296
- ----------------------------------------------------------------------------
AVERAGE BALANCE SHEET
Loans
Consumer $9,303 $9,852
Commercial 9,631 8,759
Residential mortgage 9,861 9,700
Other 3,022 2,863
- ----------------------------------------------------------------------------
Total loans 31,817 31,174
Assigned assets and other assets 7,624 7,632
- ----------------------------------------------------------------------------
Total assets $39,441 $38,806
- ----------------------------------------------------------------------------
Deposits
Noninterest-bearing demand $6,409 $6,493
Interest-bearing demand 4,759 4,136
Money market 8,972 7,119
Savings 2,447 2,630
Certificates 13,498 15,172
- ----------------------------------------------------------------------------
Total net deposits 36,085 35,550
Other liabilities 399 347
Assigned capital 2,957 2,909
- ----------------------------------------------------------------------------
Total funds $39,441 $38,806
- ----------------------------------------------------------------------------
PERFORMANCE RATIOS
Return on assigned capital 22% 21%
Noninterest income to total revenue 25 27
Efficiency 51 53
============================================================================
</TABLE>
PNC Regional Bank provides credit, deposit, branch-based brokerage and
electronic banking products and services to retail customers as well as credit,
leasing, treasury management and capital markets products and services to
mid-sized and small businesses primarily within PNC Bank's geographic footprint.
PNC Regional Bank utilizes experienced relationship managers and sophisticated
information technology to identify consumer preferences for products, services
and delivery channels of choice.
Consumers are increasingly demanding the convenience of multiple delivery
channels and choice among high value products and services. As consumer
preferences have changed, PNC Regional Bank has focused on offering desired
products and balancing resources between traditional branches and
technologically advanced delivery channels.
PNC Regional Bank contributed 56% of total business earnings for the first six
months of 1999 compared with 59% in the first six months of 1998. Earnings of
$321 million for the first six months of 1999 increased $25 million or 8% in the
period-to-period comparison and the return on assigned capital and efficiency
ratios improved due to strategies designed to respond to changing customer
preferences while improving the effectiveness and efficiency of the delivery
system. Excluding the impact of $56 million of branch gains and $40 million
of costs related to consumer delivery initiatives from 1998, earnings
increased 12%.
Excluding the impact of the branch gains from 1998, revenue increased 4% to
$1.152 billion in the first six months of 1999 compared with the prior-year
period. The increase was primarily due to growth in loans, deposits and
fee-based services. The provision for credit losses decreased in the
period-to-period comparison due to improved credit quality primarily resulting
from downsizing the indirect auto loan portfolio.
Excluding the impact of the costs related to consumer delivery initiatives from
1998, noninterest expense increased 1% in the first six months of 1999 compared
with the prior-year period. The efficiency ratio improved to 51% for the first
six months of 1999 compared with 53% for the prior year due to ongoing
efficiency initiatives.
PNC Regional Bank engages in credit and deposit activities that are affected by
economic and financial market conditions. Accordingly, changes in the economy
could impact asset quality and results of operations.
PNC BANK CORP.
----
5
<PAGE> 7
<TABLE>
<CAPTION>
PNC ADVISORS
Six months ended June 30 - dollars in millions 1999 1998
- --------------------------------------------------------------------------
<S> <C> <C>
INCOME STATEMENT
Net interest income $67 $59
Noninterest income
Investment management and trust 188 153
Brokerage 73 10
Other 37 6
- --------------------------------------------------------------------------
Total noninterest income 298 169
- --------------------------------------------------------------------------
Total revenue 365 228
Provision for credit losses (1)
Noninterest expense 243 134
- --------------------------------------------------------------------------
Pretax earnings 122 95
Income taxes 47 37
- --------------------------------------------------------------------------
Earnings $75 $58
- --------------------------------------------------------------------------
AVERAGE BALANCE SHEET
Loans
Residential mortgage $1,002 $985
Consumer 948 926
Commercial 611 588
Other 318 28
- --------------------------------------------------------------------------
Total loans 2,879 2,527
Other assets 425 127
- --------------------------------------------------------------------------
Total assets $3,304 $2,654
- --------------------------------------------------------------------------
Deposits $2,365 $2,262
Assigned funds and other liabilities 386 16
Assigned capital 553 376
- --------------------------------------------------------------------------
Total funds $3,304 $2,654
- --------------------------------------------------------------------------
PERFORMANCE RATIOS
Return on assigned capital 27% 31%
Noninterest income to total revenue 82 74
Efficiency 66 59
==========================================================================
</TABLE>
PNC Advisors, the nation's fourth largest manager of trust and high net worth
assets, offers personalized investment management, high-end brokerage, personal
trust, estate planning and traditional banking services to affluent and wealthy
individuals; and investment management, trust and administrative services to
pensions, 401(k) plans and charitable organizations.
PNC Advisors strives to be the financial "advisor of choice" in the growing
affluent market, providing a full range of high quality, customized and
predominantly fee-based investment products and services. Consistent with this
objective, in the fourth quarter of 1998, the Corporation acquired
Hilliard-Lyons, Inc. ("Hilliard Lyons"), a firm primarily focused on delivering
brokerage services and investment advice to affluent clients. PNC Advisors is
expanding the Hilliard Lyons brand and organization throughout PNC Bank's
footprint, which includes several of the nation's wealthiest metropolitan areas.
PNC Advisors contributed 13% of total business earnings for the first six months
of 1999 compared with 12% in the prior-year period. Earnings of $75 million for
the first six months of 1999 increased $17 million or 29% compared with the
first six months of 1998 driven by strong revenue growth.
Revenue increased $137 million or 60% for the first six months of 1999 compared
with the prior-year period. The increase was due to higher brokerage revenue
primarily from the acquisition of Hilliard Lyons as well as higher assets under
management resulting from market appreciation and new business. The
period-to-period increase in noninterest expense and the efficiency ratio was
attributable to Hilliard Lyons.
<TABLE>
<CAPTION>
ASSETS UNDER MANAGEMENT*
June 30 - in billions 1999 1998
- ----------------------------------------------------------------
<S> <C> <C>
Personal investment management and trust $54 $49
Institutional trust 10 6
Hilliard Lyons 4
- ----------------------------------------------------------------
Total $68 $55
================================================================
</TABLE>
* Assets under management do not include brokerage assets administered.
At June 30, 1999, PNC Advisors managed $68 billion of assets, a 24% increase
compared with the prior-year period, due to market appreciation, new business
and Hilliard Lyons. Brokerage assets administered by PNC Advisors increased $25
billion in the period-to-period comparison to $30 billion at June 30, 1999,
primarily due to Hilliard Lyons.
PNC Advisors' 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 results of operations.
PNC BANK CORP.
----
6
<PAGE> 8
Financial Review
<TABLE>
<CAPTION>
BLACKROCK
Six months ended June 30 - dollars in millions 1999 1998
- -------------------------------------------------------------------
<S> <C> <C>
INCOME STATEMENT
Advisory and administrative fees $170 $110
Other income 10 21
- -------------------------------------------------------------------
Total revenue 180 131
Operating expense 124 93
Goodwill amortization 5 5
- -------------------------------------------------------------------
Operating income 51 33
Interest expense 6 7
- -------------------------------------------------------------------
Pretax earnings 45 26
Income taxes 19 12
- -------------------------------------------------------------------
Earnings $26 $14
- -------------------------------------------------------------------
PERIOD-END BALANCE SHEET
Goodwill $199 $209
Other assets 204 106
- -------------------------------------------------------------------
Total assets $403 $315
- -------------------------------------------------------------------
Borrowings $153 $166
Other liabilities 118 67
Shareholders' equity 132 82
- -------------------------------------------------------------------
Total funds $403 $315
- -------------------------------------------------------------------
PERFORMANCE RATIOS
Return on average equity 44% 37%
Operating margin 28 25
Efficiency 69 71
===================================================================
</TABLE>
BlackRock offers fixed income, domestic and international equity and liquidity
investment products and is focused on expanding marketing and delivery channels
for a wide range of institutional and retail customers.
During the second quarter of 1999, BlackRock formed a joint venture with Nomura
Asset Management Co., Ltd., the largest asset manager in Japan. The joint
venture, Nomura BlackRock Asset Management Co., Ltd., serves Japanese
institutional and investment trust investors and represents an expansion of
BlackRock's international presence.
On May 13, 1999, BlackRock, Inc. filed a registration statement for an initial
public offering of its common stock with PNC Bank retaining a majority ownership
position. Management anticipates that this offering will assist BlackRock in
attracting and retaining the highest quality professionals and support its
long-term growth objectives. BlackRock contributed 4% of total business earnings
for the first six months of 1999 compared with 3% a year ago. Earnings of $26
million for the first six months of 1999 increased 86% compared with the
prior-year period primarily driven by revenue growth related to new business and
market appreciation. Advisory and administration fees for the first six months
of 1999 increased $60 million or 55% compared with the prior-year period. The
increase was primarily due to a 21% increase in assets under management and
higher performance fees. The $11 million decrease in other income reflected
lower performance fees associated with the planned liquidation of a closed-end
fund by the end of the third quarter. The increase in operating expense in the
period-to-period comparison supported revenue growth.
At June 30, 1999, BlackRock managed $142 billion of assets for individual and
institutional investors, of which 89% were invested in fixed income and
liquidity funds that historically have been less volatile than equity funds.
<TABLE>
<CAPTION>
ASSETS UNDER MANAGEMENT
June 30 - in billions 1999 1998
- ----------------------------------------------------------------
<S> <C> <C>
Fixed income $82 $61
Liquidity 44 42
Equity and other 16 14
- ----------------------------------------------------------------
Total assets under management $142 $117
- ----------------------------------------------------------------
Proprietary mutual funds
BlackRock Funds $25 $23
Provident Institutional Funds 22 20
- ----------------------------------------------------------------
Total proprietary mutual funds $47 $43
================================================================
</TABLE>
BlackRock's proprietary mutual fund family, with approximately $47 billion in
assets, provides individual investors with a full range of equity, bond and
money market investment products.
BlackRock's 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 results of operations.
PNC BANK CORP.
----
7
<PAGE> 9
<TABLE>
<CAPTION>
PFPC WORLDWIDE
Six months ended June 30 - dollars in millions 1999 1998
- -------------------------------------------------------------------
<S> <C> <C>
INCOME STATEMENT
Revenue $111 $91
Operating expense 76 62
- -------------------------------------------------------------------
Pretax earnings 35 29
Income taxes 13 11
- -------------------------------------------------------------------
Earnings $22 $18
- -------------------------------------------------------------------
AVERAGE BALANCE SHEET
Total assets $263 $214
- -------------------------------------------------------------------
Deposits $140 $107
Other liabilities 18 20
Assigned capital 105 87
- -------------------------------------------------------------------
Total funds $263 $214
- -------------------------------------------------------------------
PERFORMANCE RATIOS
Return on assigned capital 42% 42%
Operating margin 32 32
Efficiency 68 68
===================================================================
</TABLE>
PFPC Worldwide ("PFPC"), the Corporation's global fund servicing operation,
provides a wide range of accounting, administration, transfer agency, custody,
securities lending and integrated banking transaction services to mutual funds,
pension and money fund managers, partnerships, brokerage firms, insurance
companies and banks. Continued growth of its Dublin, Ireland operation has
expanded PFPC's international presence. PFPC will continue to leverage its
technology platform, providing customized services for clients and promoting its
full service capabilities to the global funds marketplace.
On July 20, 1999, the Corporation announced an agreement to acquire First Data
Investor Services Group ("ISG"), the mutual fund servicing subsidiary of First
Data Corp., for $1.1 billion in cash. ISG is one of the nation's leading
providers of processing services for pooled investment products, a high-growth
industry that includes mutual funds and retirement plans. The acquisition will
make PFPC one of the nation's leading full-service mutual fund transfer agents,
while significantly strengthening PFPC's position as a full-service provider of
mutual fund accounting services. The transaction will also add key related
businesses, including retirement plan servicing, to PFPC's growing operations.
The transaction is expected to close in the fourth quarter of 1999, subject to
regulatory approvals and satisfaction of customary closing conditions.
PFPC contributed 4% of total business earnings in the first six months of 1999
and 1998. Earnings of $22 million in the first six months of 1999 increased $4
million or 22% compared with the prior-year period. Revenue of $111 million in
the first six months of 1999 increased $20 million or 22% compared with a year
ago, driven by new business, existing client growth and market appreciation.
Operating expense increased in the period-to-period comparison to support
revenue and infrastructure growth associated with business expansion.
At June 30, 1999, PFPC provided custody and accounting/administration services
for $349 billion and $244 billion, respectively, of mutual fund and other pooled
assets. The comparable amounts were $281 billion and $226 billion, respectively,
a year ago.
<TABLE>
<CAPTION>
ASSETS SERVICED
June 30 - in billions 1999 1998
- ----------------------------------------------------------------
<S> <C> <C>
Custody $349 $281
Accounting/administration 244 226
================================================================
</TABLE>
PFPC's revenue is primarily affected by the number and value of customer
accounts serviced and financial market conditions. Revenue may be positively
affected by increasing customer account values or improving financial markets.
Conversely, declining customer account values or deteriorating financial markets
may have an adverse effect on results of operations.
<TABLE>
<CAPTION>
PNC INSTITUTIONAL BANK
Six months ended June 30 - dollars in millions 1999 1998
- ------------------------------------------------------------------------
<S> <C> <C>
INCOME STATEMENT
Credit-related revenue $89 $79
Noncredit revenue 113 102
- ------------------------------------------------------------------------
Total revenue 202 181
Provision for credit losses 16
Noninterest expense 106 99
- ------------------------------------------------------------------------
Pretax earnings 80 82
Income taxes 27 29
- ------------------------------------------------------------------------
Earnings $53 $53
- ------------------------------------------------------------------------
AVERAGE BALANCE SHEET
Loans
Specialized industries $4,213 $3,465
Large corporate 3,285 3,003
Other 440 339
- ------------------------------------------------------------------------
Total loans 7,938 6,807
Other assets 1,684 1,514
- ------------------------------------------------------------------------
Total assets $9,622 $8,321
- ------------------------------------------------------------------------
Net deposits $2,705 $2,503
Assigned funds and other liabilities 6,243 5,236
Assigned capital 674 582
- ------------------------------------------------------------------------
Total funds $9,622 $8,321
- ------------------------------------------------------------------------
PERFORMANCE RATIOS
Return on assigned capital 16% 18%
Noncredit revenue to total revenue 56 56
Efficiency 51 54
========================================================================
</TABLE>
PNC Institutional Bank provides specialized credit, capital markets and treasury
management products and services to corporations, institutions and government
entities nationwide.
PNC BANK CORP.
----
8
<PAGE> 10
Financial Review
The strategic focus for PNC Institutional Bank is to further enhance shareholder
value in a business that historically has been capital intensive as a result of
credit-related balance sheet activities. PNC Institutional Bank is emphasizing
relationships that utilize higher margin noncredit products and services,
especially treasury management and capital markets, and is exiting certain
businesses and relationships with limited opportunity for satisfactory returns.
Consistent with this strategy, during the first quarter of 1999 PNC
Institutional Bank made the decision to exit certain out-of-footprint large
corporate, national healthcare and other non-strategic institutional lending
pbusinesses. The operating results for these activities are excluded from
business results in both periods.
PNC Institutional Bank contributed 9% of total business earnings in the first
six months of 1999 compared with 10% in the prior-year period. Earnings of $53
million in 1999 were unchanged from the prior-year period as an increase in
revenue was offset by a higher provision for credit losses and higher expenses
commensurate with revenue growth. The increase in the provision for credit
losses reflected loan growth and the comparative impact of no provision in the
first half of the prior year.
Total revenue of $202 million for the first six months of 1999 increased $21
million or 12% compared with the first six months of 1998. Credit-related
revenue primarily represents net interest income from loans and increased 13% in
the period-to-period comparison. This growth was driven by higher loan
outstandings to relationships that also utilize or have the potential to utilize
noncredit services. Noncredit revenue, which includes noninterest income and the
benefit of compensating balances in lieu of fees, increased $11 million or 11%
compared with the prior year primarily driven by growth in treasury management.
Treasury management and capital markets products offered through PNC
Institutional Bank are sold by several businesses across the Corporation and
accordingly related revenue is included in the results of those businesses.
Total consolidated revenue from treasury management was $124 million for the
first six months of 1999, an 11% increase compared with the first six months of
1998. Total consolidated revenue from capital markets was $51 million for the
first six months of 1999, a 26% increase compared with the prior-year period.
PNC Institutional Bank engages in credit and capital markets activities, which
are impacted by economic and financial market conditions. Accordingly, changes
in the capital markets or the economy could impact asset quality and results of
operations.
<TABLE>
<CAPTION>
PNC SECURED FINANCE
Six months ended June 30 - dollars in millions 1999 1998
- -------------------------------------------------------------------------
<S> <C> <C>
INCOME STATEMENT
Net interest income $98 $78
Noninterest income
Net commercial mortgage banking 33 8
Corporate finance 13 6
Other 9 12
- -------------------------------------------------------------------------
Total noninterest income 55 26
- -------------------------------------------------------------------------
Total revenue 153 104
Provision for credit losses (2) (6)
Noninterest expense 73 47
- -------------------------------------------------------------------------
Pretax earnings 82 63
Income taxes 24 19
- -------------------------------------------------------------------------
Earnings $58 $44
- -------------------------------------------------------------------------
AVERAGE BALANCE SHEET
Loans
Commercial - real estate related $2,779 $1,981
Commercial real estate 1,005 1,199
Business credit 1,625 1,170
Leasing 1,058 801
Midland 604 309
Affordable housing 141 184
- -------------------------------------------------------------------------
Total loans 7,212 5,644
Commercial mortgages held for sale 116 79
Other assets 758 480
- -------------------------------------------------------------------------
Total assets $8,086 $6,203
- -------------------------------------------------------------------------
Deposits $1,111 $1,098
Assigned funds and other liabilities 6,409 4,671
Assigned capital 566 434
- -------------------------------------------------------------------------
Total funds $8,086 $6,203
- -------------------------------------------------------------------------
PERFORMANCE RATIOS
Return on assigned capital 21% 20%
Noninterest income to total revenue 36 25
Efficiency 39 40
=========================================================================
</TABLE>
PNC Secured Finance is engaged in commercial real estate finance, including loan
origination, securitization and servicing; asset-based financing, including
lending, syndication and treasury management services; and equipment lease
financing to corporate clients nationwide.
PNC BANK CORP.
----
9
<PAGE> 11
During the second quarter of 1998, PNC Secured Finance acquired Midland Loan
Services, L.P. ("Midland"), one of the nation's largest servicers of commercial
mortgages. This acquisition, along with several other investments made by PNC
Secured Finance in 1998, reflects its continuing strategy to increase
noninterest income and expand nationally. PNC Secured Finance contributed 10% of
total business earnings in the first six months of 1999 compared with 9% in the
prior-year period. Earnings of $58 million in the first six months of 1999
increased 32% compared with the first six months of 1998.
Net interest income increased $20 million or 26% to $98 million for the first
six months of 1999 compared with the prior-year period driven by higher average
loans resulting from the strategic expansion of asset-based and equipment lease
financing as well as an increase in outstandings to existing customers.
Noninterest income as a percentage of total revenue increased to 36% for the
first six months of 1999 compared with 25% in the first six months of 1998,
mainly due to $31 million of commercial mortgage banking revenue from Midland.
<TABLE>
<CAPTION>
COMMERCIAL MORTGAGE SERVICING PORTFOLIO
In billions 1999 1998
- ----------------------------------------------------------------
<S> <C> <C>
January 1 $39
Acquisitions/additions 8 $30
Repayments/transfers (6) (2)
- ----------------------------------------------------------------
June 30 $41 $28
================================================================
</TABLE>
At June 30, 1999, the commercial mortgage servicing portfolio totaled $41
billion.
PNC Secured Finance engages in credit and capital markets activities, which are
impacted by economic and financial market conditions. Accordingly, changes in
the capital markets or the economy could impact asset quality and results of
operations.
<TABLE>
<CAPTION>
PNC MORTGAGE
Six months ended June 30 - dollars in millions 1999 1998
- -----------------------------------------------------------------------
<S> <C> <C>
INCOME STATEMENT
Net mortgage banking revenue
Residential mortgage servicing $160 $86
Origination and securitization 115 80
Sales of servicing and other 7
MSR amortization (16) (71)
Hedging activities (98) 18
- -----------------------------------------------------------------------
Net mortgage banking revenue 161 120
Net interest income 56 39
- -----------------------------------------------------------------------
Total revenue 217 159
Operating expense 176 135
- -----------------------------------------------------------------------
Pretax earnings 41 24
Income taxes 17 9
- -----------------------------------------------------------------------
Earnings $24 $15
- -----------------------------------------------------------------------
AVERAGE BALANCE SHEET
Residential mortgages held for sale $2,721 $2,446
Securities available for sale 2,806 770
Mortgage servicing rights and other assets 1,523 950
- -----------------------------------------------------------------------
Total assets $7,050 $4,166
- -----------------------------------------------------------------------
Escrow deposits $1,238 $879
Assigned funds and other liabilities 5,354 3,016
Assigned capital 458 271
- -----------------------------------------------------------------------
Total funds $7,050 $4,166
- -----------------------------------------------------------------------
PERFORMANCE RATIOS
Return on assigned capital 11% 11%
Net mortgage banking revenue to total revenue 74 75
Efficiency 53 64
=======================================================================
</TABLE>
PNC Mortgage originates, purchases and services residential mortgages and
related products. PNC Mortgage also acquires and securitizes residential
mortgages as private-label mortgage-backed securities and performs the master
servicing of those securities for investors. At June 30, 1999, PNC Mortgage was
the nation's twelfth largest servicer and originator of residential mortgages.
PNC BANK CORP.
----
10
<PAGE> 12
Financial Review
PNC Mortgage contributed 4% of total business earnings in the first six months
of 1999 compared with 3% in the first six months of 1998. Earnings of $24
million in the first six months of 1999 increased $9 million or 60% compared
with the prior-year period primarily due to higher origination and servicing
volumes. Net mortgage banking revenue and operating expense increased
accordingly in the comparison as a result of the larger servicing portfolio and
higher loan origination volume. The efficiency ratio improved significantly as
PNC Mortgage continued to leverage its technology platform and servicing
capabilities.
During 1999, PNC Mortgage funded $12 billion of residential mortgages, with 38%
consisting of retail originations. The comparable amounts were $8 billion and
45%, respectively, in the first six months of 1998. Production volume in the
first six months of 1999 consisted of $5 billion of originated loans and $7
billion of mortgages acquired through correspondent and contractual flow
agreements. The corresponding amounts for the first six months of 1998 were $3
billion and $5 billion, respectively. The period-to-period increase reflected
the impact of initiatives to expand retail and correspondent origination
capabilities.
<TABLE>
<CAPTION>
RESIDENTIAL MORTGAGE SERVICING PORTFOLIO
In billions 1999 1998
- ----------------------------------------------------------------
<S> <C> <C>
January 1 $62 $41
Production volume 12 8
Acquisitions 6 6
Repayments (9) (7)
Sales (1)
- ----------------------------------------------------------------
June 30 $71 $47
================================================================
</TABLE>
At June 30, 1999, the residential mortgage servicing portfolio totaled $71
billion, including $64 billion of loans serviced for others, and had a
weighted-average coupon of 7.50%. In addition, the master servicing portfolio
grew 88% in the comparison to $32 billion at June 30, 1999. Capitalized MSR
totaled $1.3 billion at June 30, 1999 and had an estimated fair value of $1.5
billion.
Securities available for sale increased $2 billion in the first six months of
1999 compared with the prior-year period and are utilized as part of PNC
Mortgage's risk management strategies.
PNC Mortgage securitized $8 billion of loans in the first six months of 1999, a
29% increase from the first six months of 1998.
The value of MSR and related amortization are affected by changes in interest
rates. If interest rates decline and the rate of prepayments increases, the
underlying servicing fees and related MSR value also would decline. In a period
of rising interest rates, a converse relationship would exist. PNC Mortgage
seeks to manage this risk by using financial instruments as hedges designed to
move in the opposite direction of MSR value changes. Changes in interest rates
also can affect the level of mortgage originations that generally decline as
interest rates increase and increase as interest rates decline.
PNC BANK CORP.
----
11
<PAGE> 13
CONSOLIDATED INCOME STATEMENT REVIEW
<TABLE>
<CAPTION>
NET INTEREST INCOME ANALYSIS
Taxable-equivalent basis Average Balances Interest Income/Expense
------------------------------ ---------------------------
Six months ended June 30 - dollars in millions 1999 1998 Change 1999 1998 Change
- -------------------------------------------------------------------------------- ---------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets
Loans held for sale $3,555 $2,657 $898 $123 $94 $29
Securities available for sale 8,601 7,552 1,049 238 224 14
Loans, net of unearned income
Consumer (excluding credit card) 10,841 11,090 (249) 440 471 (31)
Credit card 1,355 3,899 (2,544) 100 266 (166)
Residential mortgage 12,341 12,671 (330) 433 462 (29)
Commercial 23,705 21,550 2,155 900 852 48
Commercial real estate 3,397 3,414 (17) 132 145 (13)
Other 2,937 2,095 842 104 72 32
- -------------------------------------------------------------------------------- ---------------------------
Total loans, net of unearned income 54,576 54,719 (143) 2,109 2,268 (159)
Other 1,121 1,015 106 35 32 3
- -------------------------------------------------------------------------------- ---------------------------
Total interest-earning assets/
interest income 67,853 65,943 1,910 2,505 2,618 (113)
Noninterest-earning assets 8,150 6,948 1,202
- --------------------------------------------------------------------------------
Total assets $76,003 $72,891 $3,112
================================================================================
Interest-bearing liabilities
Deposits
Demand and money market $17,258 $14,249 $3,009 231 209 22
Savings 2,503 2,661 (158) 20 26 (6)
Other time 16,600 17,046 (446) 416 461 (45)
Deposits in foreign offices 721 995 (274) 17 28 (11)
- -------------------------------------------------------------------------------- ---------------------------
Total interest-bearing deposits 37,082 34,951 2,131 684 724 (40)
Borrowed funds 21,061 20,922 139 545 613 (68)
- -------------------------------------------------------------------------------- ---------------------------
Total interest-bearing liabilities/
interest expense 58,143 55,873 2,270 1,229 1,337 (108)
---------------------------
Noninterest-bearing liabilities, capital
securities and shareholders' equity 17,860 17,018 842
- --------------------------------------------------------------------------------
Total liabilities, capital securities
and shareholders' equity $76,003 $72,891 $3,112
================================================================================
Interest rate spread
Impact of noninterest-bearing sources
Net interest income/margin $1,276 $1,281 $(5)
===============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
NET INTEREST INCOME ANALYSIS
Taxable-equivalent basis Average Yields/Rates
----------------------------
Six months ended June 30 - dollars in millions 1999 1998 Change
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest-earning assets
Loans held for sale 6.88% 7.08% (20)bp
Securities available for sale 5.56 5.94 (38)
Loans, net of unearned income
Consumer (excluding credit card) 8.19 8.56 (37)
Credit card 14.90 13.75 115
Residential mortgage 7.02 7.29 (27)
Commercial 7.55 7.86 (31)
Commercial real estate 7.71 8.46 (75)
Other 7.11 7.00 11
- --------------------------------------------------
Total loans, net of unearned income 7.73 8.29 (56)
Other 6.29 6.32 (3)
- --------------------------------------------------
Total interest-earning assets/
interest income 7.38 7.94 (56)
Noninterest-earning assets
- --------------------------------------------------
Total assets
- --------------------------------------------------
Interest-bearing liabilities
Deposits
Demand and money market 2.69 2.96 (27)
Savings 1.62 1.99 (37)
Other time 5.05 5.44 (39)
Deposits in foreign offices 4.80 5.59 (79)
- --------------------------------------------------
Total interest-bearing deposits 3.72 4.17 (45)
Borrowed funds 5.15 5.83 (68)
- --------------------------------------------------
Total interest-bearing liabilities/
interest expense 4.23 4.79 (56)
-----------------------------
Noninterest-bearing liabilities, capital
securities and shareholders' equity
- --------------------------------------------------
Total liabilities, capital securities
and shareholders' equity
- --------------------------------------------------
Interest rate spread 3.15 3.15
Impact of noninterest-bearing sources .60 .73 (13)
-----------------------------
Net interest income/margin 3.75% 3.88% (13)bp
===============================================================================
</TABLE>
NET INTEREST INCOME 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.
Taxable-equivalent net interest income was $1.276 billion in the first six
months of 1999, a $5 million decrease compared with the first six months of
1998. The net interest margin was 3.75% in the first six months of 1999 compared
with 3.88% in the prior-year period. These declines were primarily due to the
sale of the credit card business in the first quarter of 1999. Excluding the
credit card business, net interest income was $1.211 billion for the first six
months of 1999, an increase of $83 million or 7% compared with the first six
months of 1998, and the net interest margin was 3.63% in both periods.
Average loans for the first six months of 1999 were relatively consistent with
the prior-year period as growth in commercial and other loans substantially
offset lower credit card and residential mortgage loans. Loans represented 80%
of average earning assets for the first six months of 1999 compared to 83% for
the prior-year period. Average loans held for sale increased $0.9 billion in the
period-to-period comparison, reflecting the decision in the first quarter of
1999 to exit certain institutional lending businesses. These exited portfolios
declined approximately 25% during the second quarter of 1999.
Average securities available for sale increased to $8.6 billion compared with
$7.6 billion in the prior-year period and represented 13% of average earning
assets in the first six months of 1999 compared with 11% a year ago.
Funding cost is affected by the composition of funding sources as well as
related rates paid thereon. Average deposits comprised 60% and 61% of total
sources of funds in the first six months of 1999 and 1998, respectively, with
the remainder primarily comprised of wholesale funding obtained at prevailing
market rates.
PNC BANK CORP.
----
12
<PAGE> 14
Financial Review
PROVISION FOR CREDIT LOSSES The provision for credit losses was $103 million in
the first six months of 1999 compared with $65 million in the prior-year period.
Net charge-offs were $102 million or .38% of average loans for the first six
months of 1999 compared with $179 million or .66%, respectively, for the first
six months of 1998. The decrease was due to the sale of the credit card business
in the first quarter of 1999.
<TABLE>
<CAPTION>
DETAILS OF NONINTEREST INCOME
Six months ended June 30 -
dollars in millions 1999 1998 Change
- -----------------------------------------------------------------
<S> <C> <C> <C>
Asset management $330 $278 $52
Mutual fund servicing 104 87 17
Service charges on deposits 101 98 3
Consumer services
Credit card 29 58 (29)
Brokerage 91 32 59
Insurance 36 21 15
Other 79 64 15
- -----------------------------------------------------------------
Total 235 175 60
Corporate services
Capital markets 38 23 15
Net commercial mortgage banking 33 8 25
Other (43) 82 (125)
- -----------------------------------------------------------------
Total 28 113 (85)
Net residential mortgage banking
Mortgage servicing 130 69 61
Origination and securitization 114 92 22
MSR amortization (16) (71) 55
Hedging activities (98) 18 (116)
- -----------------------------------------------------------------
Total 130 108 22
Net securities gains 42 13 29
Other 425 203 222
- -----------------------------------------------------------------
Total $1,395 $1,075 $320
=================================================================
</TABLE>
NONINTEREST INCOME Noninterest income was $1.395 billion for the first six
months of 1999, a $320 million increase compared with the first six months of
1998. On a comparable basis, noninterest income increased $187 million or 18%;
excluding $331 million of gains on the sale of the credit card business, equity
interests in EPS and Concord, and $142 million of valuation adjustments
associated with exiting certain institutional lending businesses from 1999, and
$56 million of branch gains from 1998. The increase was primarily due to growth
in fee-based revenue. Consumer services, mutual fund servicing, mortgage banking
and asset management revenues each grew 19% or more compared with the first six
months of 1998.
Asset management fees grew 19%, primarily reflecting new business and market
appreciation. Assets under management increased to approximately $189 billion at
June 30, 1999, compared with $151 billion at June 30, 1998. Mutual fund
servicing fees grew 20% compared with the first six months of 1998 due to an
increase in assets serviced. At June 30, 1999, PFPC Worldwide provided custody
and accounting/administration services for $349 billion and $244 billion of
mutual fund and other pooled assets, respectively. The comparable amounts were
$281 billion and $226 billion, respectively, a year ago.
Consumer services revenue increased $60 million or 34% compared with the first
six months of 1998 primarily due to an increase in brokerage accounts associated
with the Hilliard Lyons acquisition. The decrease in corporate services revenue
primarily reflected the impact of the valuation adjustments associated with the
exited portfolios. Excluding these adjustments, corporate services revenue
increased 50% compared with the prior-year period primarily due to strong
commercial mortgage banking, capital markets and treasury management fees.
Net residential mortgage banking revenue grew $22 million or 20% compared with
the prior-year period primarily due to higher servicing income reflecting the
larger servicing portfolio. Residential mortgage production volume, including
both retail and correspondent activity, totaled $12 billion compared with $8
billion in the prior-year period. At June 30, 1999, approximately $71 billion of
residential mortgages were serviced, including $64 billion serviced for others.
Net securities gains were $42 million in the first six months of 1999,
substantially all relating to the gain from the sale of Concord stock.
Other noninterest income increased $222 million in the period-to-period
comparison primarily due to the credit card and EPS gains in the first six
months of 1999 partially offset by the impact of $56 million of branch gains
recorded in the first six months of 1998.
<TABLE>
<CAPTION>
DETAILS OF NONINTEREST EXPENSE
Six months ended June 30 -
dollars in millions 1999 1998 Change
- -----------------------------------------------------------------
<S> <C> <C> <C>
Staff expense
Compensation $670 $576 $94
Employee benefits 106 112 (6)
- -----------------------------------------------------------------
Total 776 688 88
Net occupancy and equipment
Net occupancy 139 103 36
Equipment 139 97 42
- -----------------------------------------------------------------
Total 278 200 78
Amortization
Goodwill 39 31 8
Other 10 22 (12)
- -----------------------------------------------------------------
Total 49 53 (4)
Marketing 32 64 (32)
Distributions on capital securities 32 27 5
Other 423 415 8
- -----------------------------------------------------------------
Total $1,590 $1,447 $143
=================================================================
</TABLE>
PNC BANK CORP.
----
13
<PAGE> 15
NONINTEREST EXPENSE Noninterest expense was $1.590 billion for the first six
months of 1999 compared with $1.447 billion for the first six months of 1998. On
a comparable basis, noninterest expense increased $70 million or 5%; excluding
$98 million of costs related to efficiency initiatives (compensation - $22
million, net occupancy - $35 million, equipment - $38 million and other - $3
million) and a $30 million contribution to the PNC Bank Foundation from 1999,
and $55 million of costs primarily for consumer delivery initiatives from 1998.
The increase was commensurate with revenue growth in fee-based businesses. The
efficiency ratio improved to 54.01% compared with 56.65% in the prior year due
to a continued focus on improving returns in traditional businesses. Average
full-time equivalent employees totaled approximately 26,200 in the first six
months of 1999 compared with 25,100 a year ago, an increase of 4% mainly due to
acquisitions.
CONSOLIDATED BALANCE SHEET REVIEW
LOANS Loans outstanding decreased $5.6 billion from year-end 1998 to $52.1
billion at June 30, 1999. Credit card loans decreased as a result of the sale of
the credit card business in the first quarter of 1999. The decrease in
commercial loans was the result of the decision in the first quarter of 1999 to
exit certain institutional lending businesses. Total exposure and outstandings
for these businesses were $4.8 billion and $1.4 billion, respectively, at June
30, 1999.
<TABLE>
<CAPTION>
DETAILS OF LOANS
June 30 December 31
In millions 1999 1998
- ----------------------------------------------------------------
<S> <C> <C>
Consumer (excluding credit card)
Home equity $5,952 $5,731
Automobile 2,038 2,444
Education 707 1,196
Other 1,509 1,609
- ----------------------------------------------------------------
Total consumer 10,206 10,980
Credit card 2,958
Residential mortgage 12,657 12,265
Commercial
Manufacturing 4,851 5,336
Retail/wholesale 4,882 4,452
Service providers 3,123 3,263
Real estate related 2,868 3,093
Communications 1,397 1,529
Health care 821 1,136
Financial services 2,021 2,928
Other 2,768 3,445
- ----------------------------------------------------------------
Total commercial 22,731 25,182
Commercial real estate
Mortgage 1,376 1,398
Real estate project 2,092 2,051
- ----------------------------------------------------------------
Total commercial real estate 3,468 3,449
Lease financing and other 3,541 3,370
Unearned income (528) (554)
- ----------------------------------------------------------------
Total, net of unearned income $52,075 $57,650
================================================================
</TABLE>
Loan portfolio composition continued to be geographically diversified among
numerous industries and types of businesses.
<TABLE>
<CAPTION>
NET UNFUNDED COMMITMENTS
June 30 December 31
In millions 1999 1998
- --------------------------------------------------------------------
<S> <C> <C>
Consumer (excluding credit card) $3,747 $3,695
Credit card 14,794
Residential mortgage 1,860 2,756
Commercial 29,359 32,923
Commercial real estate 1,102 1,078
Other 2,121 652
- --------------------------------------------------------------------
Total $38,189 $55,898
====================================================================
</TABLE>
Commitments to extend credit represent arrangements to lend funds provided there
is no violation of specified contractual conditions. The decrease in commitments
to extend credit was the result of the sale of the credit card business and the
decision to exit certain institutional lending businesses. Commercial
commitments are reported net of participations, assignments and syndications,
primarily to financial institutions, totaling $5.9 billion at June 30, 1999 and
December 31, 1998.
Net outstanding letters of credit totaled $4.6 billion and $4.7 billion at June
30, 1999 and December 31, 1998, respectively, and consisted primarily of standby
letters of credit that commit the Corporation to make payments on behalf of
customers when certain specified future events occur.
SECURITIES AVAILABLE FOR SALE The securities portfolio increased $1.8 billion
from December 31, 1998 to $8.9 billion at June 30, 1999 primarily due to an
increase in mortgage-backed securities and U.S. Treasury securities utilized as
part of residential mortgage banking risk management strategies. The expected
weighted-average life of the securities portfolio increased to 5 years and
7 months at June 30, 1999 compared with 5 years and 3 months at year-end 1998.
<TABLE>
<CAPTION>
DETAILS OF SECURITIES AVAILABLE FOR SALE
June 30, 1999 December 31, 1998
-----------------------------------------------
Amortized Fair Amortized Fair
In millions Cost Value Cost Value
- -----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Debt securities
U.S. Treasury and
government agencies $3,182 $2,946 $2,781 $2,754
Mortgage-backed 4,320 4,213 2,942 2,936
Asset-backed 984 970 709 708
State and municipal 138 139 122 128
Other debt 37 35 33 31
Corporate stocks and other 563 553 542 517
- -----------------------------------------------------------------------
Total $9,224 $8,856 $7,129 $7,074
=======================================================================
</TABLE>
Securities available for sale may be sold as part of the overall asset and
liability management process. Realized gains and losses are reflected in results
of operations. Unrealized gains and losses are reflected in other comprehensive
income. No
PNC BANK CORP.
----
14
<PAGE> 16
Financial Review
financial derivatives were designated to securities available for sale at June
30, 1999 or December 31, 1998.
FUNDING SOURCES Total funding sources were $66.1 billion at June 30, 1999, a
decrease of $2.3 billion compared with December 31, 1998, primarily resulting
from reduced funding related to the credit card business that was sold in the
first quarter of 1999. The decrease in the first six months of 1999 was
primarily in time deposits, bank notes and senior debt and other borrowed funds,
partially offset by an increase in short-term foreign deposits.
<TABLE>
<CAPTION>
DETAILS OF FUNDING SOURCES
June 30 December 31
In millions 1999 1998
- ----------------------------------------------------------------
<S> <C> <C>
Deposits
Demand, savings and money market $29,344 $29,359
Time 15,740 17,774
Foreign 2,601 363
- ----------------------------------------------------------------
Total deposits 47,685 47,496
Borrowed funds
Federal funds purchased 320 390
Repurchase agreements 2,038 1,669
Bank notes and senior debt 8,479 10,384
Other borrowed funds 5,597 6,722
Subordinated debt 2,030 1,781
- ----------------------------------------------------------------
Total borrowed funds 18,464 20,946
- ----------------------------------------------------------------
Total $66,149 $68,442
================================================================
</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. At June 30, 1999, the Corporation and each bank
subsidiary were considered well capitalized based on regulatory capital ratio
requirements.
<TABLE>
<CAPTION>
RISK-BASED CAPITAL
June 30 December 31
Dollars in millions 1999 1998
- ----------------------------------------------------------------
<S> <C> <C>
Capital components
Shareholders' equity
Common $5,442 $5,729
Preferred 313 314
Trust preferred capital securities 848 848
Goodwill and other (1,321) (1,381)
Net unrealized securities losses 241 36
- ----------------------------------------------------------------
Tier I risk-based capital 5,523 5,546
Subordinated debt 1,740 1,641
Eligible allowance for credit losses 673 753
- ----------------------------------------------------------------
Total risk-based capital $7,936 $7,940
- ----------------------------------------------------------------
Assets
Risk-weighted assets and
off-balance-sheet instruments $67,689 $71,146
Average tangible assets 73,910 76,135
- ----------------------------------------------------------------
Capital ratios
Tier I risk-based 8.16% 7.80%
Total risk-based 11.72 11.16
Leverage 7.47 7.28
================================================================
</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 February 1999, the Corporation issued $250 million of 6 1/8% subordinated
notes due 2009 that qualify as Tier II risk-based capital.
During the first six months of 1999, PNC Bank repurchased 9.2 million shares of
common stock. On February 18, 1999, the Board of Directors authorized the
Corporation to purchase up to 15 million shares of common stock through February
29, 2000. Approximately 8.7 million shares remain under this authorization.
RISK MANAGEMENT
In the normal course of business, the Corporation assumes various types of risk,
the most significant of which are credit, liquidity, interest rate and market
risk. 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 borrower or counter
party 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,
among other things, diversification, limiting exposure to any single industry or
customer, requiring collateral or selling participations to third parties and
purchasing credit-related derivatives.
<TABLE>
<CAPTION>
NONPERFORMING ASSETS
June 30 December 31
Dollars in millions 1999 1998
- ----------------------------------------------------------------
<S> <C> <C>
Nonaccrual loans
Commercial $197 $188
Residential mortgage 57 51
Commercial real estate
Real estate project 28 28
Mortgage 14 22
Consumer 4 6
- ----------------------------------------------------------------
Total nonaccrual loans 300 295
Foreclosed and other assets
Residential mortgage 12 17
Commercial real estate 12 15
Other 9 5
- ----------------------------------------------------------------
Total foreclosed and other assets 33 37
- ----------------------------------------------------------------
Total nonperforming assets $333 $332
- ----------------------------------------------------------------
Nonaccrual loans to total loans .58% .51%
Nonperforming assets to total loans,
loans held for sale and foreclosed
assets .59 .55
Nonperforming assets to total assets .44 .43
================================================================
</TABLE>
PNC BANK CORP.
----
15
<PAGE> 17
Nonperforming assets include nonaccrual loans and foreclosed and other assets
and totaled $333 million at June 30, 1999, compared with $332 million at
December 31, 1998.
<TABLE>
<CAPTION>
CHANGE IN NONPERFORMING ASSETS
In millions 1999 1998
- ----------------------------------------------------------------
<S> <C> <C>
January 1 $332 $333
Transferred from accrual 160 133
Returned to performing (2) (2)
Principal reductions (103) (94)
Sales (21) (28)
Charge-offs and other (33) (19)
- ----------------------------------------------------------------
June 30 $333 $323
================================================================
</TABLE>
The amount of nonperforming loans that were current as to principal and interest
was $91 million at June 30, 1999 and $28 million at December 31, 1998. There
were no troubled debt restructured loans outstanding as of either period end
presented.
<TABLE>
<CAPTION>
ACCRUING LOANS PAST DUE 90 DAYS OR MORE
Amount Percent of Loans
-------------------------------------------------
June 30 December 31 June 30 December 31
Dollars in millions 1999 1998 1999 1998
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Consumer (excluding
credit card)
Guaranteed education $ 18 $ 23 2.55% 1.92%
Other 22 38 .23 .39
- ----------------------------------------------------
Total consumer 40 61 .39 .56
Credit card 63 2.13
Commercial 112 56 .49 .22
Residential mortgage 42 55 .33 .45
Commercial real estate 7 32 .20 .93
Other 1 1 .03 .04
- ----------------------------------------------------
Total $202 $268 .39 .46
- -----------------------------------------------------------------------------
</TABLE>
ALLOWANCE FOR CREDIT LOSSES In determining the adequacy of the allowance for
credit losses, the Corporation makes allocations to specific problem commercial,
commercial real estate and other 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 business segment and risk rating and are based on historical
loss trends and management's judgment concerning those trends and other relevant
factors. These factors may include, among others, actual versus estimated
losses, current regional and national economic conditions, business segment and
portfolio concentrations, industry competition and consolidation, and the impact
of government regulations. Consumer and residential mortgage loan allocations
are made at a total portfolio level based on historical loss experience adjusted
for portfolio activity and current economic conditions.
While PNC Bank's commercial, commercial real estate and consumer pool reserve
methodologies strive to reflect all risk factors, there continues to be a
certain element of risk associated with, but not limited to, potential
estimation or judgmental errors. Unallocated reserves provide coverage for such
risks. While allocations are made to specific loans and pools of loans, the
total reserve is available for all credit losses.
Senior management's Reserve Adequacy Committee provides oversight for the
allowance evaluation process including quarterly evaluations, and methodology
and estimation changes. The results of the evaluations are reported to the
Credit Committee of the Board of Directors.
The increase in the provision for credit losses in the first six months of 1999
and the evaluation of the allowance for credit losses as of June 30, 1999
reflected changes in loan portfolio composition, changes in asset quality, the
impact of selling the credit card business and the decision to exit certain
institutional lending businesses. The unallocated portion of the allowance for
credit losses represented 21% of the total allowance and .27% of total loans at
June 30, 1999, compared with 22% and .29%, respectively, at December 31, 1998.
<TABLE>
<CAPTION>
ROLLFORWARD OF ALLOWANCE FOR CREDIT LOSSES
In millions 1999 1998
- ----------------------------------------------------------------
<S> <C> <C>
January 1 $753 $972
Charge-offs (134) (214)
Recoveries 32 35
- ----------------------------------------------------------------
Net charge-offs (102) (179)
Provision for credit losses 103 65
Sale of credit card business (81)
Acquisitions 1
- ----------------------------------------------------------------
June 30 $673 $859
================================================================
</TABLE>
The allowance as a percent of nonaccrual loans and total loans was 224% and
1.29%, respectively, at June 30, 1999. The comparable year-end 1998 amounts were
255% and 1.31%, respectively.
PNC BANK CORP.
----
16
<PAGE> 18
Financial Review
<TABLE>
<CAPTION>
CHARGE-OFFS AND RECOVERIES
Six months ended Percent of
June 30 - Net Average
dollars in millions Charge-offs Recoveries Charge-offs Loans
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1999
Consumer (excluding
credit card) $ 34 $ 14 $ 20 .37%
Credit card 60 2 58 8.63
Residential mortgage 6 1 5 .08
Commercial 30 13 17 .14
Commercial real estate 1 1
Other 3 1 2 .14
- ---------------------------------------------------------------------
Total $134 $ 32 $102 .38
- ---------------------------------------------------------------------------------------
1998
Consumer (excluding
credit card) $ 43 $ 18 $ 25 .45%
Credit card 147 8 139 7.19
Residential mortgage 5 1 4 .06
Commercial 13 6 7 .07
Commercial real estate 3 1 2 .12
Other 3 1 2 .19
- ---------------------------------------------------------------------
Total $214 $ 35 $179 .66
=======================================================================================
</TABLE>
The actual level of net charge-offs and the provision for credit losses in
future periods can be affected by many business and economic factors and may
differ from current or historical experience.
LIQUIDITY RISK Liquidity represents an institution's ability to obtain funds at
reasonable rates to satisfy commitments to borrowers, demands of depositors and
debt holders and to invest in strategic initiatives. Liquidity risk is centrally
managed by Asset and Liability Management.
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 management includes consideration of expected maturities of
assets, liabilities and off-balance-sheet positions. Access to a variety of
funding markets and customers in the retail and wholesale sectors is vital both
to liquidity management and to cost minimization. A large retail customer
deposit base is one of the significant strengths of the Corporation's liquidity
position. Funding is obtained by raising deposits, issuing liabilities in the
capital markets through asset securitizations or sales. The ability to raise
funds in the capital markets depends on credit ratings, market conditions,
capital considerations, investor demand and other factors.
Liquid assets consist of short-term investments, loans held for sale and
securities available for sale. At June 30, 1999, such assets totaled $15
billion, with $7.1 billion pledged as collateral for borrowing, trust and other
commitments. Liquidity is also provided by residential mortgages that may be
used as collateral for funds obtained through the Federal Home Loan Bank
("FHLB") system. At June 30, 1999, approximately $4.1 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 and
through asset securitizations and sales. At June 30, 1999, the Corporation had
unused capacity under effective shelf registration statements of approximately
$1.0 billion of debt and equity securities and $400 million of trust preferred
capital securities. During the first six months of 1999, the Corporation issued
$250 million of subordinated debt. In addition, the Corporation has an unused
line of credit of $500 million.
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 $587 million at June 30, 1999. 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, debt holders and others. The impact of
replacing maturing liabilities is reflected in the income simulation model in
the overall asset and liability management process.
INTEREST RATE RISK Interest rate risk arises primarily through the Corporation's
traditional 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, financial
derivatives and other capital markets instruments.
Interest rate risk is centrally managed by Asset and Liability Management. The
Corporation actively measures and monitors 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 and
Liability Committee provides strategic direction to Asset and Liability
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
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. An income simulation model is used to measure the
sensitivity of net interest income to changing interest rates over the next
twenty-four month period. 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,
business plans and published industry experience. 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 the timing, magnitude and frequency of interest rate changes, the
difference between actual experience and the assumed volume and characteristics
of new business and 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. At June 30, 1999, if interest rates were to gradually increase by 100
basis points over the next twelve months, the model indicates that net interest
income would decrease by 0.8%. If interest rates were to gradually decrease by
100 basis points over the next twelve months, the model indicates that net
interest income would increase by 0.9%.
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 net interest 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 on-balance-sheet
and off-balance-sheet positions to movements in interest rates using an economic
value of equity 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 net interest 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% 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 June 30, 1999, if
interest rates were to instantaneously increase by 200 basis points, the
economic value of existing on-balance-sheet and off-balance-sheet positions
would decline by 0.9% of assets. If interest rates were to instantaneously
decrease by 200 basis points, the economic value of existing on-balance-sheet
and off-balance-sheet positions would increase by 0.4% of assets.
MARKET RISK Most of PNC Bank's trading activities are designed to provide
capital markets services for customers of PNC Institutional Bank, PNC Secured
Finance, and PNC Advisors. 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.
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 potential loss due to a two standard deviation, one-day move.
The combined period-end value-at-risk of all trading operations was $1 million
at June 30, 1999.
PNC BANK CORP.
----
18
<PAGE> 20
Financial Review
FINANCIAL DERIVATIVES
A variety of off-balance-sheet financial derivatives are used as part of the
overall risk management process to manage interest rate, market and credit risk
inherent in the Corporation's business activities. Interest rate swaps and
purchased interest rate caps and floors are the primary instruments used for
interest rate risk management. 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, an assumption 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, market and
credit risk in excess of the amount on 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.
During the first six months of 1999, financial derivatives used in interest rate
risk management increased net interest income by $32 million compared with a $6
million increase in the prior-year period.
The following table sets forth changes in the notional value of
off-balance-sheet financial derivatives used for risk management during the
first six months of 1999.
<TABLE>
<CAPTION>
FINANCIAL DERIVATIVES ACTIVITY Weighted-
Average
1999 - dollars in millions January 1 Additions Maturities Terminations June 30 Maturity
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest rate risk management
Interest rate swaps
Receive fixed $7,163 $750 $(650) $(250) $7,013 2 yr. 7 mo.
Pay fixed 13 4 (6) 11 10 mo.
Basis swaps 2,274 (67) 2,207 3 yr. 1 mo.
Interest rate caps 722 (128) 594 4 yr. 1 mo.
Interest rate floors 1,939 3,000 (1,559) 3,380 2 yr. 11 mo.
- ------------------------------------------------------------------------------------------------------------------
Total interest rate risk management 12,111 3,754 (2,410) (250) 13,205
Mortgage banking activities
Residential
Forward contracts
Commitments to purchase loans 1,286 15,705 (15,204) 1,787 2 mo.
Commitments to sell loans 3,248 20,335 (20,554) 3,029 2 mo.
Options 207 615 (597) 225 2 mo.
Interest rate floors - MSR 4,875 2,800 (525) (700) 6,450 4 yr. 6 mo.
- ------------------------------------------------------------------------------------------------------------------
Total residential 9,616 39,455 (36,880) (700) 11,491
Commercial 657 496 (2) (469) 682 8 yr. 8 mo.
- ------------------------------------------------------------------------------------------------------------------
Total mortgage banking activities 10,273 39,951 (36,882) (1,169) 12,173
Credit-related activities
Credit default swaps 4,255 4,255 2 yr. 2 mo.
- ------------------------------------------------------------------------------------------------------------------
Total $26,639 $43,705 $(39,292) $(1,419) $29,633
=================================================================================================================================
</TABLE>
PNC BANK CORP.
----
19
<PAGE> 21
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 at June 30, 1999.
<TABLE>
<CAPTION>
FINANCIAL DERIVATIVES
Weighted-Average Interest Rates
Notional Estimated -------------------------------
June 30, 1999 - 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 $(3) 5.91% 5.49%
Basis swaps designated to other earning assets 263 2 5.88 6.21
Interest rate caps designated to loans (2) 594 10 NM NM
Interest rate floors designated to loans (3) 3,380 NM NM
- -------------------------------------------------------------------------------------------------
Total asset rate conversion 9,787 9
Liability rate conversion
Interest rate swaps (1)
Receive fixed designated to:
Interest-bearing deposits 150 2 6.27 6.65
Borrowed funds 1,313 5 6.15 5.97
Pay fixed designated to borrowed funds 11 3 6.86 6.23
Basis swaps designated to borrowed funds 1,944 8 5.91 5.99
- -------------------------------------------------------------------------------------------------
Total liability rate conversion 3,418 18
- -------------------------------------------------------------------------------------------------
Total interest rate risk management 13,205 27
Mortgage banking activities
Residential
Forward contracts
Commitments to purchase loans 1,787 31 NM NM
Commitments to sell loans 3,029 NM NM
Options 225 2 NM NM
Interest rate floors - MSR (3) 6,450 25 NM NM
- -------------------------------------------------------------------------------------------------
Total residential 11,491 58
Commercial
Pay fixed interest rate swaps designated to loans 682 42 5.57 6.43
- -------------------------------------------------------------------------------------------------
Total mortgage banking activities 12,173 100
Credit-related activities
Credit default swaps 4,255 (7) NM NM
- -------------------------------------------------------------------------------------------------
Total financial derivatives $29,633 $120
================================================================================================================================
</TABLE>
(1) The floating rate portion of interest rate contracts is based on
money-market indices. As a percent of notional value, 31% were based on
1-month LIBOR, 66% on 3-month LIBOR and the remainder on other short-term
indices.
(2) Interest rate caps with notional values of $188 million, $179 million and
$223 million require the counterparty to pay the excess, if any, of 3-month
LIBOR over a weighted-average strike of 6.19%, 1-month LIBOR over a
weighted-average strike of 5.80% and Prime over a weighted-average strike of
8.75%, respectively. At June 30, 1999, 3-month LIBOR was 5.37%, 1-month
LIBOR was 5.24% and Prime was 7.75%.
(3) Interest rate floors with notional values of $3.0 billion, $3.3 billion and
$3.2 billion require the counterparty to pay the Corporation the excess, if
any, of the weighted-average strike of 4.63% over 3-month LIBOR, the
weighted-average strike of 5.01% over 10-year CMT and the weighted-average
strike of 4.99% over 10-year CMS, respectively. At June 30, 1999, 3-month
LIBOR was 5.37%, 10-year CMT was 5.81% and 10-year CMS was 6.83%.
NM - Not meaningful
OTHER DERIVATIVES To accommodate customer needs, PNC Bank enters into
customer-related financial derivative 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 derivative 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
June 30, 1999 - in millions Value Value Value (Liability)
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Customer-related
Interest rate
Swaps $14,715 $55 $(69) $(14)
Caps/floors
Sold 2,412 (20) (20)
Purchased 2,313 17 17
Foreign exchange 2,658 33 (28) 5
Other 928 5 (5)
- ---------------------------------------------------------------------------
Total customer-related 23,026 110 (122) (12)
Other 2,417 1 (2) (1)
Mortgage banking
activities 270 12 12
- ---------------------------------------------------------------------------
Total other derivatives $25,713 $123 $(124) $(1)
===========================================================================
</TABLE>
PNC BANK CORP.
----
20
<PAGE> 22
Financial Review
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. The Corporation is also assessing the year 2000
preparedness of third parties such as vendors, customers, governmental entities
and others.
As of June 30, 1999, virtually all of the Corporation's MIS-supported mainframe,
mid-range and PC client-server systems have been tested and returned to use as
year 2000 ready. In addition, virtually all of the Corporation's non-PC related
hardware and systems have been tested and determined to be year 2000 ready.
At June 30, 1999, the Corporation had completed its organization-wide assessment
of year 2000 issues relating to its identified mission critical embedded chip
systems and continues to review and monitor these systems as necessary. No
significant problems have been identified to date with respect to these systems.
The Corporation has substantially completed its assessment of the year 2000
preparedness of its identified mission critical service providers. The
Corporation has not to date identified any material problems associated with its
mission critical service providers. However, the Corporation can make no
guarantee as to the year 2000 readiness of any such service provider or other
third party.
The year 2000 issue may have an adverse impact on the operations and financial
condition of the Corporation's borrowers. PNC Bank periodically compiles and
updates year 2000 profiles for certain of its largest lending relationships for
the purpose of assessing their overall risks. Determination of these risks is
based on an assessment of the borrowers' vulnerability to year 2000 issues,
resources and capacity, adequacy of year 2000 readiness plans, remediation costs
and state of remediation. This information is compiled and analyzed periodically
to determine the possible year 2000 impact on the loan portfolio and allowance
for credit losses. Based on the Corporation's current assessment of the
information it has received to date, management believes the year 2000 issue
will not have a material adverse impact on the quality of the loan portfolio.
The Corporation will continue to review and assess the year 2000 preparedness of
its borrowers during 1999.
PNC Bank has conducted fully integrated testing to determine whether its mission
critical application systems will perform in coordination with one another. The
Corporation is also conducting testing with certain mission critical vendors
that provide systems-related services. Such testing has not identified any
significant problem that would have a material adverse impact on the
Corporation.
The estimated total cumulative cost to become year 2000 ready, which is being
expensed as incurred, is approximately $30 million. Through June 30, 1999, on a
cumulative basis, the Corporation had expensed approximately $23 million related
to the year 2000 effort. Expenses incurred for year 2000 readiness efforts are
not expected to exceed 2% of technology-related expenses in 1999. No significant
outlays have been made to replace existing systems solely for year 2000 reasons.
The costs and the timetable in which the Corporation plans to complete its 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 preparedness 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 for year 2000 issues have been and will continue to be
developed and the Corporation will continue to review contingency plans during
1999 and modify them when necessary or appropriate. Certain critical service
provider and systems contingency plans will be tested during 1999. The
Corporation's business continuity plans continue to be reviewed and strengthened
to address year 2000 implications.
PNC Bank's year 2000 remediation efforts and contingency plans are also 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 ready or whether such effects could have a material adverse
impact on the Corporation. However, if the Corporation were to fail to correct
internal year 2000 problems, if one or more third parties are unable due to year
2000 issues to provide services required by the Corporation, or if the
Corporation's contingency plans fail to mitigate any such problems, a disruption
of operations could occur, resulting in increased operating costs, loss of
revenues and other material adverse effects. Such disruptions could include a
temporary inability to process transactions and delays in providing services.
The Corporation could also be subject to liquidity risk in the event of deposit
withdrawals due to year 2000 concerns, or if its lenders cannot provide funds
due to year 2000 issues. In addition, to the extent that customers' financial
positions are weakened due to year 2000 issues, credit quality could be
adversely affected.
PNC BANK CORP.
----
21
<PAGE> 23
SECOND QUARTER 1999 VS. SECOND QUARTER 1998
Net income for the second quarter of 1999 totaled $315 million or $1.03 per
diluted share. Results included a $16 million net after-tax gain or $.05 per
diluted share resulting from the sale of Concord EFS, Inc. stock partially
offset by a $30 million pretax contribution to the PNC Bank Foundation.
Excluding these items, earnings for the quarter were $299 million or $0.98 per
diluted share and, on that basis, return on average common shareholders' equity
was 21.21% and return on average assets was 1.60%. Earnings for the second
quarter of 1998 were $280 million or $0.90 per diluted share. Return on average
common shareholders' equity was 21.42% and return on average assets was 1.53% in
the second quarter of 1998.
Taxable-equivalent net interest income was $612 million in the second quarter of
1999, a $25 million decrease compared with the prior-year quarter. The net
interest margin was 3.64% for the second quarter of 1999 compared with 3.81% in
the second quarter of 1998 and 3.86% in the first quarter of 1999. These
declines were primarily due to the sale of the credit card business in the first
quarter of 1999. Excluding the credit card business, second quarter 1998 net
interest income was $563 million and the net interest margin was 3.59%.
The provision for credit losses was $25 million in the second quarter of 1999
and net charge-offs were $24 million.
Noninterest income increased 17% compared with the second quarter of 1998 to
$664 million in the second quarter of 1999 and included a $41 million gain
related to the sale of PNC Bank's investment in Concord. Excluding this gain
from the current year and $56 million of branch gains recorded in the second
quarter of 1998, noninterest income increased $110 million or 21% compared with
the prior-year quarter driven by higher fee income. Asset management, mutual
fund servicing, consumer services, mortgage banking and corporate services
revenues all grew in excess of 13%.
Asset management and mutual fund servicing fees grew 23% and 15%, respectively,
compared with the second quarter of 1998 reflecting new business and market
appreciation.
Consumer services revenue increased $12 million or 13% compared with the second
quarter of 1998 primarily due to an increase in brokerage and other fees
associated with the Hilliard Lyons acquisition, partially offset by lower credit
card fees.
Corporate services revenue increased 42% compared with the prior-year quarter to
$88 million in the second quarter of 1999 primarily due to growth in commercial
mortgage, capital markets and treasury management fees.
Net residential mortgage banking revenue grew $14 million or 25% compared with
the prior-year quarter primarily due to growth in the servicing portfolio.
Residential mortgage originations, including both retail and correspondent
activity, totaled $6 billion compared with $5 billion in the prior-year period.
Net securities gains were $42 million in the second quarter of 1999
substantially all relating to the gain from the sale of Concord stock. Other
noninterest income decreased $39 million compared with the second quarter of
1998 primarily due to $56 million of gains on sales of branches in the
prior-year quarter.
Noninterest expense of $767 million increased 4% compared with the second
quarter of 1998 commensurate with revenue growth in fee-based businesses. The
efficiency ratio improved to 54.6% compared with 56.3% in the prior year quarter
due to a continued focus on improving returns in traditional businesses.
Total assets were $75.6 billion at June 30, 1999. Average earning assets were
relatively consistent with the prior-year quarter at $66.9 billion. Average
loans decreased $2.8 billion to $52.5 billion, primarily due to the impact of
the sale of the credit card business. Loans represented 78% of average earning
assets in the second quarter of 1999 compared with 83% a year ago. Average loans
held for sale increased to $3.7 billion in the second quarter of 1999 compared
with $2.9 billion in the prior-year quarter primarily as a result of the
decision in the first quarter of 1999 to exit certain institutional lending
businesses. Average securities available for sale increased $2.1 billion to $9.4
billion or 14% of average earning assets. This increase was attributable to
securities utilized as part of residential mortgage banking risk management
strategies.
Average deposits increased $1.3 billion to $45.5 billion in the second quarter
of 1999 representing 61% of total sources of funds. The increase in average
deposits was primarily in consumer deposits.
The ratio of nonperforming assets to total loans, loans held for sale and
foreclosed assets was .59% at June 30, 1999 compared with .55% at June 30, 1998.
Nonperforming assets were $333 million at June 30, 1999 compared with $323
million at June 30, 1998. The allowance for credit losses was $673 million at
June 30, 1999, and represented 224% of nonaccrual loans compared with 316% at
June 30, 1998. Net charge-offs were $24 million or .18% of average loans in the
second quarter of 1999 compared with $89 million or .64% in the second quarter
of 1998. The decrease was due to the sale of the credit card business in the
first quarter of 1999.
PNC BANK CORP.
----
22
<PAGE> 24
Consolidated Statement of Income
<TABLE>
<CAPTION>
Three months ended June 30 Six months ended June 30
--------------------------------------------------------
In millions, except per share data 1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans and fees on loans $989 $1,139 $2,101 $2,258
Securities available for sale 130 106 236 221
Other 85 69 157 126
- --------------------------------------------------------------------------------------------------------------------------
Total interest income 1,204 1,314 2,494 2,605
- --------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Deposits 333 363 684 724
Borrowed funds 264 320 545 613
- --------------------------------------------------------------------------------------------------------------------------
Total interest expense 597 683 1,229 1,337
- --------------------------------------------------------------------------------------------------------------------------
Net interest income 607 631 1,265 1,268
Provision for credit losses 25 35 103 65
- --------------------------------------------------------------------------------------------------------------------------
Net interest income less provision for credit losses 582 596 1,162 1,203
- --------------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Asset management 169 137 330 278
Mutual fund servicing 53 46 104 87
Service charges on deposits 51 50 101 98
Consumer services 105 93 235 175
Corporate services 88 62 28 113
Net residential mortgage banking 70 56 130 108
Net securities gains 42 42 13
Other 86 125 425 203
- --------------------------------------------------------------------------------------------------------------------------
Total noninterest income 664 569 1,395 1,075
- --------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Staff expense 364 334 776 688
Net occupancy and equipment 103 104 278 200
Amortization 21 29 49 53
Marketing 17 27 32 64
Distributions on capital securities 16 14 32 27
Other 246 231 423 415
- --------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 767 739 1,590 1,447
- --------------------------------------------------------------------------------------------------------------------------
Income before income taxes 479 426 967 831
Income taxes 164 146 327 282
- --------------------------------------------------------------------------------------------------------------------------
Net income $315 $280 $640 $549
- --------------------------------------------------------------------------------------------------------------------------
Net income applicable to common shareholders $311 $276 $631 $541
EARNINGS PER COMMON SHARE
Basic $1.04 $.92 $2.10 $1.80
Diluted 1.03 .90 2.08 1.77
CASH DIVIDENDS DECLARED PER COMMON SHARE .41 .39 .82 .78
AVERAGE COMMON SHARES OUTSTANDING
Basic 297.4 300.4 299.9 300.5
Diluted 300.9 305.7 303.2 305.9
==========================================================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
PNC BANK CORP.
----
23
<PAGE> 25
Consolidated Balance Sheet
<TABLE>
<CAPTION>
June 30 December 31
In millions, except par value 1999 1998
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $2,188 $2,534
Short-term investments 1,380 1,014
Loans held for sale 4,507 3,226
Securities available for sale 8,856 7,074
Loans, net of unearned income of $528 and $554 52,075 57,650
Allowance for credit losses (673) (753)
- -------------------------------------------------------------------------------------------------------------------------------
Net loans 51,402 56,897
Goodwill and other amortizable assets 2,769 2,548
Other 4,456 3,914
- -------------------------------------------------------------------------------------------------------------------------------
Total assets $75,558 $77,207
===============================================================================================================================
LIABILITIES
Deposits
Noninterest-bearing $9,088 $9,943
Interest-bearing 38,597 37,553
- -------------------------------------------------------------------------------------------------------------------------------
Total deposits 47,685 47,496
Borrowed funds
Federal funds purchased 320 390
Repurchase agreements 2,038 1,669
Bank notes and senior debt 8,479 10,384
Other borrowed funds 5,597 6,722
Subordinated debt 2,030 1,781
- -------------------------------------------------------------------------------------------------------------------------------
Total borrowed funds 18,464 20,946
Other 2,806 1,874
- -------------------------------------------------------------------------------------------------------------------------------
Total liabilities 68,955 70,316
- -------------------------------------------------------------------------------------------------------------------------------
Mandatorily redeemable capital securities of subsidiary trusts 848 848
SHAREHOLDERS' EQUITY
Preferred stock 7 7
Common stock - $5 par value
Authorized 450 shares
Issued 353 shares 1,764 1,764
Capital surplus 1,260 1,250
Retained earnings 5,646 5,262
Deferred benefit expense (34) (36)
Accumulated other comprehensive loss (248) (43)
Common stock held in treasury at cost: 57 and 49 shares (2,640) (2,161)
- -------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 5,755 6,043
- -------------------------------------------------------------------------------------------------------------------------------
Total liabilities, capital securities and shareholders' equity $75,558 $77,207
===============================================================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
PNC BANK CORP.
----
24
<PAGE> 26
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
Six months ended June 30 - in millions 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $640 $549
Adjustments to reconcile net income to net cash provided (used) by operating
activities
Provision for credit losses 103 65
Depreciation, amortization and accretion 217 211
Deferred income taxes 98 57
Net securities losses (gains) 14 (26)
Net gain on sales of businesses and assets (353) (167)
Valuation adjustments 142
Change in
Loans held for sale 85 (631)
Other (543) (664)
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities 403 (606)
- ------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Net change in loans 340 (3,339)
Repayment of securities available for sale 750 1,027
Sales
Securities available for sale 5,687 5,154
Loans 312 1,403
Foreclosed assets 21 34
Purchases
Securities available for sale (7,676) (5,171)
Loans (363) (79)
Net cash received (paid) for acquisitions/divestitures 3,261 (969)
Other (27) (219)
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities 2,305 (2,159)
- ------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net change in
Noninterest-bearing deposits (855) (186)
Interest-bearing deposits 1,044 22
Federal funds purchased (70) (2,735)
Sale/issuance
Repurchase agreements 71,290 53,796
Bank notes and senior debt 1,320 6,409
Other borrowed funds 17,040 52,470
Subordinated debt 254 140
Capital securities 198
Common stock 67 94
Repayment/maturity
Repurchase agreements (70,921) (52,852)
Bank notes and senior debt (3,226) (4,447)
Other borrowed funds (18,193) (51,895)
Subordinated debt (5) (2)
Acquisition of treasury stock (543) (212)
Cash dividends paid (256) (244)
- ------------------------------------------------------------------------------------------------------------------------------
Net cash (used) provided by financing activities (3,054) 556
- ------------------------------------------------------------------------------------------------------------------------------
(DECREASE) IN CASH AND DUE FROM BANKS (346) (2,209)
Cash and due from banks at beginning of year 2,534 4,303
- ------------------------------------------------------------------------------------------------------------------------------
Cash and due from banks at end of period $2,188 $2,094
- ------------------------------------------------------------------------------------------------------------------------------
CASH PAID FOR
Interest $1,286 $1,331
Income taxes 108 199
NONCASH ITEMS
Transfer from loans to loans held for sale 1,489
Transfers from loans to other assets 20 25
Conversion of debt to equity 55
==============================================================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
PNC BANK CORP.
----
25
<PAGE> 27
Notes to Consolidated Financial Statements
BUSINESS PNC Bank Corp. ("Corporation" or "PNC Bank") is one of the largest
diversified financial services companies in the United States operating retail
banking, asset management and wholesale businesses that provide financial
products and services 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 those authorities.
ACCOUNTING POLICIES
BASIS OF FINANCIAL STATEMENT PRESENTATION The unaudited consolidated interim
financial statements include the accounts of PNC Bank and its subsidiaries, most
of which are wholly owned. Such statements have been prepared in accordance with
generally accepted accounting principles. All significant intercompany accounts
and transactions have been eliminated.
In the opinion of management, the financial statements reflect all adjustments,
which are of a normal recurring nature, necessary for a fair statement of
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 classifications did not impact the Corporation's
financial condition or results of operations.
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the amounts reported. Actual results
will differ from such estimates and the differences may be material to the
consolidated financial statements.
The notes included herein should be read in conjunction with the audited
consolidated financial statements included in PNC Bank's 1998 Annual Report.
MORTGAGE-BACKED SECURITIES RETAINED DURING THE SECURITIZATION PROCESS Effective
January 1, 1999, the Corporation adopted Statement of Financial Accounting
Standards ("SFAS") No. 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 No. 65). SFAS No. 134 requires the Corporation
to classify all mortgage-backed securities or other interests in the form of a
security 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. Restatement
of prior year financial statements was not required. The adoption of SFAS No.
134 did not have a material impact on the Corporation's financial position or
results of operations.
RECENT ACCOUNTING PRONOUNCEMENTS SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133" (an amendment of SFAS No. 133), issued in June 1999, defers
the effective date of SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," until fiscal years beginning after June 15, 2000. The
Corporation expects to adopt SFAS No. 133, as amended by SFAS No. 137, effective
January 1, 2001. Management has not yet determined what effect this statement
will have on the financial position and results of operations of the
Corporation.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
was originally required to be adopted in years beginning after June 15, 1999,
although early adoption is permitted. This statement requires the Corporation to
recognize all financial derivatives on the balance sheet at fair value.
Derivatives that do not qualify as hedges must be adjusted to fair value through
results of operations. If the derivative is a hedge as defined by the statement,
changes in the fair value of derivatives will be either offset against the
change in fair value of the hedged assets, liabilities, or firm commitments
through results of operations or recognized in other comprehensive income until
the hedged item is recognized in results of operations based on the nature of
the hedge. The ineffective portion of a derivative's change in fair value will
be immediately recognized in earnings.
CASH FLOWS During the first six months of 1999, divestiture activity which
affected cash flows consisted of $3.1 billion of divested assets and receipt of
$3.3 billion in cash and due from banks. Acquisition and divestiture activity
for the first six months of 1998 consisted of $670 million of acquired assets,
$299 million of divested liabilities, cash payments totaling $998 million and
receipt of $29 million in cash and due from banks.
PNC BANK CORP.
----
26
<PAGE> 28
Notes to Consolidated Financial Statements
SECURITIES AVAILABLE FOR SALE
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
---------------------------------------------------------------------------------------
Unrealized Unrealized
Amortized ------------------- Fair Amortized ----------------- Fair
In millions Cost Gains Losses Value Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Debt securities
U.S. Treasury and government agencies $ 3,182 $ 2 $ (238) $ 2,946 $ 2,781 $ 10 $ (37) $ 2,754
Mortgage-backed 4,320 1 (108) 4,213 2,942 5 (11) 2,936
Asset-backed 984 (14) 970 709 1 (2) 708
State and municipal 138 3 (2) 139 122 6 128
Other debt 37 (2) 35 33 (2) 31
- ---------------------------------------------------------------------------------------------------------------------------------
Total debt securities 8,661 6 (364) 8,303 6,587 22 (52) 6,557
Corporate stocks and other 563 13 (23) 553 542 10 (35) 517
- ---------------------------------------------------------------------------------------------------------------------------------
Total securities available for sale $ 9,224 $ 19 $ (387) $ 8,856 $ 7,129 $ 32 $ (87) $ 7,074
=================================================================================================================================
</TABLE>
Net securities gains were $42 million in the first six months of 1999,
substantially all relating to the gain from the sale of Concord EFS, Inc.
("Concord") stock. Gross securities losses related to residential mortgage
banking risk management strategies of $56 million were included in net
residential mortgage banking revenue.
During the first six months of 1998, net securities gains totaled $26 million,
of which $13 million were included in net residential mortgage banking revenue.
ALLOWANCE FOR CREDIT LOSSES
Changes in the allowance for credit losses were as follows:
<TABLE>
<CAPTION>
In millions 1999 1998
- ----------------------------------------------------------------------------
<S> <C> <C>
Allowance at January 1 $ 753 $ 972
Charge-offs
Consumer (excluding credit card) (34) (43)
Credit card (60) (147)
Residential mortgage (6) (5)
Commercial (30) (13)
Commercial real estate (1) (3)
Other (3) (3)
- ----------------------------------------------------------------------------
Total charge-offs (134) (214)
Recoveries
Consumer (excluding credit card) 14 18
Credit card 2 8
Residential mortgage 1 1
Commercial 13 6
Commercial real estate 1 1
Other 1 1
- ----------------------------------------------------------------------------
Total recoveries 32 35
- ----------------------------------------------------------------------------
Net charge-offs
Consumer (excluding credit card) (20) (25)
Credit card (58) (139)
Residential mortgage (5) (4)
Commercial (17) (7)
Commercial real estate (2)
Other (2) (2)
- ----------------------------------------------------------------------------
Total net charge-offs (102) (179)
Provision for credit losses 103 65
Sale of credit card business (81)
Acquisitions 1
- ----------------------------------------------------------------------------
Allowance at June 30 $ 673 $ 859
============================================================================
</TABLE>
NONPERFORMING ASSETS
Nonperforming assets were as follows:
<TABLE>
<CAPTION>
June 30 December 31
In millions 1999 1998
- ----------------------------------------------------------------
<S> <C> <C>
Nonaccrual loans $300 $295
Foreclosed and other assets 33 37
- ----------------------------------------------------------------
Total nonperforming assets $333 $332
================================================================
</TABLE>
PNC BANK CORP.
----
27
<PAGE> 29
FINANCIAL DERIVATIVES
FAIR VALUE OF FINANCIAL DERIVATIVES The notional and fair values of financial
derivatives used for risk management and mortgage banking activities were as
follows:
<TABLE>
<CAPTION>
Positive Negative
Notional Fair Notional Fair
In millions Value Value Value Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
JUNE 30, 1999
Interest rate
Swaps $ 5,802 $ 76 $ 3,429 $ (59)
Caps 594 10
Floors 3,000 3 380 (3)
- --------------------------------------------------------------------------------
Total interest rate
risk management 9,396 89 3,809 (62)
Mortgage banking
activities 9,406 102 2,767 (2)
Credit default swaps 4,255 (7)
- --------------------------------------------------------------------------------
Total $ 18,802 $ 191 $ 10,831 $ (71)
================================================================================
DECEMBER 31, 1998
Interest rate
Swaps $ 6,915 $ 177 $ 2,535 $ (10)
Caps 722 6
Floors 1,500 439 (9)
- --------------------------------------------------------------------------------
Total interest rate
risk management 9,137 183 2,974 (19)
Mortgage banking
activities 9,367 74 906 (10)
Credit default
swaps 4,255 (2)
- --------------------------------------------------------------------------------
Total $ 18,504 $ 257 $ 8,135 $ (31)
================================================================================
</TABLE>
OTHER DERIVATIVES The following schedule sets forth information relating to
positions associated with customer-related and other derivatives.
<TABLE>
<CAPTION>
Positive Negative
Notional Fair Fair Net Asset
In millions Value Value Value (Liability)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
JUNE 30, 1999
Customer-related
Interest rate
Swaps $14,715 $ 55 $ (69) $ (14)
Caps/floors
Sold 2,412 (20) (20)
Purchased 2,313 17 17
Foreign exchange 2,658 33 (28) 5
Other 928 5 (5)
- --------------------------------------------------------------------------------
Total customer-
related 23,026 110 (122) (12)
Other 2,417 1 (2) (1)
Mortgage banking
activities 270 12 12
- --------------------------------------------------------------------------------
Total $25,713 $ 123 $ (124) $ (1)
================================================================================
DECEMBER 31, 1998
Customer-related
Interest rate
Swaps $11,040 $ 69 $ (89) $ (20)
Caps/floors
Sold 2,844 (19) (19)
Purchased 2,589 20 20
Foreign exchange 2,108 33 (27) 6
Other 457 7 (8) (1)
- --------------------------------------------------------------------------------
Total customer-
related 19,038 129 (143) (14)
Other 709 1 1
- --------------------------------------------------------------------------------
Total $19,747 $ 130 $ (143) $ (13)
================================================================================
</TABLE>
PNC BANK CORP.
----
28
<PAGE> 30
Notes to Consolidated Financial Statements
SEGMENT REPORTING
PNC Bank operates seven major businesses engaged in retail banking, asset
management and wholesale banking activities: PNC Regional Bank, PNC Advisors,
BlackRock, PFPC Worldwide, PNC Institutional Bank, PNC Secured Finance and PNC
Mortgage.
Business results presented are based on PNC Bank's management accounting
practices and the Corporation's current management structure.
The presentation of business results was changed during the first quarter of
1999 as part of the Corporation's operating strategy. PNC Regional Bank reflects
the combination of PNC Regional Community Bank and PNC National Consumer Bank.
Branch-based brokerage activities (previously included in PNC Advisors), the
middle market customer segment (previously part of PNC Corporate Bank) and
regional real estate lending and leasing activities in PNC Bank's geographic
footprint (previously included in PNC Secured Finance) were also combined with
PNC Regional Bank. Additionally, residential mortgages (previously included in
PNC Mortgage) were realigned with PNC Regional Bank. Certain out-of-footprint
large corporate, national healthcare and other non-strategic institutional
lending businesses as well as venture capital activities (previously in PNC
Corporate Bank) are included in Other. The remaining activities, which were
previously in PNC Corporate Bank, comprise PNC Institutional Bank. BlackRock
reflects total legal entity results for BlackRock, Inc. Financial results for
1999 and 1998 are presented consistent with this structure.
The management accounting process uses various balance sheet and income
statement assignments and transfers to measure performance of the businesses.
Methodologies change from time-to-time as management accounting practices are
enhanced and businesses change. Securities or borrowings and related net
interest income are assigned based on the net asset or liability position of
each business. Capital is assigned based on management's assessment of inherent
risks and equity levels at independent companies providing similar products and
services. Support areas not directly aligned with the businesses are allocated
primarily based on the utilization of these services.
Total business financial results differ from consolidated financial results
primarily due to differences between management accounting practices and
generally accepted accounting principles, divested and exited businesses,
venture capital activities, sales of equity interests in subsidiaries,
eliminations and unassigned items; the impact of which is reflected in Other.
Additionally, Other for the first six months of 1999 included gains on the sales
of the credit card business and equity interests in EPS and Concord stock;
valuation adjustments associated with exiting certain institutional lending
businesses, costs related to efficiency initiatives and a contribution to the
PNC Bank Foundation.
BUSINESS SEGMENT PRODUCTS AND SERVICES
PNC Regional Bank provides credit, deposit, branch-based brokerage and
electronic banking products and services to retail customers as well as credit,
leasing, treasury management and capital markets products and services to
mid-sized and small businesses primarily within PNC Bank's geographic footprint.
PNC Advisors offers personalized investment management, high-end brokerage
services, personal trust, estate planning and traditional banking services to
affluent and wealthy individuals; and investment management, trust and
administrative services to pensions, 401(k) plans and charitable organizations.
BlackRock offers fixed income, domestic and international equity and liquidity
investment products, and utilizes technology-based risk management capabilities
to provide investment advisory and asset management capabilities for a wide
range of institutional and retail customers.
PFPC Worldwide provides a wide range of accounting, administration, transfer
agency, custody, securities lending and integrated banking transaction services
to mutual funds, pension and money fund managers, partnerships, brokerage firms,
insurance companies and banks.
PNC Institutional Bank provides specialized credit, capital markets and treasury
management products and services to corporations, institutions and government
entities nationwide.
PNC Secured Finance is engaged in commercial real estate finance, including loan
origination, securitization and servicing; asset-based financing, including
lending, syndication and treasury management services; and equipment lease
financing to corporate clients nationwide.
PNC Mortgage originates, purchases and services residential mortgages and
related products. PNC Mortgage also acquires and securitizes residential
mortgages as private-label mortgage-backed securities and performs the master
servicing of those securities for investors.
PNC BANK CORP.
----
29
<PAGE> 31
RESULTS OF BUSINESSES
<TABLE>
<CAPTION>
PNC PNC
Three months ended June 30 - Regional PNC PFPC Institutional
in millions Bank Advisors BlackRock Worldwide Bank
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999
INCOME STATEMENT
Net interest income* $ 434 $ 33 $ (2) $ 2 $ 60
Noninterest income 160 150 92 55 41
- ---------------------------------------------------------------------------------------------------
Total revenue 594 183 90 57 101
Provision for credit losses 11 (1) 12
Noninterest expense 306 120 65 40 52
- ---------------------------------------------------------------------------------------------------
Pretax earnings 277 64 25 17 37
Income taxes 106 25 11 6 12
- ---------------------------------------------------------------------------------------------------
Earnings $ 171 $ 39 $ 14 $ 11 $ 25
===================================================================================================
Inter-segment revenue $ 9 $ 4 $ 20 $ (13)
===================================================================================================
Average assets ** $ 39,498 $ 3,358 $ 403 $ 258 $ 9,606
===================================================================================================
1998
INCOME STATEMENT
Net interest income* $ 425 $ 30 $ (3) $ 2 $ 53
Noninterest income 191 89 61 46 41
- ---------------------------------------------------------------------------------------------------
Total revenue 616 119 58 48 94
Provision for credit losses 15 (1)
Noninterest expense 335 65 47 33 47
- ---------------------------------------------------------------------------------------------------
Pretax earnings 266 55 11 15 47
Income taxes 105 22 5 6 17
- ---------------------------------------------------------------------------------------------------
Earnings $ 161 $ 33 $ 6 $ 9 $ 30
===================================================================================================
Inter-segment revenue $ 5 $ 1 $ (6)
===================================================================================================
Average assets ** $ 38,812 $ 2,653 $ 315 $ 210 $ 8,308
===================================================================================================
</TABLE>
<TABLE>
<CAPTION>
PNC
Three months ended June 30 - Secured PNC Total
in millions Finance Mortgage Other Consolidated
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1999
INCOME STATEMENT
Net interest income* $ 48 $ 31 $ 6 $ 612
Noninterest income 34 85 47 664
- -------------------------------------------------------------------------------------
Total revenue 82 116 53 1,276
Provision for credit losses 3 25
Noninterest expense 38 93 53 767
- -------------------------------------------------------------------------------------
Pretax earnings 44 23 (3) 484
Income taxes 13 10 (14) 169
- -------------------------------------------------------------------------------------
Earnings $ 31 $ 13 $ 11 $ 315
=====================================================================================
Inter-segment revenue $ 4 $ 9 $ (33)
=====================================================================================
Average assets ** $ 7,971 $ 7,016 $ 6,950 $ 75,060
=====================================================================================
1998
INCOME STATEMENT
Net interest income* $ 37 $ 20 $ 73 $ 637
Noninterest income 17 65 59 569
- -------------------------------------------------------------------------------------
Total revenue 54 85 132 1,206
Provision for credit losses (3) 24 35
Noninterest expense 29 71 112 739
- -------------------------------------------------------------------------------------
Pretax earnings 28 14 (4) 432
Income taxes 9 5 (17) 152
- -------------------------------------------------------------------------------------
Earnings $ 19 $ 9 $ 13 $ 280
=====================================================================================
Inter-segment revenue $ 2 $ 8 $ (10)
=====================================================================================
Average assets ** $ 7,102 $ 4,502 $ 11,730 $ 73,632
=====================================================================================
<CAPTION>
PNC PNC
Six months ended June 30 - Regional PNC PFPC Institutional
in millions Bank Advisors BlackRock Worldwide Bank
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999
INCOME STATEMENT
Net interest income* $ 866 $ 67 $ (6) $ 5 $ 118
Noninterest income 286 298 180 106 84
- ---------------------------------------------------------------------------------------------------
Total revenue 1,152 365 174 111 202
Provision for credit losses 22 16
Noninterest expense 608 243 129 76 106
- ---------------------------------------------------------------------------------------------------
Pretax earnings 522 122 45 35 80
Income taxes 201 47 19 13 27
- ---------------------------------------------------------------------------------------------------
Earnings $ 321 $ 75 $ 26 $ 22 $ 53
===================================================================================================
Inter-segment revenue $ 17 $ 4 $ 39 $ (22)
===================================================================================================
Average assets ** $ 39,441 $ 3,304 $ 403 $ 263 $ 9,622
===================================================================================================
1998
INCOME STATEMENT
Net interest income* $ 845 $ 59 $ (7) $ 4 $ 106
Noninterest income 314 169 131 87 75
- ---------------------------------------------------------------------------------------------------
Total revenue 1,159 228 124 91 181
Provision for credit losses 30 (1)
Noninterest expense 640 134 98 62 99
- ---------------------------------------------------------------------------------------------------
Pretax earnings 489 95 26 29 82
Income taxes 193 37 12 11 29
- ---------------------------------------------------------------------------------------------------
Earnings $ 296 $ 58 $ 14 $ 18 $ 53
===================================================================================================
Inter-segment revenue $ 9 $ 1 $ 1 $ (12)
===================================================================================================
Average assets ** $ 38,806 $ 2,654 $ 315 $ 214 $ 8,321
===================================================================================================
<CAPTION>
PNC
Six months ended June 30 - Secured PNC Total
in millions Finance Mortgage Other Consolidated
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1999
INCOME STATEMENT
Net interest income* $ 98 $ 56 $ 72 $ 1,276
Noninterest income 55 161 225 1,395
- --------------------------------------------------------------------------------------
Total revenue 153 217 297 2,671
Provision for credit losses (2) 67 103
Noninterest expense 73 176 179 1,590
- --------------------------------------------------------------------------------------
Pretax earnings 82 41 51 978
Income taxes 24 17 (10) 338
- --------------------------------------------------------------------------------------
Earnings $ 58 $ 24 $ 61 $ 640
======================================================================================
Inter-segment revenue $ 6 $ 18 $ (62)
======================================================================================
Average assets ** $ 8,086 $ 7,050 $ 7,834 $ 76,003
======================================================================================
1998
INCOME STATEMENT
Net interest income* $ 78 $ 39 $ 157 $ 1,281
Noninterest income 26 120 153 1,075
- --------------------------------------------------------------------------------------
Total revenue 104 159 310 2,356
Provision for credit losses (6) 42 65
Noninterest expense 47 135 232 1,447
- --------------------------------------------------------------------------------------
Pretax earnings 63 24 36 844
Income taxes 19 9 (15) 295
- --------------------------------------------------------------------------------------
Earnings $ 44 $ 15 $ 51 $ 549
======================================================================================
Inter-segment revenue $ 4 $ 17 $ (20)
======================================================================================
Average assets ** $ 6,203 $ 4,166 $ 12,212 $ 72,891
======================================================================================
</TABLE>
* Taxable-equivalent basis
** BlackRock's assets are presented as of period end.
PNC BANK CORP.
----
30
<PAGE> 32
Notes to Consolidated Financial Statements
EARNINGS PER SHARE
The following table sets forth basic and diluted earnings per share
calculations.
<TABLE>
<CAPTION>
Three months ended June 30 Six months ended June 30
----------------------------------------------------
In thousands, except per share data 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CALCULATION OF BASIC EARNINGS PER COMMON SHARE
Net income $315,173 $280,411 $640,413 $549,671
Less: Preferred dividends declared 4,821 4,842 9,648 9,691
- ------------------------------------------------------------------------------------------------------------------------------------
Net income applicable to basic earnings per common share $310,352 $275,569 $630,765 $539,980
- ------------------------------------------------------------------------------------------------------------------------------------
Basic weighted-average common shares outstanding 297,427 300,354 299,851 300,460
- ------------------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER COMMON SHARE $1.04 $.92 $2.10 $1.80
====================================================================================================================================
CALCULATION OF DILUTED EARNINGS PER COMMON SHARE
Net income $315,173 $280,411 $640,413 $549,671
Add: Interest expense on convertible debentures (net of tax) 4 346 7 872
Less: Dividends declared on nonconvertible preferred stock 4,538 4,538 9,075 9,075
- ------------------------------------------------------------------------------------------------------------------------------------
Net income applicable to diluted earnings per common share $310,639 $276,219 $631,345 $541,468
- ------------------------------------------------------------------------------------------------------------------------------------
Basic weighted-average common shares outstanding 297,427 300,354 299,851 300,460
Weighted-average common shares to be issued using average market price and
assuming:
Conversion of preferred stock Series A and B 133 149 136 153
Conversion of preferred stock Series C and D 1,077 1,151 1,087 1,163
Conversion of debentures 24 1,301 24 1,509
Exercise of stock options 1,866 2,203 1,674 2,204
Incentive share awards 380 544 380 431
- ------------------------------------------------------------------------------------------------------------------------------------
Diluted weighted-average common shares outstanding 300,907 305,702 303,152 305,920
- ------------------------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER COMMON SHARE $1.03 $.90 $2.08 $1.77
====================================================================================================================================
</TABLE>
LITIGATION
The Corporation and persons to whom the Corporation may have indemnification
obligations, in the normal course of business, are subject to various pending
and threatened lawsuits in which claims for monetary damages are asserted.
Management, after consultation with legal counsel, does not at the present time
anticipate the ultimate aggregate liability, if any, arising out of such
lawsuits will have a material adverse effect on the Corporation's financial
position. At the present time, management is not in a position to determine
whether any such pending or threatened litigation will have a material adverse
effect on the Corporation's results of operations in any future reporting
period.
COMPREHENSIVE INCOME
Total comprehensive income was $156 million in the second quarter and $435
million in the first six months of 1999 compared with $296 million and $557
million, respectively, in 1998.
PNC BANK CORP.
----
31
<PAGE> 33
OTHER FINANCIAL INFORMATION
In connection with the 1995 Midlantic Corporation ("Midlantic") merger, the
parent company and its wholly-owned subsidiary, PNC Bancorp, Inc., jointly and
severally assumed borrowed funds of Midlantic in the aggregate principal amount
of $300 million at June 30, 1999.
Summarized financial information for PNC Bancorp, Inc. and subsidiaries is as
follows:
<TABLE>
<CAPTION>
PNC BANCORP, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
June 30 December 31
In millions 1999 1998
- ------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $2,180 $2,527
Securities available for sale 8,428 6,868
Loans, net of unearned income 51,708 57,282
Allowance for credit losses (673) (753)
- ------------------------------------------------------------------
Net loans 51,035 56,529
Other assets 11,182 9,261
- ------------------------------------------------------------------
Total assets $72,825 $75,185
- ------------------------------------------------------------------
LIABILITIES
Deposits $47,801 $47,578
Borrowed funds 16,847 19,402
Other liabilities 1,627 1,130
- ------------------------------------------------------------------
Total liabilities 66,275 68,110
Mandatorily redeemable capital
securities of subsidiary trust 350 350
SHAREHOLDERS' EQUITY 6,200 6,725
- ------------------------------------------------------------------
Total liabilities, capital securities
and shareholders' equity $72,825 $75,185
==================================================================
</TABLE>
<TABLE>
<CAPTION>
PNC BANCORP, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
Six months ended June 30 - in millions 1999 1998
- ------------------------------------------------------------------
<S> <C> <C>
Interest income $2,458 $2,582
Interest expense 1,170 1,287
- ------------------------------------------------------------------
Net interest income 1,288 1,295
Provision for credit losses 103 65
- ------------------------------------------------------------------
Net interest income less provision
for credit losses 1,185 1,230
Noninterest income 960 1,042
Noninterest expense 1,307 1,467
- ------------------------------------------------------------------
Income before income taxes 838 805
Income taxes 304 281
- ------------------------------------------------------------------
Net income $534 $524
==================================================================
</TABLE>
SUBSEQUENT EVENT
On July 20, 1999, the Corporation announced an agreement to acquire First Data
Investor Services Group, Inc., the mutual fund servicing subsidiary of First
Data Corporation for $1.1 billion in cash. The transaction is expected to close
in the fourth quarter of 1999, subject to regulatory approvals and satisfaction
of customary closing conditions.
PNC BANK CORP.
----
32
<PAGE> 34
Statistical Information
CONSOLIDATED AVERAGE BALANCE SHEET AND NET INTEREST ANALYSIS
<TABLE>
<CAPTION>
Six months ended June 30
-------------------------------------------------------
1999
-------------------------------------------------------
Dollars in millions Average Average
Taxable-equivalent basis Balances Interest Yields/Rates
- -----------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C> <C>
Interest-earning assets
Loans held for sale $ 3,555 $ 123 6.88%
Securities available for sale
U.S. Treasury and government agencies and 4,720 120 5.11
corporations
Other debt 3,186 98 6.15
Other 695 20 5.83
- ------------------------------------------------------------------------------------------------
Total securities available for sale 8,601 238 5.56
Loans, net of unearned income
Consumer (excluding credit card) 10,841 440 8.19
Credit card 1,355 100 14.90
Residential mortgage 12,341 433 7.02
Commercial 23,705 900 7.55
Commercial real estate 3,397 132 7.71
Other 2,937 104 7.11
- ------------------------------------------------------------------------------------------------
Total loans, net of unearned income 54,576 2,109 7.73
Other 1,121 35 6.29
- ------------------------------------------------------------------------------------------------
Total interest-earning assets/interest income 67,853 2,505 7.38
Noninterest-earning assets
Allowance for credit losses (711)
Cash and due from banks 2,052
Other assets 6,809
- -----------------------------------------------------------------------------
Total assets $ 76,003
=============================================================================
LIABILITIES, CAPITAL SECURITIES AND SHAREHOLDERS'
EQUITY
Interest-bearing liabilities
Interest-bearing deposits
Demand and money market $ 17,258 231 2.69
Savings 2,503 20 1.62
Other time 16,600 416 5.05
Deposits in foreign offices 721 17 4.80
- ------------------------------------------------------------------------------------------------
Total interest-bearing deposits 37,082 684 3.72
Borrowed funds
Bank notes and senior debt 9,512 242 5.07
Federal funds purchased 1,445 35 4.79
Repurchase agreements 2,237 41 3.60
Other borrowed funds 5,908 153 5.15
Subordinated debt 1,959 74 7.54
- ------------------------------------------------------------------------------------------------
Total borrowed funds 21,061 545 5.15
- ------------------------------------------------------------------------------------------------
Total interest-bearing liabilities/interest expense 58,143 1,229 4.23
Noninterest-bearing liabilities and shareholders' equity
Demand and other noninterest-bearing deposits 8,858
Accrued expenses and other liabilities 2,231
Mandatorily redeemable capital securities
of subsidiary trusts 848
Shareholders' equity 5,923
- -----------------------------------------------------------------------------
Total liabilities, capital securities and
shareholders' equity $ 76,003
- -----------------------------------------------------------------------------------------------------------------
Interest rate spread 3.15
Impact of noninterest-bearing sources .60
- -----------------------------------------------------------------------------------------------------------------
Net interest income/margin $ 1,276 3.75%
=================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Six months ended June 30
-------------------------------------------------
1998
-------------------------------------------------
Dollars in millions Average Average
Taxable-equivalent basis Balances Interest Yields/Rates
- -----------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C> <C>
Interest-earning assets
Loans held for sale $ 2,657 $ 94 7.08%
Securities available for sale
U.S. Treasury and government agencies and 5,415 154 5.70
corporations
Other debt 1,585 52 6.53
Other 552 18 6.51
- ------------------------------------------------------------ ----------------------------
Total securities available for sale 7,552 224 5.94
Loans, net of unearned income
Consumer (excluding credit card) 11,090 471 8.56
Credit card 3,899 266 13.75
Residential mortgage 12,671 462 7.29
Commercial 21,550 852 7.86
Commercial real estate 3,414 145 8.46
Other 2,095 72 7.00
- ------------------------------------------------------------ ----------------------------
Total loans, net of unearned income 54,719 2,268 8.29
Other 1,015 32 6.32
- ------------------------------------------------------------ ----------------------------
Total interest-earning assets/interest income 65,943 2,618 7.94
Noninterest-earning assets
Allowance for credit losses (916)
Cash and due from banks 2,401
Other assets 5,463
- ------------------------------------------------------------ -------------
Total assets $ 72,891
============================================================ =============
LIABILITIES, CAPITAL SECURITIES AND SHAREHOLDERS'
EQUITY
Interest-bearing liabilities
Interest-bearing deposits
Demand and money market $ 14,249 209 2.96
Savings 2,661 26 1.99
Other time 17,046 461 5.44
Deposits in foreign offices 995 28 5.59
- ------------------------------------------------------------ ----------------------------
Total interest-bearing deposits 34,951 724 4.17
Borrowed funds
Bank notes and senior debt 10,309 295 5.69
Federal funds purchased 2,749 76 5.53
Repurchase agreements 1,643 40 4.81
Other borrowed funds 4,467 134 5.98
Subordinated debt 1,754 68 7.70
- ------------------------------------------------------------ ----------------------------
Total borrowed funds 20,922 613 5.83
- ------------------------------------------------------------ ----------------------------
Total interest-bearing liabilities/interest expense 55,873 1,337 4.79
Noninterest-bearing liabilities and shareholders' equity
Demand and other noninterest-bearing deposits 9,448
Accrued expenses and other liabilities 1,459
Mandatorily redeemable capital securities
of subsidiary trusts 674
Shareholders' equity 5,437
- ------------------------------------------------------------ -------------
Total liabilities, capital securities and
shareholders' equity $ 72,891
- -----------------------------------------------------------------------------------------------------------
Interest rate spread 3.15
Impact of noninterest-bearing sources .73
- -----------------------------------------------------------------------------------------------------------
Net interest income/margin $ 1,281 3.88%
===========================================================================================================
</TABLE>
Nonaccrual loans are included in loans, net of unearned income. The impact of
financial derivatives used in interest rate risk management is included in the
interest income/expense and average yields/rates of the related assets and
liabilities. Average balances of securities available for sale are based on
amortized historical cost (excluding SFAS No. 115 adjustments to fair value).
PNC BANK CORP.
----
33
<PAGE> 35
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Second Quarter 1999 First Quarter 1999
- --------------------------------------------------------------------------------------------------
Average Average Average Average
Balances Interest Yields/Rates Balances Interest Yields/Rates
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 3,727 $ 67 7.07% $ 3,383 $ 56 6.68%
5,187 66 5.12 4,248 54 5.10
3,521 55 6.19 2,848 43 6.11
729 10 5.70 659 10 5.98
- ----------------------------- -------------------------------
9,437 131 5.56 7,755 107 5.55
10,729 218 8.16 10,955 222 8.21
2,724 100 14.91
12,496 218 6.97 12,184 216 7.09
22,846 438 7.58 24,574 462 7.52
3,396 66 7.66 3,398 65 7.70
3,012 52 6.98 2,860 52 7.24
- ----------------------------- -------------------------------
52,479 992 7.53 56,695 1,117 7.91
1,236 19 6.37 1,005 16 6.19
- ----------------------------- -------------------------------
66,879 1,209 7.20 68,838 1,296 7.56
(678) (744)
2,038 2,066
6,821 6,798
- ----------- -----------------
$ 75,060 $ 76,958
- ----------- -----------------
$ 17,686 118 2.66 $ 16,825 113 2.73
2,472 10 1.60 2,535 10 1.63
15,946 197 4.97 17,262 219 5.12
682 8 4.83 759 9 4.78
- ----------------------------- -------------------------------
36,786 333 3.63 37,381 351 3.80
9,214 117 5.03 9,814 125 5.10
1,230 15 4.77 1,663 20 4.81
2,629 25 3.62 1,841 16 3.57
5,441 69 5.05 6,380 84 5.24
2,030 38 7.50 1,886 36 7.58
- ----------------------------- -------------------------------
20,544 264 5.08 21,584 281 5.21
- ----------------------------- -------------------------------
57,330 597 4.15 58,965 632 4.31
8,684 9,035
2,325 2,135
848 848
5,873 5,975
- ----------- -----------------
$ 75,060 $ 76,958
- --------------------------------------------------------------------------------------------------
3.05 3.25
.59 .61
- --------------------------------------------------------------------------------------------------
$ 612 3.64% $ 664 3.86%
==================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------
Second Quarter 1998
- -------------------------------------------------
Average Average
Balances Interest Yields/Rates
- -------------------------------------------------
<S> <C> <C>
$ 2,948 $ 52 7.02%
5,252 74 5.62
1,531 25 6.46
540 8 6.44
- -------------------------------
7,323 107 5.86
10,995 235 8.56
4,048 133 13.17
12,560 228 7.26
22,425 445 7.85
3,206 66 8.22
2,114 37 7.01
- -------------------------------
55,348 1,144 8.23
1,069 17 6.18
- -------------------------------
66,688 1,320 7.89
(885)
2,020
5,809
- -----------------
$ 73,632
- -----------------
$ 14,344 106 2.95
2,675 13 1.98
16,749 227 5.43
1,188 17 5.53
- -------------------------------
34,956 363 4.15
10,643 153 5.68
3,089 43 5.51
1,762 21 4.75
4,524 68 5.97
1,826 35 7.64
- -------------------------------
21,844 320 5.81
- -------------------------------
56,800 683 4.79
9,213
1,445
698
5,476
- -----------------
$ 73,632
- -------------------------------------------------
3.10
.71
- -------------------------------------------------
$ 637 3.81%
=================================================
</TABLE>
PNC BANK CORP.
----
34
<PAGE> 36
Quarterly Report on Form 10-Q
Securities and Exchange Commission
Washington, D.C. 20549
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the quarterly period ended June 30, 1999.
Commission File Number 1-9718
PNC BANK CORP.
Incorporated in the Commonwealth of Pennsylvania
IRS Employer Identification No. 25-1435979
Address: One PNC Plaza
249 Fifth Avenue
Pittsburgh, Pennsylvania 15222-2707
Telephone: (412) 762-1553
As of July 30, 1999, PNC Bank Corp. had 295,337,200 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 six months ended June
30, 1999 and 1998 23
Consolidated Balance Sheet as of June
30, 1999 and December 31, 1998 24
Consolidated Statement of Cash Flows for
the six months ended June 30, 1999 and
1998 25
Notes to Consolidated Financial 26 - 32
Statements
Consolidated Average Balance Sheet and
Net Interest Analysis 33 - 34
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of
Operations 2 - 22
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:
12.1 Computation of Ratio of Earnings to Fixed Charges
12.2 Computation of Ratio of Earnings to Fixed Charges and Preferred Stock
Dividends
27 Financial Data Schedule
================================================================================
Copies of these Exhibits may be obtained electronically at the Securities and
Exchange Commission's home page at www.sec.gov. Exhibits may also be obtained
without charge by writing to Lynn F. Evans, Director of Financial Reporting, at
corporate headquarters or by calling (412) 762-1553 or via e-mail at
[email protected].
Since March 31, 1999, the Corporation filed the following Current Reports on
Form 8-K:
Form 8-K dated as of March 29, 1999, reporting developments regarding the
Corporation's credit card business, filed pursuant to Item 5.
Form 8-K dated as of April 22, 1999, reporting the Corporation's consolidated
financial results for the three months ended March 31, 1999 and information on
the Corporation's businesses for the three months ended March 31, 1999 and 1998,
filed pursuant to Item 5.
Form 8-K dated as of July 15, 1999, reporting the Corporation's consolidated
financial results for the three and six months ended June 30, 1999 and
information on the Corporation's businesses for the six months ended June 30,
1999 and 1998, filed pursuant to Item 5.
Form 8-K dated as of July 20, 1999, with respect to the announcement of an
agreement to acquire First Data Investor Services Group, Inc., filed pursuant to
Item 5.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on August 16, 1999, 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.
----
35
<PAGE> 37
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.
INTERNET INFORMATION
Information on PNC Bank Corp.'s financial results and its products and services
is available on the Internet at www.pncbank.com.
FINANCIAL INFORMATION
The Annual Report on Form 10-K is filed with the Securities and Exchange
Commission ("SEC"). Copies of this document and other filings, including
Exhibits thereto, may be obtained electronically at the SEC's home page at
www.sec.gov. Copies may also be obtained by writing to Lynn F. Evans, Director
of Financial Reporting, at corporate headquarters, or by calling (412) 762-1553
or via e-mail at [email protected].
INQUIRIES
For financial services call 1-800-4-BANKER. Individual shareholders should
contact Shareholder Relations at (800) 843-2206 or the PNC Bank Hotline at (800)
982-7652.
Analysts and institutional investors should contact William H. Callihan, Vice
President, Investor Relations, at (412) 762-8257 or via e-mail at
[email protected].
News media representatives and others seeking general information should contact
Brian E. Goerke, Director of Public Relations, at (412) 762-4304 or via e-mail
at [email protected].
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
1999 QUARTER High Low Close Declared
- ---------------------------------------------------------------------
<S> <C> <C> <C> <C>
First $59.750 $47.000 $55.563 $.41
Second 60.125 54.375 57.625 .41
- ---------------------------------------------------------------------
Total $.82
=====================================================================
Cash
Dividends
1998 QUARTER High Low Close Declared
- ---------------- ------------- ------------ ------------ ------------
First $61.625 $49.500 $59.938 $.39
Second 66.750 53.813 53.875 .39
Third 60.000 41.625 45.000 .39
Fourth 54.625 38.750 54.000 .41
- ---------------------------------------------------------------------
Total $1.58
=====================================================================
</TABLE>
DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN
The PNC Bank Corp. dividend reinvestment and stock purchase plan enables holders
of common and preferred stock to purchase additional shares of common stock
conveniently and without paying brokerage commissions or service charges. A
prospectus and enrollment card may be obtained by writing to Shareholder
Relations at corporate headquarters.
REGISTRAR AND TRANSFER AGENT
The Chase Manhattan Bank
P.O. Box 590
Ridgefield Park, New Jersey 07660
800-982-7652
PNC BANK CORP.
----
36
<PAGE> 1
EXHIBIT 12.1
PNC BANK CORP.
COMPUTATION OF RATIO OF EARNINGS
TO FIXED CHARGES
<TABLE>
<CAPTION>
Six Year ended December 31
months ended -----------------------------------------------------------
Dollars in millions June 30, 1999 1998 1997 1996 1995 1994
- ----------------------------------------- ------------ ---------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
EARNINGS
Income before taxes and cumulative effect
of changes in accounting principles $ 967 $ 1,710 $ 1,618 $ 1,527 $ 627 $ 1,209
Fixed charges excluding interest on deposits 602 1,366 1,171 1,098 1,487 1,104
------- ------- ------- ------- ------- -------
Subtotal 1,569 3,076 2,789 2,625 2,114 2,313
Interest on deposits 684 1,471 1,457 1,428 1,552 1,160
------- ------- ------- ------- ------- -------
Total $ 2,253 $ 4,547 $ 4,246 $ 4,053 $ 3,666 $ 3,473
======= ======= ======= ======= ======= =======
FIXED CHARGES
Interest on borrowed funds $ 545 $ 1,267 $ 1,098 $ 1,065 $ 1,454 $ 1,071
Interest component of rentals 25 37 29 31 32 32
Amortization of notes and debentures 2 1 1 1 1
Distributions on Mandatorily Redeemable
Capital Securities of Subsidiary Trusts 32 60 43 1
------- ------- ------- ------- ------- -------
Subtotal 602 1,366 1,171 1,098 1,487 1,104
Interest on deposits 684 1,471 1,457 1,428 1,552 1,160
------- ------- ------- ------- ------- -------
Total $ 1,286 $ 2,837 $ 2,628 $ 2,526 $ 3,039 $ 2,264
======= ======= ======= ======= ======= =======
RATIO OF EARNINGS TO FIXED CHARGES
Excluding interest on deposits 2.61 x 2.25 x 2.38 x 2.39 x 1.42 x 2.10 x
Including interest on deposits 1.75 1.60 1.62 1.60 1.21 1.53
======================================================================================================================
</TABLE>
<PAGE> 1
EXHIBIT 12.2
PNC BANK CORP.
COMPUTATION OF RATIO OF EARNINGS
TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
<TABLE>
<CAPTION>
Six Year ended December 31
months ended -----------------------------------------------------------
Dollars in millions June 30, 1999 1998 1997 1996 1995 1994
- ------------------------------------------ ------------ ---------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
EARNINGS
Income before taxes and cumulative effect
of changes in accounting principles $ 967 $ 1,710 $ 1,618 $ 1,527 $ 627 $ 1,209
Fixed charges and preferred stock dividends
excluding interest on deposits 617 1,395 1,201 1,106 1,492 1,112
------- ------- ------- ------- ------- -------
Subtotal 1,584 3,105 2,819 2,633 2,119 2,321
Interest on deposits 684 1,471 1,457 1,428 1,552 1,160
------- ------- ------- ------- ------- -------
Total $ 2,268 $ 4,576 $ 4,276 $ 4,061 $ 3,671 $ 3,481
======= ======= ======= ======= ======= =======
FIXED CHARGES
Interest on borrowed funds $ 545 $ 1,267 $ 1,098 $ 1,065 $ 1,454 $ 1,071
Interest component of rentals 25 37 29 31 32 32
Amortization of notes and debentures 2 1 1 1 1
Distributions on Mandatorily Redeemable
Capital Securities of Subsidiary Trusts 32 60 43 1
Preferred stock dividend requirements 15 29 30 8 5 8
------- ------- ------- ------- ------- -------
Subtotal 617 1,395 1,201 1,106 1,492 1,112
Interest on deposits 684 1,471 1,457 1,428 1,552 1,160
------- ------- ------- ------- ------- -------
Total $ 1,301 $ 2,866 $ 2,658 $ 2,534 $ 3,044 $ 2,272
======= ======= ======= ======= ======= =======
RATIO OF EARNINGS TO FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
Excluding interest on deposits 2.57 x 2.23 x 2.35 x 2.38 x 1.42 x 2.09 x
Including interest on deposits 1.74 1.60 1.61 1.60 1.21 1.53
======================================================================================================================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial information incorporated by reference to the 1999 Second
Quarter Financial Review and is qualified in its entirety by reference to such
financial information.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 2,188
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 8,856
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 52,075
<ALLOWANCE> (673)
<TOTAL-ASSETS> 75,558
<DEPOSITS> 47,685
<SHORT-TERM> 9,660
<LIABILITIES-OTHER> 2,806
<LONG-TERM> 8,804
0
7
<COMMON> 1,764
<OTHER-SE> 3,984
<TOTAL-LIABILITIES-AND-EQUITY> 75,558
<INTEREST-LOAN> 2,101
<INTEREST-INVEST> 236
<INTEREST-OTHER> 157
<INTEREST-TOTAL> 2,494
<INTEREST-DEPOSIT> 684
<INTEREST-EXPENSE> 1,229
<INTEREST-INCOME-NET> 1,265
<LOAN-LOSSES> 103
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,590
<INCOME-PRETAX> 967
<INCOME-PRE-EXTRAORDINARY> 640
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 640
<EPS-BASIC> 2.10
<EPS-DILUTED> 2.08
<YIELD-ACTUAL> 3.75
<LOANS-NON> 300
<LOANS-PAST> 204
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 753
<CHARGE-OFFS> (134)
<RECOVERIES> 32
<ALLOWANCE-CLOSE> 673
<ALLOWANCE-DOMESTIC> 673
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
