-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, RcQAcFdcJ5/aoLmSaic0uJ8c3jde065LO+/oKxYvr7Im1oqx7MhwH/c5kFiEu1+w /NomWhTZnpNJ3wsDrrnsXw== 0000950128-94-000135.txt : 19940816 0000950128-94-000135.hdr.sgml : 19940816 ACCESSION NUMBER: 0000950128-94-000135 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19940630 FILED AS OF DATE: 19940815 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PNC BANK CORP CENTRAL INDEX KEY: 0000713676 STANDARD INDUSTRIAL CLASSIFICATION: 6021 IRS NUMBER: 251435979 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-09718 FILM NUMBER: 94544196 BUSINESS ADDRESS: STREET 1: ONE PNC PLAZA STREET 2: FIFTH AVE & WOOD ST CITY: PITTSBURGH STATE: PA ZIP: 15265 BUSINESS PHONE: 4127622666 MAIL ADDRESS: STREET 1: ONE PNC PLAZA STREET 2: FIFTH AVENUE & WOOD STREET CITY: PITTSBURGH STATE: PA ZIP: 15265 FORMER COMPANY: FORMER CONFORMED NAME: PNC BANK CORP /PA/ DATE OF NAME CHANGE: 19930428 FORMER COMPANY: FORMER CONFORMED NAME: PNC FINANCIAL CORP DATE OF NAME CHANGE: 19920703 10-Q 1 PNC BANK 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT 0F 1934 For the Quarterly Period Ended June 30, 1994 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________________ to _______________________. COMMISSION FILE NUMBER 1-9718 PNC BANK CORP. (Exact name of registrant as specified in its charter) PENNSYLVANIA 25-1435979 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.)
ONE PNC PLAZA FIFTH AVENUE AND WOOD STREET PITTSBURGH, PENNSYLVANIA 15265 (Address of principal executive offices) (Zip Code) (412) 762-3900 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock ($5 par value): 235,871,108 shares outstanding at July 29, 1994. Exhibit Index appears on page 5 2 PART I--FINANCIAL INFORMATION ITEM 1. Financial Statements The following consolidated financial information of PNC Bank Corp. and subsidiaries ("Corporation") is incorporated herein by reference to the 1994 Second Quarter Financial Review ("Financial Review") which is filed herewith as Exhibit 99.1. Page references set forth below are to such Financial Review.
Financial Information Page Reference --------------------- -------------- Consolidated Balance Sheet as of June 30, 1994 and December 31, 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Consolidated Statement of Income for the three months and six months ended June 30, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . 18 Consolidated Statement of Cash Flows for the six months ended June 30, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . 19 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . 20-21
The statistical disclosure under the caption "Average Consolidated Balance Sheet and Net Interest Analysis" in the Financial Review at pages 22 and 23 is incorporated herein by reference. Certain other statistical disclosure is included below in Part I, Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations, as permitted by Guide 3, Statistical Disclosures by Bank Holding Companies. ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The information contained under the caption "Corporate Financial Review" in the Financial Review at pages 2 through 16 is incorporated herein by reference. 2 3 PART II--OTHER INFORMATION ITEM 4. Submission of Matters for a Vote of Security Holders An annual meeting of shareholders of the Corporation was held on April 26, 1994, for the purpose of electing fifteen directors of the Corporation and to approve the PNC Bank Corp. 1994 Annual Incentive Award Plan ("Incentive Plan"). All fifteen nominees were elected and the Incentive Plan was approved. A summary of the votes cast with respect to the election of directors and the approval of the Incentive Plan is filed herewith as Exhibit 99.2 and incorporated herein by reference. ITEM 6. Exhibits and Reports on Form 8-K (a) The exhibits listed on the Exhibit Index on Page 5 of this Form 10-Q are filed herewith. (b) The following reports on Form 8-K were filed during the quarter ended June 30, 1994: (1) Current Report on Form 8-K dated April 18, 1994, was filed pursuant to Item 5 to report the Corporation's consolidated financial results for the three months ended March 31, 1994. (2) Current Report on Form 8-K dated May 24, 1994, was filed pursuant to Item 5 to report a public offering of $200 million of Debt Securities designated 7-3/4% Subordinated Notes Due 2004 issued by PNC Funding Corp and guaranteed by the Corporation. A form of Debt Securities and the underwriting agreement were filed as exhibits. (3) Current Report on Form 8-K dated June 16, 1994, was filed pursuant to Item 5 to report (i) the Corporation's consolidated financial results for the three months and six months ended June 30, 1994; (ii) the completion of the acquisition of First Eastern Corp., a bank holding company with operations in northeastern Pennsylvania; (iii) the completion of the acquisition of a $10-billion residential mortgage servicing portfolio from the Associates Corporation of North America; and (iv) the execution of a definitive agreement to acquire BlackRock Financial Management L.P., a New York-based fixed-income management firm. 3 4 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PNC BANK CORP. (Registrant) Date: August 15, 1994 By /s/ Robert L. Haunschild ---------------------- Robert L. Haunschild SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER 4 5 EXHIBIT INDEX The following exhibits are filed herewith: 11 Calculation of Primary and Fully Diluted Earnings Per Common Share. 12.1 Computation of Ratio of Earnings to Fixed Charges. 12.2 Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends. 99.1 1994 Second Quarter Financial Review. 99.2 Summary of Votes Cast. 5 EX-11 2 PNC BANK 10-Q 1 EXHIBIT 11 PNC BANK CORP. CALCULATION OF PRIMARY AND FULLY DILUTED EARNINGS PER COMMON SHARE
- ----------------------------------------------------------------------------------------------------------------------- In thousands, except per share data Three months ended Six months ended June 30 June 30 ----------------------- ----------------------- 1994 1993 1994 1993 - ----------------------------------------------------------------------------------------------------------------------- PRIMARY AVERAGE COMMON SHARES OUTSTANDING Weighted average shares of common stock outstanding 235,320 233,635 235,093 233,347 Weighted average common shares to be issued using average market price and assuming: Exercise of stock options 1,921 2,830 1,881 2,769 Exercise of warrants 96 98 - ----------------------------------------------------------------------------------------------------------------------- Primary weighted average common shares outstanding 237,241 236,561 236,974 236,241 - ----------------------------------------------------------------------------------------------------------------------- FULLY DILUTED AVERAGE COMMON SHARES OUTSTANDING Weighted average shares of common stock outstanding 235,320 233,635 235,093 233,347 Weighted average common shares to be issued using average market price or period-end market price, whichever is higher, and assuming: Conversion of preferred stock Series A & B 223 258 232 262 Conversion of preferred stock Series C 684 760 694 773 Conversion of preferred stock Series D 864 965 869 989 Conversion of debentures 73 88 74 90 Exercise of stock options 1,921 2,948 1,925 2,985 Exercise of warrants 97 99 - ----------------------------------------------------------------------------------------------------------------------- Fully diluted weighted average 239,086 238,751 238,887 238,545 common shares outstanding - ----------------------------------------------------------------------------------------------------------------------- PRIMARY EARNINGS PER COMMON SHARE Income before cumulative effect of changes in accounting principles $187,845 $169,142 $393,534 $356,153 Cumulative effect of changes in accounting principles, net of tax benefit of $5,343 (19,393) - ----------------------------------------------------------------------------------------------------------------------- Net income 187,845 169,142 393,534 336,760 Less: Preferred dividends declared 410 459 829 971 - ----------------------------------------------------------------------------------------------------------------------- Net income applicable to primary earnings per common share $187,435 $168,683 $392,705 $335,789 - ----------------------------------------------------------------------------------------------------------------------- Primary before cumulative effect of changes in accounting principles $.79 $.71 $1.66 $1.50 Cumulative effect of changes in accounting principles (.08) - ----------------------------------------------------------------------------------------------------------------------- Primary earnings per common share $.79 $.71 $1.66 $1.42 - ----------------------------------------------------------------------------------------------------------------------- FULLY DILUTED EARNINGS PER COMMON SHARE Income before cumulative effect of changes in accounting principles $187,845 $169,142 $393,534 $356,153 Cumulative effect of changes in accounting principles, net of tax benefit of $5,343 (19,393) - ----------------------------------------------------------------------------------------------------------------------- Net income 187,845 168,142 393,534 336,760 Add: Interest expense on convertible debentures (net of tax) 13 15 25 31 Less: Dividends declared on non-convertible preferred stock 34 - ----------------------------------------------------------------------------------------------------------------------- Net income applicable to fully diluted earnings per common share $187,858 $169,157 $393,559 $336,757 - ----------------------------------------------------------------------------------------------------------------------- Fully diluted before cumulative effect of changes in accounting principles $.79 $.71 $1.65 $1.49 Cumulative effect of changes in accounting principles (.08) - ----------------------------------------------------------------------------------------------------------------------- Fully diluted earnings per common share $.79 $.71 $1.65 $1.41 - -----------------------------------------------------------------------------------------------------------------------
EX-12.1 3 PNC BANK 10-Q 1 EXHIBIT 12.1 PNC BANK CORP. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
Six months Year ended December 31 ended ------------------------------------------------------------------ In thousands, except ratios June 30, 1994 1993 1992 1991 1990 1989 ------------- ---------- ---------- ---------- ---------- ---------- EARNINGS Income before income taxes and cumulative effect of changes in accounting principles................ $ 581,905 $1,116,612 $ 778,122 $ 548,201 $ 29,425 $ 485,264 Fixed charges excluding interest on deposits.......................... 435,137 649,898 517,424 513,370 918,698 867,083 ---------- ---------- ---------- ---------- ---------- ---------- Subtotal............................ 1,017,042 1,766,510 1,295,546 1,061,571 948,123 1,352,347 Interest on deposits.................. 417,516 742,772 1,063,422 1,727,765 1,973,087 1,907,769 ---------- ---------- ---------- ---------- ---------- ---------- Total............................... $1,434,558 $2,509,282 $2,358,968 $2,789,336 $2,921,210 $3,260,116 ========== ========== ========== ========== ========== ========== FIXED CHARGES Interest on notes and debentures...... $ 214,286 $ 265,353 $ 145,125 $ 95,207 $ 84,045 $ 61,590 Interest on borrowed funds............ 207,311 362,995 352,162 398,779 816,448 788,520 Amortization of notes and debentures.. 685 967 970 584 538 506 Interest component of rentals ........ 12,855 20,583 19,167 18,800 17,667 16,467 ---------- ---------- ---------- ---------- ---------- ---------- Subtotal............................ 435,137 649,898 517,424 513,370 918,698 867,083 Interest on deposits.................. 417,516 742,772 1,063,422 1,727,765 1,973,087 1,907,769 ---------- ---------- ---------- ---------- ---------- ---------- Total............................... $ 852,653 $1,392,670 $1,580,846 $2,241,135 $2,891,785 $2,774,852 ========== ========== ========== ========== ========== ========== RATIO OF EARNINGS TO FIXED CHARGES Excluding interest on deposits...... 2.34x 2.72x 2.50x 2.07x 1.03x 1.56x Including interest on deposits...... 1.68 1.80 1.49 1.24 1.01 1.17
EX-12.2 4 PNC BANK 10-Q 1 EXHIBIT 12.2 PNC BANK CORP. COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
Six months Year ended December 31 ended ------------------------------------------------------------------ In thousands, except ratios June 30, 1994 1993 1992 1991 1990 1989 ------------- ---------- ---------- ---------- ---------- ---------- EARNINGS Income before income taxes and cumulative effect of changes in accounting principles.. $ 581,905 $1,116,612 $ 778,122 $ 548,201 $ 29,425 $ 485,264 Fixed charges and preferred stock dividends excluding interest on deposits.............. 436,363 652,432 521,908 518,004 922,156 873,248 ---------- ---------- ---------- ---------- ---------- ---------- Subtotal................................... 1,018,268 1,769,044 1,300,030 1,066,205 951,581 1,358,512 Interest on deposits......................... 417,516 742,772 1,063,422 1,727,765 1,973,087 1,907,769 ---------- ---------- ---------- ---------- ---------- ---------- Total...................................... $1,435,784 $2,511,816 $2,363,452 $2,793,970 $2,924,668 $3,266,281 ========== ========== ========== ========== ========== ========== FIXED CHARGES Interest on notes and debentures............. $ 214,286 $ 265,353 $ 145,125 $ 95,207 $ 84,045 $ 61,590 Interest on borrowed funds................... 207,311 362,995 352,162 398,779 816,448 788,520 Amortization of notes and debentures......... 685 967 970 584 538 506 Interest component of rentals................ 12,855 20,583 19,167 18,800 17,667 16,467 Preferred stock dividend requirements........ 1,226 2,534 4,484 4,634 3,458 6,165 ---------- ---------- ---------- ---------- ---------- ---------- Subtotal................................... 436,363 652,432 521,908 518,005 922,156 873,248 Interest on deposits......................... 417,516 742,772 1,063,422 1,727,765 1,973,087 1,907,769 ---------- ---------- ---------- ---------- ---------- ---------- Total...................................... $ 853,879 $1,395,204 $1,585,330 $2,245,769 $2,895,243 $2,781,017 ========== ========== ========== ========== ========== ========== RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS Excluding interest on deposits.............. 2.33x 2.71x 2.49x 2.06x 1.03x 1.56x Including interest on deposits.............. 1.68 1.80 1.49 1.24 1.01 1.17
EX-99.1 5 PNC BANK 10-Q 1 Exhibit 99.1 PNC BANK CORP. - -------------------------------------------------------------------------------- Consolidated Financial Highlights - --------------------------------------------------------------------------------
Three months ended Six months ended June 30 June 30 --------------------------- ---------------------------- Dollars in thousands, except per share data 1994 1993 1994 1993 - ----------------------------------------------------------------------------------------------------------------------------------- FINANCIAL PERFORMANCE Net interest income (taxable-equivalent basis) $501,363 $466,134 $1,007,167 $929,702 Income before cumulative effect of changes in accounting principles 187,845 169,142 393,534 356,153 Net income 187,845 169,142 393,534 336,760 Earnings per common share Before cumulative effect of changes in accounting principles Primary .79 .71 1.66 1.50 Fully diluted .79 .71 1.65 1.49 Net income Primary .79 .71 1.66 1.42 Fully diluted .79 .71 1.65 1.41 Net interest margin 3.58% 3.96% 3.63% 4.04% Returns before cumulative effect of changes in accounting principles Return on average total assets 1.26 1.35 1.34 1.47 Return on average common shareholders' equity 17.70 17.59 18.51 18.76 Returns based on net income Return on average total assets 1.26 1.35 1.34 1.39 Return on average common shareholders' equity 17.70 17.59 18.51 17.73 Net charge-offs to average loans .35 .76 .32 .76 After-tax profit margin 25.75 25.61 26.34 23.98 Overhead ratio 57.33 52.25 56.57 52.13 - ----------------------------------------------------------------------------------------------------------------------------------- SELECTED AVERAGE BALANCES (In millions) Total assets $59,625 $50,152 $59,297 $48,979 Total earning assets 56,062 47,075 55,625 46,033 Securities 21,859 21,184 21,550 20,088 Loans, net of unearned income 32,531 25,184 32,278 25,199 Deposits 32,252 28,091 31,996 28,090 Shareholders' equity 4,268 3,869 4,299 3,841 - -----------------------------------------------------------------------------------------------------------------------------------
June 30 December 31 June 30 1994 1993 1993 - ----------------------------------------------------------------------------------------------------------------------------------- PERIOD-END RATIOS Capital Risk-based capital Tier I 8.99% 9.57% 10.57% Total 11.88 12.11 12.65 Leverage 6.99 7.85 7.80 Common shareholders' equity to total assets 6.77 6.93 7.32 Asset quality Nonperforming loans to total loans 1.11 1.15 1.81 Nonperforming assets to total loans and foreclosed assets 1.55 1.65 2.63 Nonperforming assets to total assets .85 .89 1.25 Allowance for credit losses to total loans 2.97 2.92 3.60 Allowance for credit losses to nonperforming loans 267.09 253.12 199.57 Book value per common share As reported $18.37 $18.34 $16.84 Excluding net unrealized securities gains/losses 19.02 17.96 16.84 - ----------------------------------------------------------------------------------------------------------------------------------- CONTENTS CORPORATE FINANCIAL REVIEW.................................. 2 Consolidated Financial Statements Consolidated Balance Sheet................................ 17 Consolidated Statement of Income.......................... 18 Consolidated Statement of Cash Flows...................... 19 Notes to Consolidated Financial Statements................ 20 Average Consolidated Balance Sheet and Net Interest Analysis................................. 22 Corporate Information....................................... 24
1 2 PNC BANK CORP. - -------------------------------------------------------------------------------- Corporate Financial Review The following Corporate Financial Review should be read in conjunction with the Consolidated Financial Statements of PNC Bank Corp. and subsidiaries ("Corporation") included herein and with management's discussion and analysis included in the Corporation's 1993 Annual Report. Overview During the first six months of 1994, the nation's real gross domestic product grew at a preliminary annual rate of 3.5 percent, according to the United States Commerce Department. Management expects economic growth to continue throughout the remainder of 1994, although at a more moderate pace, accompanied by further increases in short-term interest rates. Net income for the first six months of 1994 was $393.5 million, or $1.65 per fully diluted share, compared with $336.8 million, or $1.41 per share, for the first six months of 1993. Income before accounting changes in the prior-year period was $356.2 million or $1.49 per fully diluted share. Return on assets and return on common shareholders' equity were 1.34 percent and 18.51 percent, respectively, in 1994, compared with 1.39 percent and 17.73 percent, respectively, in 1993. The corresponding 1993 returns before accounting changes were 1.47 percent and 18.76 percent. The results for the first six months of 1993 included the cumulative effect of adopting Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," and a change in the method of accounting for certain intangible assets, primarily purchased mortgage servicing rights. The cumulative effect of these changes reduced net income by $9.0 million and $10.4 million, respectively. Mergers and Acquisitions On November 30, 1993, the Corporation completed its acquisition of PNC Mortgage (formerly Sears Mortgage Banking Group) for $328 million in cash. The purchase price is subject to certain post-closing adjustments. With this acquisition, the Corporation added assets of $7.6 billion; a mortgage servicing portfolio approximating $27 billion, including $21 billion serviced for others; and a national residential mortgage production network. During the first six months of 1994, the Corporation completed the purchase of United Federal Bancorp, Inc. ("United"), State College, Pennsylvania, and First Eastern Corp. ("First Eastern"), Wilkes-Barre, Pennsylvania, for a total of $486 million in cash. The combined assets and deposits totaled $2.8 billion and $2.4 billion, respectively. The Corporation also completed the acquisition of a $10-billion residential mortgage servicing portfolio from the Associates Corporation of North America ("Associates") for $117 million in cash. During the second quarter of 1994, the Corporation entered into a definitive agreement to acquire BlackRock Financial Management, L.P. ("BlackRock"), a New York-based fixed-income investment management firm with approximately $23 billion in assets under management. The purchase price will approximate $240 million in cash and notes. This transaction is expected to close in the fourth quarter of 1994, pending regulatory and other approvals. Subsequent to June 30, 1994, the Corporation announced agreements to acquire Brentwood Financial Corporation, Cincinnati, Ohio, and Indian River Federal Savings Bank, Vero Beach, Florida. The aggregate purchase price approximates $33 million in cash. The combined assets and deposits totaled approximately $175 million and $141 million, respectively, at June 30, 1994. These transactions are expected to close in the fourth quarter of 1994, subject to regulatory and shareholder approvals. 2 3 PNC BANK CORP. - -------------------------------------------------------------------------------- Corporate Financial Review Income Statement Review INCOME STATEMENT HIGHLIGHTS - --------------------------------------------------------------------
Six months ended June 30 Change ----------------- Dollars in millions 1994 1993 Amount Percent - -------------------------------------------------------------------- Net interest income-- taxable-equivalent basis $1,007 $930 $77 8.3% Provision for credit losses 50 115 (65) (56.5) Noninterest income 487 475 12 2.5 Noninterest expenses 845 732 113 15.4 Income before cumulative effect of changes in accounting principles 394 356 38 10.7 Net income 394 337 57 16.9 - -------------------------------------------------------------------
NET INTEREST INCOME AND NET INTEREST MARGIN On a fully taxable-equivalent basis, net interest income for the first six months of 1994 increased $77.5 million, or 8.3 percent, compared with the first six months of 1993. The increase was due to higher levels of average earning assets. NET INTEREST MARGIN - ------------------------------------------------------------
Six months ended June 30 Basis Point Taxable-equivalent basis 1994 1993 Change - ------------------------------------------------------------ Book-basis yield on earning assets 6.36% 6.72% (36) Effect of loan fees .13 .15 (2) Taxable-equivalent adjustment .06 .09 (3) - ------------------------------------------------------------ Taxable-equivalent yield on earning assets 6.55 6.96 (41) Rate on interest-bearing liabilities 3.80 3.92 (12) - ------------------------------------------------------------ Interest rate spread 2.75 3.04 (29) Impact of noninterest-bearing sources .53 .61 (8) Net benefit of interest rate swaps .35 .39 (4) - ------------------------------------------------------------ Net interest margin 3.63% 4.04% (41) - ------------------------------------------------------------
The net interest margin for the first six months of 1994 narrowed 41 basis points when compared with the corresponding 1993 period. The maturity structure and nature of liabilities assumed relative to assets acquired in the PNC Mortgage acquisition contributed to the narrower interest rate spread. This impact was mitigated by the benefit of lower prepayments on mortgage-related assets in the rising interest rate environment in 1994. In addition, the net interest margin was negatively impacted by a lower proportion of noninterest-bearing sources supporting earning assets. The benefit of interest rate swaps also declined in the rising interest rate environment. VOLUME/RATE ANALYSIS - ------------------------------------------------------------------
Six months ended June 30 Increase (Decrease) 1994 versus 1993 Due to Changes in: ----------------------------------- Rate In millions Volume Rate Volume Total - ------------------------------------------------------------------ Interest income $336 $(85) $(19) $232 Interest expense 157 (2) 155 Net interest income 193 (94) (22) 77 - ------------------------------------------------------------------
PROVISION FOR CREDIT LOSSES The provision for credit losses was $50.0 million in the first six months of 1994, compared with $115.2 million a year ago. Continuing improvement in economic conditions combined with management's ongoing efforts to improve asset quality resulted in lower nonperforming assets and charge-offs, and a higher reserve coverage of nonperforming loans. The quarterly provision for credit losses is expected to decline during the remainder of 1994. 3 4 PNC BANK CORP. - -------------------------------------------------------------------------------- Corporate Financial Review
NONINTEREST INCOME - --------------------------------------------------------------------------------------------------------------------- Six months ended June 30 Change ---------------------- Dollars in thousands 1994 1993 Amount Percent - --------------------------------------------------------------------------------------------------------------------- Investment management and trust Trust $ 98,805 $ 92,187 $ 6,618 7.2% Mutual funds 47,656 43,179 4,477 10.4 - ------------------------------------------------------------------------------------------------------- Total investment management and trust 146,461 135,366 11,095 8.2 - ------------------------------------------------------------------------------------------------------- Service charges, fees and commissions Deposit account and corporate services 82,225 78,072 4,153 5.3 Credit card and merchant services 26,797 26,545 252 .9 Brokerage 17,223 17,517 (294) (1.7) Corporate finance 21,227 18,305 2,922 16.0 Other services 32,569 28,910 3,659 12.7 - ------------------------------------------------------------------------------------------------------- Total service charges, fees and commissions 180,041 169,349 10,692 6.3 - ------------------------------------------------------------------------------------------------------- Mortgage Banking Servicing 77,292 13,031 64,261 493.1 Marketing 3,071 3,945 (874) (22.2) - ------------------------------------------------------------------------------------------------------- Total mortgage banking 80,363 16,976 63,387 373.4 - ------------------------------------------------------------------------------------------------------- Net securities gains 30,307 111,777 (81,470) (72.9) Other 49,619 41,247 8,372 20.3 - ------------------------------------------------------------------------------------------------------- Total $486,791 $474,715 $ 12,076 2.5% - ---------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME Noninterest income totaled $486.8 million in the first six months of 1994, compared with $474.7 million in the corresponding 1993 period. Net securities gains totaled $30.3 million, compared with $111.8 million in the year-earlier period. Excluding net securities gains, noninterest income as a percentage of total revenue was 31.2 percent in the first six months of 1994, compared with 28.1 percent a year earlier. Investment management and trust increased 8.2 percent to $146.5 million. Growth in revenue from new trust business and mutual fund accounting and administrative services was partially offset by a decline in fees resulting from lower levels of managed assets. The BlackRock acquisition is expected to add approximately 20 percent to investment management and trust revenue on an annual basis. The table below sets forth trust and mutual fund assets, and the related revenue, as of and for the six months ended June 30, 1994 and 1993.
INVESTMENT MANAGEMENT AND TRUST - --------------------------------------------------------------------------------------------------------------------------------- In millions Assets at June 30 Revenue ----------------------------------------------------------------------- Six months ended Discretionary Nondiscretionary Total June 30 ------------------- -------------------- -------------------- ------------ 1994 1993 1994 1993 1994 1993 1994 1993 - --------------------------------------------------------------------------------------------------------------------------------- Personal and charitable $23,853 $22,556 $ 9,560 $ 6,743 $ 33,413 $ 29,299 $ 73 $ 67 Institutional 6,535 9,257 70,978 68,861 77,513 78,118 25 25 - --------------------------------------------------------------------------------------------------------------------------------- Total trust 30,388 31,813 80,538 75,604 110,926 107,417 98 92 - --------------------------------------------------------------------------------------------------------------------------------- Mutual funds 23,164 27,548 55,463 45,989 78,627 73,537 48 43 - --------------------------------------------------------------------------------------------------------------------------------- Total $53,552 $59,361 $136,001 $121,593 $189,553 $180,954 $146 135 - ---------------------------------------------------------------------------------------------------------------------------------
Service charges, fees and commissions increased $10.7 million, or 6.3 percent, to $180.0 million in the first six months of 1994. Increased transaction volume related to new business and acquisitions accounted for the growth in deposit account and corporate services revenue. Increased syndication and advisory activity accounted for the growth in corporate finance fees. Other service fees increased as a result of revised consumer loan fee schedules. 4 5 PNC BANK CORP. - -------------------------------------------------------------------------------- Corporate Financial Review Mortgage banking income increased $63.4 million to $80.4 million, primarily as a result of the PNC Mortgage acquisition. During the first six months of 1994, the Corporation originated $3.9 billion of residential mortgages, approximately 65 percent of which represented new financings, and realized gains of $16.6 million from sales of mortgage servicing. During the first half of 1994, the rising interest rate environment adversely impacted the volume of originations. However, the value of the mortgage servicing portfolio increased as the rate of mortgage loan prepayments declined. Conversely, should interest rates decline, the volume of originations and prepayment rates would likely increase and the value of the existing servicing portfolio could decrease. At June 30, 1994, the Corporation's mortgage servicing portfolio totaled $43.8 billion with a weighted-average coupon of 7.72 percent, including $34.3 billion serviced for others. The increase in other noninterest income is attributable to higher gains from sales of assets and venture capital activity. These increases were partially offset by lower trading account profits.
NONINTEREST EXPENSE - ------------------------------------------------------------------ Six months ended June 30 Change ---------------- Dollars in thousands 1994 1993 Amount Percent - ------------------------------------------------------------------ Compensation $329,402 $279,403 $ 49,999 17.9% Employee benefits 81,469 66,937 14,532 21.7 - ------------------------------------------------------------------ Total staff expense 410,871 346,340 64,531 18.6 - ------------------------------------------------------------------ Net occupancy 66,562 58,203 8,359 14.4 Equipment 65,580 54,889 10,691 19.5 Amortization of intangible assets 37,830 15,366 22,464 146.2 Federal deposit insurance 36,339 32,932 3,407 10.3 Taxes other than income 21,878 18,610 3,268 17.6 Other 206,081 205,823 258 .1 - ------------------------------------------------------------------ Total $845,141 $732,163 $112,978 15.4% - ------------------------------------------------------------------
NONINTEREST EXPENSE Noninterest expense totaled $845.1 million in the first six months of 1994, compared with $732.2 million in the year-earlier period. The overhead ratio increased to 56.6 percent in the first six months of 1994, compared with 52.1 percent in 1993, due to lower net securities gains in 1994 and higher operating expenses relative to revenue associated with PNC Mortgage. Excluding acquisitions, noninterest expense declined 2.2 percent. Pending acquisitions are expected to increase noninterest expense by approximately 3 percent on a combined basis. Staff expense increased 18.6 percent to $410.9 million, primarily due to acquisitions completed subsequent to June 30, 1993. Average full-time equivalent employees were 20,900 for the first six months of 1994, compared with 17,700 in the year-earlier period. Approximately 3,600 average full-time equivalent employees were added from acquisitions. Excluding the impact of acquisitions, staff expense increased 2.8 percent. Pension expense increased $4.8 million in the comparison due to acquisitions and a reduction in the discount rate used to calculate the pension obligation. Net occupancy and equipment expense increased $8.4 million and $10.7 million, respectively, primarily due to acquisitions, occupancy of an office building purchased in 1993 and an upgrade of computer equipment. Amortization of intangible assets increased $22.5 million primarily due to higher levels of purchased mortgage servicing rights associated with PNC Mortgage. The increase in federal deposit insurance resulted from acquired deposits. Taxes other than income also increased due to acquisitions. 5 6 PNC BANK CORP. - -------------------------------------------------------------------------------- Corporate Financial Review Line of Business Results The management accounting process uses various methods of balance sheet and income statement allocations, transfers and assignments to evaluate the performance of various business units. Unlike financial accounting, there is no comprehensive, authoritative body of guidance for management accounting equivalent to generally accepted accounting principles. The following information is based on management accounting practices which conform to and support the management structure of the Corporation and is not necessarily comparable with similar information for any other financial institution. Designations, assignments and allocations may change from time to time as the management accounting system is enhanced and business or product lines change. During 1994, certain methodologies were changed and, accordingly, results for 1993 are presented on a consistent basis. For management reporting purposes, the Corporation has designated four distinct lines of business: Corporate Banking, Retail Banking, Investment Management and Trust, and Investment Banking. The financial results presented in this section reflect each line of business as if it operated on a stand-alone basis. Securities or borrowings have been assigned to each line of business based on its net asset or liability position. The remaining securities and borrowings, and related interest rate spread, emanating from management of the Corporation's overall asset/liability position, and net securities gains, are included in Portfolio Management. LINE OF BUSINESS HIGHLIGHTS - ---------------------------------------------------------------------------------------------------------------------------------
Net Interest and Six months ended June 30 Noninterest Average Return on Earnings Revenue Assigned Assets Assigned Equity -------------- ------------------ -------------------- ---------------- Dollars in millions 1994 1993 1994 1993 1994 1993 1994 1993 - --------------------------------------------------------------------------------------------------------------------------------- Corporate Banking Large Corporate $ 40 $ 35 $ 88 $ 71 $ 3,756 $ 2,969 19% 20% Middle Market 125 104 261 283 9,790 9,893 20 15 - --------------------------------------------------------------------------------------------------------- Total Corporate Banking 165 139 349 354 13,546 12,862 20 16 - --------------------------------------------------------------------------------------------------------- Retail Banking Consumer Banking 138 129 641 617 24,938 23,325 19 21 Mortgage Banking 31 16 203 70 9,848 3,277 14 21 - --------------------------------------------------------------------------------------------------------- Total Retail Banking 169 145 844 687 34,786 26,602 18 21 - --------------------------------------------------------------------------------------------------------- Investment Management and Trust Trust 22 23 109 103 393 351 45 53 Mutual Funds 12 12 53 47 170 107 44 55 - --------------------------------------------------------------------------------------------------------- Total Investment Management and Trust 34 35 162 150 563 458 44 54 - --------------------------------------------------------------------------------------------------------- Investment Banking Portfolio Management 58 106 96 172 9,824 8,774 43 85 Brokerage and Underwriting 14 13 49 36 533 278 42 39 - --------------------------------------------------------------------------------------------------------- Total Investment Banking 72 119 145 208 10,357 9,052 43 75 - --------------------------------------------------------------------------------------------------------- Total lines of business 440 438 1,500 1,399 59,252 48,974 22 25 Unallocated items (46) (82) (23) (15) 45 5 Cumulative effect of changes in accounting principles (19) - --------------------------------------------------------------------------------------------------------- Total $394 $337 $1,477 $1,384 $59,297 $48,979 - ---------------------------------------------------------------------------------------------------------------------------------
Earnings contributed by the lines of business totaled $440 million in the first six months of 1994, compared with $438 million in the first six months of 1993. These results exceeded reported consolidated net income by $46 million and $101 million, respectively, due to the cumulative effect of changes in accounting principles in 1993, provision for credit losses in excess of specific reserve allocations and certain unallocated revenue and expenses. Excluding net securities gains, earnings from the lines of business were $420 million and $365 million, respectively, and returns on assigned equity were 21 percent and 20 percent, respectively. 6 7 PNC BANK CORP. - -------------------------------------------------------------------------------- Corporate Financial Review CORPORATE BANKING Corporate Banking provided 38 percent of line of business earnings in the first six months of 1994, compared with 32 percent in the first half of 1993. Large Corporate benefited from a 25 percent increase in average loans and improved asset quality, which more than offset the impact of narrower interest rate spreads on loans. The majority of the loan growth was in short-term commercial and money market loans that are typically repaid shortly after period end. Middle Market revenue declined in 1994 due to the impact of narrower interest rate spreads on loans and a reduction in the real estate project portfolio. The increase in earnings resulted from a lower provision for credit losses as asset quality improved in both the commercial and real estate project portfolios. Revenue from treasury management services accounted for 16 percent of total Corporate Banking revenue in 1994, compared with 15 percent a year ago. RETAIL BANKING The earnings contribution from Retail Banking increased to 38 percent in the first six months of 1994, from 33 percent a year ago. Consumer Banking average loans and deposits increased 16 percent and 6 percent, respectively, when compared with the first six months of 1993, primarily due to acquisitions. Higher net interest revenue and improved asset quality contributed to the increase in earnings. The increase in Mortgage Banking earnings reflected the contribution of the acquired assets and mortgage banking operations of PNC Mortgage. Average mortgage-related assets increased $6.6 billion to $9.8 billion. During the first six months of 1994, the mortgage servicing portfolio increased $8.2 billion to $43.8 billion at June 30, 1994, including $34.3 billion serviced for others. The net growth in servicing resulted from the Associates transaction. Mortgage Banking originated $3.9 billion of residential mortgages during the first half of 1994, and $1.9 billion of servicing was sold which resulted in gains of $16.6 million. INVESTMENT MANAGEMENT AND TRUST Investment Management and Trust contributed 8 percent to line of business earnings in both periods. Trust earnings declined in the comparison as increased revenue from new business was more than offset by higher marketing and incentive expenses. Mutual Funds earnings were unchanged in the first six months of 1994 when compared with the year-earlier period. Increased revenue from growth of the PNC Family of Funds, as well as expanded accounting and administrative services, was offset by lower investment advisory fees and increased marketing costs. INVESTMENT BANKING The earnings contribution from Investment Banking was 16 percent in the first half of 1994, compared with 27 percent in the first six months of 1993. Portfolio Management earnings declined in the comparison as net securities gains were $30.3 million in the first six months of 1994, compared with $111.8 million in 1993. These gains were significantly higher in the first half of last year as certain mortgage-backed securities were sold in a higher prepayment environment to provide more stability to net interest income. Excluding net securities gains, Investment Banking's earnings were $52 million and $46 million in the first six months of 1994 and 1993, respectively. Higher venture capital income accounted for the increase in Brokerage and Underwriting earnings. Balance Sheet Review BALANCE SHEET HIGHLIGHTS - ------------------------------------------------------------------
Six months ended June 30 ------------------------ Full Year Averages in millions 1994 1993 1993 - ------------------------------------------------------------------ Total assets $59,297 $48,979 $50,321 Total earning assets 55,625 46,033 47,340 Securities 21,550 20,088 20,403 Loans, net of unearned income 32,278 25,199 25,959 Deposits 31,996 28,090 28,442 Borrowed funds 11,253 10,821 10,373 Notes and debentures 10,589 5,163 6,486 Shareholders' equity 4,299 3,841 3,957 - ------------------------------------------------------------------
The changes in the average balance sheet reflect the impact of acquisitions, stronger loan demand and asset/liability management activities. Average earning assets increased $9.6 billion when compared with the first six months of 1993. The proportion of average loans to average earning assets was 58.0 percent in the first six months of 1994, compared with 54.7 percent in the first half of 1993. 7 8 PNC BANK CORP. - -------------------------------------------------------------------------------- Corporate Financial Review Average loans for the first six months of 1994 increased 28.1 percent to $32.3 billion when compared with the first six months of 1993. Excluding the impact of acquisitions, average loans increased 4.7 percent in the comparison due to increased loan demand and higher levels of short-term commercial, money market and consumer loans. Average deposits increased $3.9 billion when compared with the first six months of 1993. The proportion of average noninterest-bearing sources supporting average earning assets was 14.1 percent in the first six months of 1994, compared with 15.6 percent in the first half of 1993. Average notes and debentures increased $5.4 billion as bank notes and Federal Home Loan Bank advances were used as lower cost alternatives to other funding sources. LOANS - ---------------------------------------------------------------------------------------------------------------------------------
June 30, 1994 December 31, 1993 ---------------------------- ---------------------------- Unfunded Unfunded In millions Outstandings Commitments Outstandings Commitments - --------------------------------------------------------------------------------------------------------------------------------- Commercial Manufacturing $ 2,850 $ 5,225 $ 2,765 $ 4,351 Retail/Wholesale 1,975 1,888 1,789 1,570 Services 2,031 2,191 1,586 1,599 Financial services 962 2,324 872 1,666 Communications 1,312 1,285 1,337 732 Real estate related 534 200 557 177 Investment/Holding Co. 478 230 454 264 Other 2,731 3,666 3,103 3,089 - --------------------------------------------------------------------------------------------------------------------------------- Total commercial 12,873 17,009 12,463 13,448 - --------------------------------------------------------------------------------------------------------------------------------- Real estate project Residential construction and development 75 90 70 72 Commercial construction and development 263 280 280 221 Medium-term financings Standing 902 219 875 142 Other 392 56 505 68 - --------------------------------------------------------------------------------------------------------------------------------- Total real estate project 1,632 645 1,730 503 - --------------------------------------------------------------------------------------------------------------------------------- Real estate mortgage Residential 8,329 1,088 8,036 1,521 Commercial 1,332 25 905 6 - --------------------------------------------------------------------------------------------------------------------------------- Total real estate mortgage 9,661 1,113 8,941 1,527 - --------------------------------------------------------------------------------------------------------------------------------- Consumer Home Equity 2,655 1,627 2,238 1,360 Automobile 2,580 2,428 Student 1,120 3 1,103 27 Credit card 700 3,287 725 3,065 Other 1,920 222 2,031 214 - --------------------------------------------------------------------------------------------------------------------------------- Total consumer 8,975 5,139 8,525 4,666 - --------------------------------------------------------------------------------------------------------------------------------- Other 1,937 495 1,871 400 Unearned income (218) (222) - --------------------------------------------------------------------------------------------------------------------------------- Total, net of unearned income $34,860 $24,401 $33,308 $20,544 - ---------------------------------------------------------------------------------------------------------------------------------
8 9 PNC BANK CORP. - -------------------------------------------------------------------------------- Corporate Financial Review LOANS The Corporation manages credit risk associated with its lending activities through portfolio diversification, underwriting policies and procedures and loan monitoring practices. At June 30, 1994, commercial, real estate project, real estate mortgage, consumer and other loans accounted for 36.7 percent, 4.7 percent, 27.5 percent, 25.6 percent and 5.5 percent of total loans, respectively. At June 30, 1994, total commercial loan outstandings increased $410 million, or 3.3 percent, from December 31, 1993, primarily attributable to short-term commercial loans. Total commercial unfunded commitments increased $3.6 billion, or 26.5 percent, in the comparison. The growth in commitments was attributable to increased economic activity. Should economic growth continue, management expects a portion of these commitments to be converted into outstandings. Total real estate project exposure remained relatively flat since year end. Retail and office projects accounted for 29 percent and 25 percent, respectively, of total real estate project exposure at June 30, 1994. Multi-family and hotel/motel projects accounted for 12 percent and 8 percent, respectively. No other project type accounted for more than 7 percent. Projects in the Corporation's primary markets, which include Delaware, Indiana, Kentucky, New Jersey, Ohio and Pennsylvania, accounted for 71 percent of the total outstandings. The southeast region of the United States accounted for 15 percent and no other geographic region accounted for more than 5 percent. Real estate mortgage outstandings increased 8.1 percent primarily due to acquisitions. Residential and commercial mortgages acquired in the first half of 1994 totaled $568 million and $288 million, respectively. As part of its overall asset/liability management strategy, the Corporation retains certain originated residential mortgage products in the loan portfolio. Generally, these products are limited to adjustable-rate loans or those with balloon payment features. The remainder of its fixed-rate production is securitized and retained for the securities portfolio or sold. Consumer loan outstandings increased $450 million due to acquisitions and loan growth. Other loans increased $66 million and consisted of money market, lease financing and foreign loans. Highly leveraged transactions ("HLT") are included in various commercial loan categories. At June 30, 1994, the loan portfolio included $942 million of HLT outstandings and $239 million of HLT unfunded commitments. The comparable amounts at December 31, 1993, were $953 million and $186 million, respectively. The communications, manufacturing and retail/wholesale industries accounted for 70 percent, 19 percent and 4 percent, respectively, of total HLT exposure at June 30, 1994. HLT outstandings represented 2.7 percent of total loans at June 30, 1994, compared with 2.9 percent at December 31, 1993. During the first six months of 1994, $145 million of loans and $26 million of unfunded commitments were no longer classified as HLT. At June 30, 1994, the Corporation had 61 customers with loans designated as HLT. The ten largest HLT outstandings and unfunded commitments totaled $472 million and $63 million, respectively. During the first six months of 1994, the Corporation originated and/or participated in $219 million of commitments to new HLT customers, compared with $43 million in the corresponding 1993 period. HLT loan fees recognized in income during the first six months of 1994 totaled $3.2 million and deferred HLT loan fees totaled $4.4 million at June 30, 1994. The yield on the HLT portfolio, including loans classified as nonperforming, was 6.4 percent during the first six months of 1994, compared with 6.1 percent a year ago. 9 10 PNC BANK CORP. - -------------------------------------------------------------------------------- Corporate Financial Review RISK ELEMENTS During the first six months of 1994, nonperforming assets declined $10 million as a result of continued improvement in overall asset quality. Excluding the impact of the First Eastern acquisition, total nonperforming assets declined $84 million when compared with year-end 1995. Assuming further economic growth, management anticipates the favorable trend will continue during the remainder of 1994. At June 30, 1994, $81 million of nonperforming loans were current as to principal and interest, compared with $102 million at December 31, 1993. Nonperforming HLT loans totaled $17 million at June 30, 1994, compared with $25 million at December 31, 1993. Office, retail and land projects accounted for 59 percent of total nonperforming real estate project assets at June 30, 1994. The Corporation's primary markets accounted for 58 percent of total nonperforming real estate project assets. The southeast region of the United States and metropolitan Washington D.C. area accounted for 29 percent and 8 percent, respectively. Accruing loans contractually past due 90 days or more as to the payment of principal or interest totaled $148 million at June 30, 1994, compared with $135 million at December 31, 1993. Residential mortgages and student loans in the amount of $68 million and $34 million, respectively, were included in the total at June 30, 1994, compared with $55 million and $41 million, respectively, at year-end 1995. NONPERFORMING ASSETS - -------------------------------------------------------------
JUNE 30 December 31 Dollars in millions 1994 1993 - ------------------------------------------------------------- Nonaccrual loans Commercial $232 $181 Real estate project 72 91 Real estate mortgage 80 84 - ------------------------------------------------------------- Total nonaccrual loans 384 356 - ------------------------------------------------------------- Restructured loans 4 28 - ------------------------------------------------------------- Total nonperforming loans 388 384 - ------------------------------------------------------------- Foreclosed assets Real estate project 93 108 Real estate mortgage 33 42 Other 30 20 - ------------------------------------------------------------- Total foreclosed assets 156 170 - ------------------------------------------------------------- Total $544 $554 - ------------------------------------------------------------- Nonperforming loans to total loans 1.11% 1.15% Nonperforming assets to total loans and foreclosed assets 1.55 1.65 Nonperforming assets to total assets .85 .89 - -------------------------------------------------------------
Annualized net charge-offs as a percentage of average loans were .32 percent for the first six months of 1994, compared with .76 percent in the corresponding 1993 period. The 1994 charge-off and recovery levels reflected the continued improvement in overall asset quality and the Corporation's loan workout efforts. During the first six months of 1994, $10 million of HLT were charged-off and no recoveries were realized. The corresponding 1993 amounts were $7 million and $2 million, respectively. CHARGE-OFFS AND RECOVERIES - ---------------------------------------------------------------
Six months ended June 30 1994 ------------------------------------- Net In millions Charge-offs Recoveries Charge-offs - --------------------------------------------------------------- Commercial $28 $12 $16 Real estate project 9 1 8 Real estate mortgage 12 2 10 Consumer 32 15 17 - --------------------------------------------------------------- Total $81 $30 $51 - --------------------------------------------------------------- 1993 - --------------------------------------------------------------- Commercial $54 $15 $39 Real estate project 22 3 19 Real estate mortgage 9 1 8 Consumer 42 13 29 - --------------------------------------------------------------- Total $127 $32 $95 - ---------------------------------------------------------------
10 11 PNC BANK CORP. - -------------------------------------------------------------------------------- Corporate Financial Review ALLOWANCE FOR CREDIT LOSSES The allowance for credit losses totaled $1.0 billion at June 30, 1994, compared with $972 million at December 31, 1993. The allowance as a percentage of period-end loans and nonperforming loans was 2.97 percent and 267.1 percent, respectively, at June 30, 1994. The comparable year-end amounts were 2.92 percent and 253.1 percent, respectively. ASSET/LIABILITY MANAGEMENT The primary objectives of asset/liability management are to provide maximum levels of net interest income while maintaining acceptable levels of interest rate and liquidity risk, facilitating the Corporation's funding needs and ensuring capital adequacy. To achieve these objectives, asset/liability management uses a variety of investment alternatives, funding sources and off-balance-sheet instruments in managing the overall interest rate risk profile of the Corporation. Asset/liability management policies include limits on the amounts of various financial instruments, the types of funding and the level of interest rate sensitivity, and an assessment of overall liquidity. Asset/liability management seeks to minimize the credit risk associated with its activities. This is primarily accomplished by entering into transactions with only a select number of high quality institutions, establishing credit limits with counterparties and, where applicable, requiring segregated collateral. A dynamic income simulation model is the primary mechanism used in assessing the impact on net interest income of changes in interest rates. Asset/liability management projects net interest income in what it believes is a most likely interest rate environment, as well as in higher and lower alternative interest rate scenarios. The table below sets forth average interest rates for the month of June 1994 and the respective rate assumptions for December 1994 and June 1995. INTEREST RATE ASSUMPTIONS - ---------------------------------------------------------------
June 30 December June 1994 1994 1995 - --------------------------------------------------------------- Federal funds 4.25% 4.50% 5.00% 3-month LIBOR 4.63 4.90 5.40 5-year U.S. Treasury Note 6.70 6.80 7.00 - ---------------------------------------------------------------
In addition to interest rate assumptions, loan and deposit growth rates, mortgage-related asset prepayments, and interest rate swap amortization are adjusted based on current expectations. The model reflects management's assumption that the market would present investment alternatives with acceptable maturities and interest rate characteristics relative to expected funding sources. The model also reflects transactions initiated by management to reduce its liability-sensitive position, including reducing fixed-rate assets and adding variable-rate assets. Actual net interest income may differ from simulated results due to changes in management's strategies or market conditions. The actual timing and rate of changes in interest rates and other assumptions also could affect net interest income. As the model is based on current on- and off-balance-sheet positions, it does not reflect additional actions management could take to mitigate the impact of changes in interest rates. In the most likely scenario, the model projects that net interest income would be relatively stable for the remainder of 1994, and for 1995 when compared with full-year 1994. If interest rates were 100 basis points higher than the most likely scenario, net interest income would decrease 8.4 percent over the 18-month period ended December 31, 1995. Conversely, net interest income would increase 7.2 percent over the same period if interest rates were 100 basis points lower than the most likely scenario. An interest rate sensitivity ("gap") analysis represents a point-in-time net position of assets, liabilities and off-balance-sheet instruments subject to repricing in specified time periods. Gap analysis alone does not accurately measure the magnitude of changes in net interest income since changes in interest rates do not impact all categories of assets, liabilities and off-balance-sheet positions equally or simultaneously. The liability sensitivity of the cumulative one-year gap position was 18.4 percent of total earning assets at June 30, 1994, which declined to 8.1 percent within 24 months. The cumulative one-year gap position narrowed during the second quarter of 1994 as a result of management actions to reduce exposure to rising interest 11 12 PNC BANK CORP. - -------------------------------------------------------------------------------- Corporate Financial Review rates, primarily by reducing fixed-rate assets and adding variable-rate assets. These actions were partially offset by a slower rate of prepayments on mortgage-related assets which had the effect of extending the maturity of these instruments. INTEREST RATE SWAPS - ----------------------------------------------------------------------
In millions Gain Position Loss Position ------------------ ------------------ Total Notional Fair Notional Fair Notional June 30, 1994 Value Value Value Value Value - ---------------------------------------------------------------------- Hedge swaps Receive fixed $2,001 $22 $11,350 $(437) $13,351 Pay fixed 79 693 (31) 772 - ---------------------------------------------------------------------- Total hedge swaps 2,080 22 12,043 (468) 14,123 Customer swaps 60 2 60 (2) 120 - ---------------------------------------------------------------------- Total $2,140 $24 $12,103 $(470) $14,243 - ---------------------------------------------------------------------- December 31, 1993 - ---------------------------------------------------------------------- Hedge swaps Receive fixed $7,904 $153 $2,715 $ (26) $10,619 Pay fixed 1,193 (86) 1,193 - ---------------------------------------------------------------------- Total hedge swaps 7,904 153 3,908 (112) 11,812 Customer swaps 245 3 245 (3) 490 - ---------------------------------------------------------------------- Total $8,149 $156 $4,153 $(115) $12,302 - ----------------------------------------------------------------------
The Corporation enters into interest rate swaps to alter the maturity and repricing structure of the balance sheet ("hedge swaps") and as an intermediary for customers ("customer swaps"). At June 30, 1994, hedge swaps and customer swaps accounted for 87 percent and 1 percent, respectively, of the total notional amount of all interest rate swap, futures, forward, foreign currency exchange and option contracts. The notional amount of hedge and customer swaps totaled $14.1 billion and $120 million, respectively, at June 30, 1994. The corresponding December 31, 1993 amounts were $11.8 billion and $490 million, respectively. Credit risk with respect to interest rate swaps represents the inability of the counterparty to perform under terms of the swap agreements. The Corporation limits credit risk with respect to swap agreements by requiring, where applicable, segregated collateral. INTEREST RATE SWAPS ACTIVITY - ----------------------------------------------------------------
Hedge Swaps ---------------- Total Receive Pay Customer Notional In millions Fixed Fixed Swaps Value - ---------------------------------------------------------------- Balance at January 1, 1994 $10,619 $1,193 $490 $12,302 Additions 3,200 20 3,220 Maturities/amortization (468) (221) (341) (1,030) Terminations (200) (49) (249) - ---------------------------------------------------------------- Balance at June 30, 1994 $13,351 $772 $120 $14,243 - ----------------------------------------------------------------
Substantially all hedge swaps are index amortizing, the majority of which are designated as hedges on deposits and other interest-bearing liabilities. The Corporation receives payments based on fixed interest rates and makes payments based on a floating money market rate. During the first six months of 1994, hedge swaps benefited net interest income by $96.1 million, compared with $90.5 million in the corresponding 1993 period. Net deferred gains on terminated interest rate swaps totaled $14 million and $22 million at June 30, 1994 and December 31, 1993, respectively. Such deferred gains are being amortized over various remaining periods of up to two years. The table below sets forth the maturity distribution of hedge swaps and the weighted average interest rates at June 30, 1994. MATURITY DISTRIBUTION OF HEDGE SWAPS - -------------------------------------------------------------------
In millions 1994 1995 1996 Beyond Total - ------------------------------------------------------------------- Receive fixed $1,932 $5,819 $4,900 $700 $13,351 Rate received 6.74% 5.79% 5.25% 5.49% 5.71% Rate paid 4.59 4.51 4.84 3.32 4.58 Pay fixed $49 $383 $165 $175 $772 Rate received 4.84% 5.81% 7.04% 9.12% 6.76% Rate paid 4.29 4.33 4.07 4.44 4.30 - -------------------------------------------------------------------
Hedge swaps have remaining expected maturities that range from one and one-half months to three years and four months in management's most likely interest rate scenario. If interest rates rise further than assumed in the most likely scenario, the maturities of certain index swaps would be extended; however, the maturities would not extend beyond 1999. Because the Corporation has an aggregate receive-fixed/pay-variable interest rate swap position, further increases in interest rates would reduce 12 13 PNC BANK CORP. - -------------------------------------------------------------------------------- Corporate Financial Review the fair value of, and benefit provided by, such swaps. If such rate increases are significant, the rate paid on interest rate swaps could exceed the rate received. In a rising interest rate environment, management would expect several factors to mitigate a decline in the benefit provided by such swaps. As interest rates increase, the Corporation will derive a greater benefit from existing long-term liabilities as well as noninterest-bearing sources of funds. Also, an increase in interest rates would likely be associated with increased economic activity providing opportunities for loan growth, increased yields on variable-rate assets, increased value of the mortgage servicing portfolio and higher fee income. LIQUIDITY MANAGEMENT Liquidity represents an institution's ability to generate cash or otherwise obtain funds at reasonable rates to satisfy commitments to borrowers as well as the demands of depositors and debtholders. Liquidity is managed through the coordination of the relative maturities of assets, liabilities and off-balance-sheet positions and is enhanced by the ability to raise funds in capital markets. Liquid assets consist of cash and due from banks, federal funds sold and resale agreements, interest-earning deposits with banks, trading account securities and securities available for sale. At June 30, 1994, such assets totaled $9.9 billion. Liquidity is also provided by securities that may be sold under agreements to repurchase, which totaled $7.7 billion at June 30, 1994. In addition, several bank affiliates have access to funds as members of the Federal Home Loan Bank system. Liquidity for the parent company and its nonbank affiliates is generated through the issuance of securities in public or private markets, lines of credit and dividends from subsidiaries. Under effective shelf registration statements at June 30, 1994, the Corporation has available $140 million of debt, $300 million of preferred stock and $350 million of securities that may be issued as either debt or preferred stock. Additionally, the Corporation has a $150 million unused committed line of credit. Funds obtained from any of these sources can be used for both bank and nonbank activities. In addition to current parent company funds, the funding for pending or potential acquisitions may include the issuance of instruments that qualify as regulatory capital, such as preferred stock or subordinated debt. Management believes that the Corporation has sufficient liquidity to meet its obligations to customers, debtholders and others. The impact of replacing maturing liabilities is reflected in the income simulation model used in the Corporation's overall asset/liability management process. At June 30, 1994, the model assumes rising interest rates and a resulting higher cost of replacement funding. As part of the overall asset/liability management process, management seeks to obtain funding through various sources to maximize net interest income within acceptable risk parameters. The following table sets forth funding sources at June 30, 1994 and December 31, 1993. FUNDING SOURCES - --------------------------------------------------------------
JUNE 30 December 31 In millions 1994 1993 - ------------------------------------------------------------- Deposits Demand, savings and money market $18,932 $18,621 Time 14,017 14,494 - ------------------------------------------------------------- Total deposits 32,949 33,115 - ------------------------------------------------------------- Borrowed funds Repurchase agreements 4,547 4,995 Treasury, tax and loan 5,427 3,414 Federal funds purchased 2,123 2,066 Commercial paper 1,161 514 Other 144 673 - ------------------------------------------------------------- Total borrowed funds 13,402 11,662 - ------------------------------------------------------------- Notes and debentures 11,437 9,585 - ------------------------------------------------------------- Total $57,788 $54,362 - -------------------------------------------------------------
Total deposits at June 30, 1994 declined slightly since year-end as decreases in brokered and other deposits more than offset the impact of acquired deposits. Brokered deposits are primarily included in time deposits. Such deposits totaled $2.9 billion at June 30, 1994, compared with $4.1 billion at December 31, 1993. These deposits are expected to decline further in future periods as they mature and alternative funding sources are employed. Retail brokered deposits are issued or participated-out by brokers in denominations of $100,000 or less and are fully insured. Such deposits represented 66.0 percent of the 13 14 PNC BANK CORP. - -------------------------------------------------------------------------------- Corporate Financial Review total at June 30, 1994, compared with 63.7 percent at year-end 1993. At June 30, 1994, treasury, tax and loan borrowings increased $2.0 billion from year-end 1993 due to relatively lower costs associated with such funds. Notes and debentures increased $1.8 billion since year-end 1993. During the first six months of 1994, the Corporation issued $2.9 billion of variable-rate, unsecured bank notes with maturities of one year and $200 million of 7.75 percent subordinated debentures due in 2004. SECURITIES At June 30, 1994, securities totaled $23.2 billion and were comprised of $16.0 billion of investment securities and $7.2 billion of securities available for sale. The comparable amounts at year-end 1993 were $11.7 billion and $11.4 billion, respectively. At June 30, 1994, the securities portfolio included $16.7 billion of collateralized mortgage obligations and mortgage-backed securities with an aggregate weighted-average expected maturity of 3 years and 7 months. As part of the overall asset/liability management strategy, the Corporation invests in collateralized mortgage obligations and mortgage-backed securities, primarily government agency-backed instruments. The characteristics of these investments include attractive yields, principal guarantees, marketability and availability as collateral for additional liquidity. A risk associated with fixed-rate mortgage-related securities is the rate of prepayment inherent in the underlying mortgages. The Corporation manages this risk through the use of the income simulation model. The following table sets forth the securities portfolio at June 30, 1994 and December 31, 1993. SECURITIES - ---------------------------------------------------------------------------------------------------------------------------------
June 30, 1994 December 31, 1993 ------------------------------------------------ ------------------------------------------------ Unrealized Unrealized Amortized ------------------ Fair Amortized ------------------ Fair In millions Cost Gains Losses Value Cost Gains Losses Value - --------------------------------------------------------------------------------------------------------------------------------- Investment securities Debt securities U.S. Treasury $ 1,774 $ 32 $ 1,742 $ 1 $ 1 U.S. Government agencies and corporations 11,747 690 11,057 10,227 $ 39 $32 10,234 State and municipal 364 $20 1 383 389 38 427 Other debt 1,785 36 1,749 810 3 4 809 Corporate stocks and other 301 1 302 245 245 - --------------------------------------------------------------------------------------------------------------------------------- Total $15,971 $21 $759 $15,233 $11,672 $ 80 $36 $11,716 - --------------------------------------------------------------------------------------------------------------------------------- Securities available for sale Debt securities U.S. Treasury $ 2,624 $ 1 $ 72 $ 2,553 $ 2,402 $ 2 $ 2 $ 2,402 U.S. Government agencies and corporations 3,931 2 91 3,842 8,023 114 16 8,121 State and municipal 2 2 2 2 Other debt 668 5 6 667 788 18 4 802 Corporate stocks and other 154 25 7 172 36 25 61 - --------------------------------------------------------------------------------------------------------------------------------- Total $ 7,379 $33 $176 $ 7,236 $11,251 $159 $22 $11,388 - ---------------------------------------------------------------------------------------------------------------------------------
14 15 PNC BANK CORP. - -------------------------------------------------------------------------------- Corporate Financial Review Capital The current economic and regulatory environment has placed an increased emphasis on capital strength. Acquisition capability, funding alternatives, new business activities, deposit insurance costs, and the level and nature of expanded regulatory oversight depend in large part on a banking institution's capital classification. At June 30, 1994, the capital position of each bank affiliate was classified as well capitalized. RISK-BASED CAPITAL AND LEVERAGE RATIOS - ---------------------------------------------------------------
June 30 December 31 Dollars in millions, except ratios 1994 1993 - --------------------------------------------------------------- CAPITAL COMPONENTS Shareholders' equity $ 4,349 $ 4,325 Goodwill (352) (85) Net unrealized securities (gains) losses 154 (88) - --------------------------------------------------------------- Total Tier I risk-based capital 4,151 4,152 - --------------------------------------------------------------- Subordinated debt 583 554 Eligible allowance for credit losses 753 547 - --------------------------------------------------------------- Total risk-based capital $ 5,487 $ 5,253 - --------------------------------------------------------------- ASSETS Risk-weighted assets and off- balance-sheet instruments $46,173 $43,380 Average tangible assets 59,378 52,923 - --------------------------------------------------------------- CAPITAL RATIOS Tier I risk-based capital 8.99% 9.57% Total risk-based capital 11.88 12.11 Leverage 6.99 7.85 - ---------------------------------------------------------------
The minimum regulatory capital ratios are 4.00 percent for Tier I, 8.00 percent for total risk-based and 3.00 percent for leverage. However, regulators may require higher capital levels when a bank's particular circumstances warrant. The leverage ratio declined during the first six months of 1994, as a result of completed purchase acquisitions. Capital ratios are expected to decline further by year-end 1994 as a result of the BlackRock transaction. The Corporation maintains its capital position primarily through its dividend policy and retained earnings. During the first six months of 1994, the Corporation retained capital of $243.6 million. 15 16 PNC BANK CORP. - -------------------------------------------------------------------------------- Corporate Financial Review Second Quarter 1994 versus Second Quarter 1993 Net income for the second quarter of 1994 was $187.8 million, or $.79 per fully diluted common share, compared with $169.1 million, or $.71 per share, in the comparable quarter of 1993. Return on assets and return on common shareholders' equity were 1.26 percent and 17.70 percent, respectively, in the second quarter of 1994. The corresponding returns in 1993 were 1.35 percent and 17.59 percent. On a fully taxable-equivalent basis, net interest income for the second quarter of 1994 was $501.4 million, an increase of $35.2 million, or 7.6 percent, from the comparable year-earlier period. The growth in net interest income was due to higher levels of average earning assets. The net interest margin narrowed 38 basis points in the comparison, primarily due to the PNC Mortgage acquisition, a reduced benefit of noninterest-bearing sources and a lower benefit of interest rate swaps. The provision for credit losses was $25.0 million in the second quarter of 1994, compared with $53.8 million in the second quarter 1993. Continuing improvement in economic conditions combined with management's ongoing efforts to improve asset quality resulted in lower nonperforming assets and charge-offs, and a higher reserve coverage of nonperforming loans. Excluding the results of securities transactions, noninterest income increased $40.5 million, or 21.6 percent, to $228.3 million during the second quarter of 1994. Investment management and trust totaled $73.5 million, an increase of 6.4 percent. Revenue growth from new trust business and mutual fund accounting and administrative services was partially offset by a decline in fees resulting from lower levels of managed assets. Service charges, fees and commissions totaled $92.2 million, an increase of 4.9 percent from the second quarter of 1993. The increase was primarily from growth in deposit and corporate services revenue. Mortgage banking income increased to $42.7 million, compared with $9.1 million in 1993 due to the PNC Mortgage acquisition. Noninterest expense increased to $418.3 million, compared with $345.1 million a year ago, primarily due to acquisitions. Excluding acquisitions, noninterest expense increased less than one percent when compared with the second quarter of 1993. 16 17 PNC BANK CORP. - -------------------------------------------------------------------------------- Consolidated Balance Sheet - -----------------------------------------------------------------------------------------------------------------------------
June 30 December 31 Dollars in millions, except par values 1994 1993 - ----------------------------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 1,989 $ 1,817 Short-term investments 672 856 Loans held for sale 804 1,392 Securities available for sale 7,236 11,388 Investment securities, fair value of $15,233 and $11,716 15,971 11,672 Loans, net of unearned income of $218 and $222 34,860 33,308 Allowance for credit losses (1,036) (972) - ----------------------------------------------------------------------------------------------------------------------------- Net loans 33,824 32,336 Other 3,471 2,619 - ----------------------------------------------------------------------------------------------------------------------------- Total assets $63,967 $62,080 - ----------------------------------------------------------------------------------------------------------------------------- LIABILITIES Deposits Noninterest-bearing $ 6,257 $ 7,057 Interest-bearing 26,692 26,058 - ----------------------------------------------------------------------------------------------------------------------------- Total deposits 32,949 33,115 - ----------------------------------------------------------------------------------------------------------------------------- Borrowed funds Federal funds purchased 2,123 2,066 Repurchase agreements 4,547 4,995 Commercial paper 1,161 514 Other 5,571 4,087 - ----------------------------------------------------------------------------------------------------------------------------- Total borrowed funds 13,402 11,662 - ----------------------------------------------------------------------------------------------------------------------------- Notes and debentures 11,437 9,585 Accrued expenses and other liabilities 1,830 3,393 - ----------------------------------------------------------------------------------------------------------------------------- Total liabilities 59,618 57,755 - ----------------------------------------------------------------------------------------------------------------------------- SHAREHOLDERS' EQUITY Preferred stock--$1 par value Authorized: 17,628,760 and 17,663,791 shares Issued and outstanding: 948,202 and 983,233 shares Aggregate liquidation value: $20 1 1 Common stock--$5 par value Authorized: 450,000,000 shares Issued: 235,687,237 and 234,994,196 shares 1,179 1,175 Capital surplus 461 450 Retained earnings 2,958 2,715 Deferred ESOP benefit expense (95) (95) Net unrealized securities gains (losses) (154) 88 Common stock held in treasury at cost: 26,767 and 288,959 shares (1) (9) - ----------------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 4,349 4,325 - ----------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $63,967 $62,080 - -----------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements. 17 18 PNC BANK CORP. - -------------------------------------------------------------------------------- Consolidated Statement of Income - ---------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Six months ended June 30 June 30 ------------------------ -------------------------- In thousands, except per share data 1994 1993 1994 1993 - --------------------------------------------------------------------------------------------------------------------------------- INTEREST INCOME Loans and fees on loans $594,011 $475,335 $1,166,847 $ 961,554 Securities 316,647 315,936 612,455 614,433 Other 24,336 9,205 50,796 18,042 - --------------------------------------------------------------------------------------------------------------------------------- Total interest income 934,994 800,476 1,830,098 1,594,029 - --------------------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE Deposits 217,512 188,536 417,516 387,713 Borrowed funds 110,574 98,827 207,311 187,350 Notes and debentures 113,949 57,467 214,971 109,629 - --------------------------------------------------------------------------------------------------------------------------------- Total interest expense 442,035 344,830 839,798 684,692 - --------------------------------------------------------------------------------------------------------------------------------- Net interest income 492,959 455,646 990,300 909,337 Provision for credit losses 25,030 53,814 50,045 115,231 - --------------------------------------------------------------------------------------------------------------------------------- Net interest income less provision for credit losses 467,929 401,832 940,255 794,106 - --------------------------------------------------------------------------------------------------------------------------------- NONINTEREST INCOME Investment management and trust 73,494 69,093 146,461 135,366 Service charges, fees and commissions 92,205 87,904 180,041 169,349 Mortgage banking 42,658 9,082 80,363 16,976 Net securities gains (85) 6,616 30,307 111,777 Other 19,968 21,739 49,619 41,247 - --------------------------------------------------------------------------------------------------------------------------------- Total noninterest income 228,240 194,434 486,791 474,715 - --------------------------------------------------------------------------------------------------------------------------------- NONINTEREST EXPENSE Staff expense 203,972 169,936 410,871 346,340 Net occupancy and equipment 66,860 54,773 132,142 113,092 Other 147,463 120,439 302,128 272,731 - --------------------------------------------------------------------------------------------------------------------------------- Total noninterest expense 418,295 345,148 845,141 732,163 - --------------------------------------------------------------------------------------------------------------------------------- Income before income taxes and cumulative effect of changes in accounting principles 277,874 251,118 581,905 536,658 Applicable income taxes 90,029 81,976 188,371 180,505 - --------------------------------------------------------------------------------------------------------------------------------- Income before cumulative effect of changes in accounting principles 187,845 169,142 393,534 356,153 Cumulative effect of changes in accounting principles, net of tax benefit of $5,343 (19,393) - --------------------------------------------------------------------------------------------------------------------------------- Net income $187,845 $169,142 $ 393,534 $ 336,760 - --------------------------------------------------------------------------------------------------------------------------------- EARNINGS PER COMMON SHARE Primary before cumulative effect of changes in accounting principles $.79 $ .71 $1.66 $1.50 Cumulative effect of changes in accounting principles (.08) - --------------------------------------------------------------------------------------------------------------------------------- Primary $.79 $ .71 $1.66 $1.42 - --------------------------------------------------------------------------------------------------------------------------------- Fully diluted before cumulative effect of changes in accounting principles $.79 $ .71 $1.65 $1.49 Cumulative effect of changes in accounting principles (.08) - --------------------------------------------------------------------------------------------------------------------------------- Fully diluted $.79 $ .71 $1.65 $1.41 - --------------------------------------------------------------------------------------------------------------------------------- CASH DIVIDENDS DECLARED PER COMMON SHARE $.32 $.285 $ .64 $ .57 AVERAGE COMMON SHARES OUTSTANDING Primary 237,241 236,561 236,974 236,241 Fully diluted 239,086 238,751 238,887 238,545 - ---------------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements. 18 19 PNC BANK CORP. - -------------------------------------------------------------------------------- Consolidated Statement of Cash Flows - ---------------------------------------------------------------------------------------------------------------------------------
Six months ended June 30 In millions 1994 1993 - --------------------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $ 394 $ 337 Adjustments to reconcile net income to net cash provided by operating activities Cumulative effect of changes in accounting principles 19 Provision for credit losses 50 115 Depreciation, amortization and accretion 126 94 Deferred income taxes (3) (10) Net securities gains (30) (112) Net gain on sales of assets (54) (5) Valuation adjustments on foreclosed assets, net of gains on sales (11) (5) Change in Loans held for sale 642 (177) Trading account securities (71) (81) Other (240) 28 - --------------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 803 203 - --------------------------------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Net change in loans (600) 415 Repayment Securities available for sale 1,630 614 Investment securities 1,867 2,914 Sales Securities available for sale 7,325 10,666 Investment securities 34 11 Loans 561 51 Foreclosed assets 54 56 Purchases Securities available for sale (7,329) (9,757) Investment securities (4,922) (6,110) Loans (17) (226) Net cash paid for acquisitions (462) Other 392 733 - --------------------------------------------------------------------------------------------------------------------------------- Net cash used by investing activities (1,467) (633) - --------------------------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Net change in Noninterest-bearing deposits (1,128) 282 Interest-bearing deposits (1,396) (1,241) Federal funds purchased 53 (849) Sale/issuance Repurchase agreements 72,192 97,276 Commercial paper 2,152 3,804 Other borrowed funds 50,964 17,914 Notes and debentures 3,948 2,556 Common stock 20 27 Redemption/maturity Repurchase agreements (72,640) (95,960) Commercial paper (1,504) (4,209) Other borrowed funds (49,477) (18,676) Notes and debentures (2,190) (118) Acquisition of treasury stock (6) (6) Cash dividends paid to shareholders (152) (134) - --------------------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 836 666 - --------------------------------------------------------------------------------------------------------------------------------- INCREASE IN CASH AND DUE FROM BANKS 172 236 Cash and due from banks at beginning of year 1,817 2,117 - --------------------------------------------------------------------------------------------------------------------------------- Cash and due from banks at end of period $ 1,989 $ 2,353 - ---------------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements. 19 20 PNC BANK CORP. - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements Basis of Financial Statement Presentation The unaudited consolidated interim financial statements have been prepared in accordance with generally accepted accounting principles and include the accounts of PNC Bank Corp. and its subsidiaries ("Corporation"), substantially all of which are wholly owned. In the opinion of management, the financial statements reflect all adjustments, which are of a normal recurring nature, necessary for a fair statement of the results for the interim periods presented. In preparing the unaudited consolidated interim financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ from such estimates. The notes included herein should be read in conjunction with the audited consolidated financial statements included in the 1993 Annual Report. Reclassifications Certain prior period amounts have been reclassified to conform to reporting classifications utilized for the current reporting period. These reclassifications did not impact the Corporation's financial condition or results of operations. Earnings per Common Share Primary earnings per common share is calculated by dividing net income adjusted for preferred stock dividends declared by the sum of the weighted average number of shares of common stock outstanding and the number of shares of common stock which would be issued assuming the exercise of stock options during each period. Fully diluted earnings per common share is based on net income adjusted for interest expense, net of tax, on outstanding convertible debentures and dividends declared on nonconvertible preferred stock. The weighted average number of shares of common stock outstanding is increased by the assumed conversion of outstanding convertible preferred stock and convertible debentures from the beginning of the year and the number of shares of common stock which would be issued assuming the exercise of stock options. Adjustments to net income and the weighted average number of shares of common stock outstanding are made only when such adjustments dilute earnings per common share. Changes in Accounting Principles SECURITIES Effective December 31, 1993, the Corporation adopted Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Securities are classified as investments and carried at amortized cost if management has the positive intent and ability to hold the securities to maturity. Securities purchased with the intention of recognizing short-term profits are placed in the trading account and are carried at market value. Securities not classified as investments or trading are designated as securities available for sale and carried at fair value with unrealized gains and losses reflected in shareholders' equity. Prior to the adoption of SFAS No. 115, securities available for sale were carried at the lower of cost or fair value. INCOME TAXES Effective January 1, 1993, the Corporation adopted SFAS No. 109, "Accounting for Income Taxes," which requires the use of the liability method to account for deferred income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Previously, deferred income taxes were accounted for using the deferred method. The cumulative effect of the change decreased net income in 1993 by $9.0 million or $.04 per fully diluted share. INTANGIBLE ASSETS Effective January 1, 1993, the Corporation changed its method of accounting for certain identifiable intangible assets, consisting primarily of purchased mortgage servicing rights. Such assets are 20 21 PNC BANK CORP. - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements accounted for at the lower of amortized cost or the estimated value of future net revenues on a disaggregated basis. The estimated value of these assets is determined by discounting the related expected future net cash flows at a rate no less than the original discount rate. Previously, cash flows were not discounted for this purpose. The cumulative effect of the change decreased net income in 1993 by $10.4 million or $.04 per fully diluted share. Mergers and Acquisitions On November 30, 1993, the Corporation consummated its acquisition of PNC Mortgage (formerly Sears Mortgage Banking Group) for $328 million in cash. The purchase price is subject to certain post-closing adjustments. The transaction was recorded under the purchase method of accounting and the total assets of PNC Mortgage were $7.6 billion at closing. During the first six months of 1994, the Corporation completed the purchase of United Federal Bancorp, Inc., State College, Pennsylvania, and First Eastern Corp., Wilkes-Barre, Pennsylvania, for a total of $486 million in cash. The combined assets and deposits totaled $2.8 billion and $2.4 billion, respectively, at closing. The Corporation also completed the acquisition of a $10-billion residential mortgage servicing portfolio from the Associates Corporation of North America for $117 million in cash. During the second quarter of 1994, the Corporation entered into a definitive agreement to acquire BlackRock Financial Management, L.P., a New York-based fixed-income investment management firm with approximately $23 billion in assets under management. The purchase price will approximate $240 million in cash and notes. This transaction is expected to close in the fourth quarter of 1994, pending regulatory and other approvals. Subsequent to June 30, 1994, the Corporation announced agreements to acquire Brentwood Financial Corporation, Cincinnati, Ohio, and Indian River Federal Savings Bank, Vero Beach, Florida. The aggregate purchase price approximates $33 million in cash. The combined assets and deposits totaled approximately $175 million and $141 million, respectively, at June 30, 1994. These transactions are expected to close in the fourth quarter of 1994, subject to regulatory and shareholder approvals. Cash Flows During the first six months of 1994 and 1993, interest paid on deposits and other contractual debt obligations totaled $816.5 million and $558.4 million, respectively, and income taxes paid were $258.8 million and $199.6 million, respectively. Noncash investing activities consisted of transfers of securities available for sale to investment securities totaling $2.7 billion during the first six months of 1994 and transfers of loans to foreclosed assets aggregating $18.2 million in both 1994 and 1993. In connection with acquisitions completed during 1994, the Corporation acquired assets of $2.8 billion and assumed liabilities of $2.7 billion. The cash paid totaled $580 million and the Corporation received $128 million in cash and due from banks in connection with these acquisitions. Allowance for Credit Losses The following table presents changes in the allowance for credit losses:
- ------------------------------------------------------------- In millions 1994 1993 - ------------------------------------------------------------- Balance at January 1 $972 $897 - ------------------------------------------------------------- Charge-offs (81) (127) Recoveries 30 32 - ------------------------------------------------------------- Net charge-offs (51) (95) - ------------------------------------------------------------- Provision for credit losses 50 115 Acquisitions 65 - ------------------------------------------------------------- Balance at June 30 $1,036 $917 - -------------------------------------------------------------
Notes and Debentures During the first six months of 1994, the Corporation issued $200 million of 7.75 percent, unsecured subordinated debentures due in 2004. 21 22 PNC BANK CORP. - -------------------------------------------------------------------------------- Average Consolidated Balance Sheet and Net Interest Analysis - --------------------------------------------------------------------------------
Six months ended June 30 Taxable-equivalent basis ------------------------------------------------------------------------------------ 1994 1993 -------------------------------------- -------------------------------------- Average balances in millions, interest in Average Average Average Average thousands Balances Interest Yields/Rates Balances Interest Yields/Rates - --------------------------------------------------------------------------------------------------------------------------------- ASSETS Interest-earning assets Short-term investments $ 860 $ 19,886 4.66% $ 424 $ 9,923 4.72% Securities U.S. Treasury 3,844 91,511 4.80 2,708 64,726 4.82 U.S. Government agencies and corporations 15,363 454,198 5.91 14,878 479,317 6.44 State and municipal 374 19,349 10.34 536 25,482 9.51 Other debt 1,685 46,070 5.47 1,884 50,333 5.34 Corporate stocks and other 284 8,180 5.76 82 3,255 7.94 - --------------------------------------------------------------------------------------------------------------------------------- Total securities 21,550 619,308 5.75 20,088 623,113 6.21 - --------------------------------------------------------------------------------------------------------------------------------- Loans, net of unearned income Commercial 11,714 417,899 7.19 10,641 358,506 6.79 Real estate project 1,729 65,594 7.65 1,901 66,115 7.01 Real estate mortgage 9,018 308,794 6.85 3,960 172,611 8.72 Consumer 8,534 345,726 8.17 7,831 347,836 8.96 Other 1,283 38,785 6.07 866 28,120 6.51 - --------------------------------------------------------------------------------------------------------------------------------- Total loans, net of unearned income 32,278 1,176,798 7.34 25,199 973,188 7.78 - --------------------------------------------------------------------------------------------------------------------------------- Other interest-earning assets 937 30,973 6.62 322 8,170 5.12 - --------------------------------------------------------------------------------------------------------------------------------- Total interest-earning assets/interest income 55,625 1,846,965 6.67 46,033 1,614,394 7.04 - --------------------------------------------------------------------------------------------------------------------------------- Noninterest-earning assets Allowance for credit losses (992) (915) Cash and due from banks 2,128 1,949 Other assets 2,536 1,912 - --------------------------------------------------------------------------------------------------------------------------------- Total assets $59,297 $48,979 - --------------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing liabilities Interest-bearing deposits Demand $ 3,378 14,659 .87 $ 3,042 12,853 .85 Savings 2,386 10,721 .91 2,253 13,281 1.19 Money market 6,494 69,676 2.16 5,656 56,527 2.02 Certificates of deposit of $100,000 or more 3,541 87,467 4.97 2,458 70,207 5.76 Other time 9,569 223,989 4.72 9,228 231,324 5.06 Deposits in foreign offices 555 11,004 4.00 237 3,521 3.00 - --------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing deposits 25,923 417,516 3.25 22,874 387,713 3.42 - --------------------------------------------------------------------------------------------------------------------------------- Borrowed funds Federal funds purchased 2,539 46,760 3.71 1,635 24,877 3.08 Repurchase agreements 5,468 100,069 3.69 7,639 130,464 3.44 Commercial paper 714 13,776 3.89 841 13,924 3.34 Other 2,532 46,706 3.72 706 18,086 5.16 - --------------------------------------------------------------------------------------------------------------------------------- Total borrowed funds 11,253 207,311 3.72 10,821 187,351 3.49 - --------------------------------------------------------------------------------------------------------------------------------- Notes and debentures 10,589 214,971 4.07 5,163 109,628 4.28 - --------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities/interest expense 47,765 839,798 3.54 38,858 684,692 3.55 - --------------------------------------------------------------------------------------------------------------------------------- Noninterest-bearing liabilities and shareholder's equity Demand and other noninterest-bearing deposits 6,073 5,216 Accrued expenses and other liabilities 1,160 1,064 Shareholders' equity 4,299 3,841 - --------------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $59,297 $48,979 - --------------------------------------------------------------------------------------------------------------------------------- Interest rate spread including interest rate swaps 3.13 3.49 Impact of noninterest-bearing liabilities .50 .55 - --------------------------------------------------------------------------------------------------------------------------------- Net interest income/margin on earning assets $1,007,167 3.63% $929,702 4.04% - ---------------------------------------------------------------------------------------------------------------------------------
Nonaccrual loans are included in loans, net of unearned income. The impact of interest rate swaps is included in the interest income/expense and average yields/ rates for commercial loans, real estate mortgages, U.S. Government agencies and corporations securities, demand, savings, money market, certificates of deposit of $100,000 or more, and other time deposits, and other borrowed funds. 22 23 PNC BANK CORP. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
1994 1993 - ---------------------------------------------------------------------------- ---------------------------------- Second Quarter First Quarter Second Quarter - --------------------------------------- ---------------------------------- ---------------------------------- Average Average Average Average Average Average Balances Interest Yields/Rates Balances Interest Yields/Rates Balances Interest Yields/Rates - ----------------------------------------------------------------------------------------------------------------- $ 855 $ 10,666 5.00% $ 864 $ 9,220 4.32% $ 412 $ 4,113 4.01% 4,244 51,997 4.91 3,439 39,514 4.66 3,149 36,468 4.65 15,206 229,640 6.04 15,520 224,558 5.79 14,626 233,683 6.39 369 9,566 10.36 379 9,783 10.33 524 12,408 9.47 1,746 24,823 5.69 1,625 21,247 5.23 2,803 35,532 5.07 294 3,996 5.44 275 4,184 6.10 82 2,233 10.89 - ----------------------------------------------------------------------------------------------------------------- 21,859 320,022 5.86 21,238 299,286 5.65 21,184 320,324 6.05 - ----------------------------------------------------------------------------------------------------------------- 12,075 213,853 7.10 11,349 204,046 7.29 10,705 179,705 6.73 1,736 33,767 7.80 1,723 31,827 7.49 1,876 32,205 6.89 8,981 156,806 6.98 9,055 151,988 6.71 3,892 82,997 8.53 8,617 175,131 8.15 8,450 170,595 8.19 7,858 172,999 8.83 1,122 19,448 6.94 1,446 19,337 5.38 853 13,506 6.34 - ----------------------------------------------------------------------------------------------------------------- 32,531 599,005 7.38 32,023 577,793 7.29 25,184 481,412 7.66 - ----------------------------------------------------------------------------------------------------------------- 817 13,705 6.71 1,057 17,268 6.54 295 5,115 6.92 - ----------------------------------------------------------------------------------------------------------------- 56,062 943,398 6.74 55,182 903,567 6.59 47,075 810,964 6.90 - ----------------------------------------------------------------------------------------------------------------- (997) (986) (920) 2,029 2,228 2,046 2,531 2,542 1,951 - ----------------------------------------------------------------------------------------------------------------- $59,625 $58,966 $50,152 - ----------------------------------------------------------------------------------------------------------------- $ 3,380 8,644 .99 $ 3,377 6,315 .76 $ 3,074 5,808 .76 2,381 6,851 1.15 2,391 3,870 .66 2,267 6,105 1.08 6,495 37,421 2.31 6,493 32,255 2.01 5,612 27,352 1.95 3,302 41,298 5.01 3,782 46,169 4.94 2,325 33,498 5.78 9,686 114,466 4.74 9,450 109,523 4.70 9,187 114,022 4.98 884 9,132 4.14 223 1,872 3.41 247 1,751 2.84 - ----------------------------------------------------------------------------------------------------------------- 26,128 217,812 3.34 25,716 200,004 3.15 22,712 188,536 3.33 - ----------------------------------------------------------------------------------------------------------------- 2,821 28,434 4.04 2,254 18,326 3.30 1,756 13,160 3.01 4,879 48,241 3.97 6,065 51,828 3.47 8,304 70,804 3.42 925 9,681 4.20 500 4,095 3.32 626 5,166 3.31 2,342 24,218 4.15 2,724 22,488 3.21 799 9,697 4.87 - ----------------------------------------------------------------------------------------------------------------- 10,967 110,574 4.04 11,543 96,737 3.37 11,485 98,827 3.45 - ----------------------------------------------------------------------------------------------------------------- 11,030 113,949 4.14 10,142 101,022 4.04 5,578 57,467 4.13 - ----------------------------------------------------------------------------------------------------------------- 48,125 442,335 3.68 47,401 397,763 3.39 39,775 344,830 3.48 - ----------------------------------------------------------------------------------------------------------------- 6,124 6,021 5,379 1,108 1,214 1,129 4,268 4,330 3,869 - ----------------------------------------------------------------------------------------------------------------- $59,625 $58,966 $50,152 - ----------------------------------------------------------------------------------------------------------------- 3.06 3.20 3.42 .52 .48 .54 - ----------------------------------------------------------------------------------------------------------------- $501,063 3.58% $505,804 3.68% $466,134 3.96% - -----------------------------------------------------------------------------------------------------------------
23 24 PNC BANK CORP. - -------------------------------------------------------------------------------- Corporate Information Stock Listing PNC Bank Corp.'s common stock is traded on the New York Stock Exchange (NYSE) under the symbol PNC. Registrar and Transfer Agent Chemical Bank J.A.F. Building P.O. Box 3068 New York, New York 10116-3068 800-982-7652 Inquiries Individual shareholders should contact: The PNC Bank Hotline at 800-982-7652 or Shareholder Relations at 800-843-2206. Analysts and institutional investors should contact: William H. Callihan, Vice President, Investor Relations at 412-762-8257. News media representatives and others seeking general information should contact: Jonathan Williams, Vice President, Media Relations at 412-762-4550. Form 10-Q: PNC Bank Corp.'s Quarterly Report on Form 10-Q is filed with the Securities and Exchange Commission. This report, excluding exhibits, may be obtained without charge by writing to Samuel R. Patterson, Senior Vice President, Financial Reporting, at corporate headquarters. Corporate Headquarters PNC Bank Corp. One PNC Plaza Fifth Avenue and Wood Street Pittsburgh, Pennsylvania 15265 Stock Prices/Dividends Declared The table below sets forth by quarter the range of high and low sale prices for PNC Bank Corp.'s common stock and cash dividends declared per common share. - ----------------------------------------------------------------
Daily Sale Prices ----------------------- Cash Dividends High Low Declared - ---------------------------------------------------------------- 1994 QUARTER - ---------------------------------------------------------------- FIRST $29.875 $25.250 $ .320 SECOND 31.625 26.125 .320 - ---------------------------------------------------------------- TOTAL $ .640 - ---------------------------------------------------------------- 1993 Quarter - ---------------------------------------------------------------- First $35.000 $27.000 $ .285 Second 36.125 29.750 .285 Third 32.750 28.500 .285 Fourth 31.125 27.625 .320 - ---------------------------------------------------------------- Total $1.175 - ----------------------------------------------------------------
Dividend Reinvestment and Stock Purchase Plan PNC Bank Corp.'s 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. 24 EX-99.2 6 PNC BANK 10-Q 1 EXHIBIT 99.2 SUMMARY OF VOTES CAST On the record date for the 1994 annual meeting of shareholders of PNC Bank Corp., the following shares of common stock and preferred stock (with the indicated voting rights) were outstanding and entitled to vote:
Number of Shares Voting Description Voting Rights Outstanding Power - -------------------------------------------------------------------------------- Common Stock One vote per share 234,789,558 234,789,558 ============================ Series A - $1.80 Cumulative Eight votes per share 20,490 163,920 Convertible Preferred Stock Series B - $1.80 Cumulative Eight votes per share 9,297 74,376 Convertible Preferred Stock Series C - $1.80 Cumulative Four votes per 2.4 423,761 706,268* Convertible Preferred Stock shares Series D - $1.80 Cumulative Four votes per 2.4 522,650 871,083* Convertible Preferred Stock shares ---------------------------- Total Preferred Stock 976,198 1,815,647* ============================ __________________ *Greatest number possible; actual voting power is slightly less due to fractional shares. Each holder of preferred stock is entitled to a number of votes equal to the number of FULL shares of common stock into which such holder's preferred stock is convertible.
2 The results of the shareholder vote are set forth below: 1) ELECTION OF DIRECTORS
Negative/ Nominees Affirmative Votes Withheld Votes - ------------------------------------------------------------------------- Robert N. Clay 179,656,826 2,864,370 William G. Copeland 179,665,061 2,856,135 George A. Davidson, Jr. 179,760,708 2,760,488 C. G. Grefenstette 179,725,751 2,795,445 W. Craig McClelland 179,717,056 2,804,140 Thomas Marshall 179,674,467 2,846,729 Donald I. Moritz 179,690,585 2,830,611 Thomas H. O'Brien 179,673,425 2,847,771 Jackson H. Randolph 179,751,003 2,770,193 James E. Rohr 179,716,440 2,804,756 Roderic H. Ross 179,716,074 2,805,122 Vincent A. Sarni 179,221,343 3,299,853 Richard P. Simmons 179,739,011 2,782,185 Thomas J. Usher 179,602,770 2,918,426 Helge H. Wehmeier 179,634,963 2,886,233
2) PROPOSAL TO APPROVE THE PNC BANK CORP. 1994 ANNUAL INCENTIVE AWARD PLAN
Negative Description Affirmative Votes Votes Abstentions - -------------------------------------------------------------------------------- Common Stock 168,991,947 10,991,275 1,580,381 Preferred Stock-Series A 66,256 2,832 1,824 Preferred Stock-Series B 26,248 -- -- Preferred Stock-Series C 345,288 27,032 9,228 Preferred Stock-Series D 426,040 40,898 11,717 ---------------------------------------------------- Totals 169,855,779 11,062,037 1,603,150 ====================================================
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