-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NuG8e9m17tfP4rEzcBr3fEyyVoQhw2pQD957Tao7toTAGYlKmG6uYo0v6iBIdzI/ PjUx/oV5IidfnHmoIpfolg== 0000950128-98-000648.txt : 19980324 0000950128-98-000648.hdr.sgml : 19980324 ACCESSION NUMBER: 0000950128-98-000648 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980323 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PNC BANK CORP CENTRAL INDEX KEY: 0000713676 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 251435979 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-09718 FILM NUMBER: 98570528 BUSINESS ADDRESS: STREET 1: ONE PNC PLAZA STREET 2: 249 FIFTH AVE CITY: PITTSBURGH STATE: PA ZIP: 15265 BUSINESS PHONE: 4127622281 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-K405 1 PNC BANK CORP. 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One) [X] Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1997 OR [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ________ to ________ PNC BANK CORP. (Exact name of registrant as specified in its charter) PENNSYLVANIA 25-1435979 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) ONE PNC PLAZA 249 FIFTH AVENUE PITTSBURGH, PENNSYLVANIA 15222-2707 (Address of principal executive offices) Registrant's telephone number, including area code - (412) 762-1553 Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange Title of Each Class on Which Registered ------------------- ------------------- COMMON STOCK, PAR VALUE $5.00 New York Stock Exchange $1.60 CUMULATIVE CONVERTIBLE PREFERRED STOCK-SERIES C, PAR VALUE $1.00 New York Stock Exchange $1.80 CUMULATIVE CONVERTIBLE PREFERRED STOCK-SERIES D, PAR VALUE $1.00 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: $1.80 CUMULATIVE CONVERTIBLE PREFERRED STOCK - SERIES A, PAR VALUE $1.00 $1.80 CUMULATIVE CONVERTIBLE PREFERRED STOCK - SERIES B, PAR VALUE $1.00 8.25% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2008 8 1/4% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2010 9.875% SUBORDINATED CAPITAL NOTES DUE 1999 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No ___ Indicate by check mark if the disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K. _X_ The aggregate market value of the voting common equity held by non-affiliates of the Registrant amounted to approximately $14.7 billion at January 30, 1998. There is no non-voting common equity of the Registrant outstanding. Number of shares of Registrant's common stock outstanding at February 28, 1998: 300,777,025 DOCUMENTS INCORPORATED BY REFERENCE Portions of PNC Bank Corp.'s Annual Report to Shareholders for the year ended December 31, 1997 ("Annual Report to Shareholders") are incorporated by reference into Parts I and II and portions of the definitive Proxy Statement of PNC Bank Corp. for the annual meeting of shareholders to be held on April 28, 1998 ("Proxy Statement") are incorporated by reference into Part III of this Form 10-K. The incorporation by reference herein of portions of the Proxy Statement shall not be deemed to specifically incorporate by reference the information referred to in Item 402(a)(8) of Regulation S-K. 2 TABLE OF CONTENTS PART I Page ------- Item 1 Business 2 Item 2 Properties 5 Item 3 Legal Proceedings 6 Item 4 Submission of Matters to a Vote of Security Holders * PART II Item 5 Market for Registrant's Common Equity and Related Stockholder Matters 6 Item 6 Selected Financial Data 6 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 6 Item 7A Quantitative and Qualitative Disclosures About Market Risk 6 Item 8 Financial Statements and Supplementary Data 6 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure * PART III Item 10 Directors and Executive Officers of the Registrant 6 Item 11 Executive Compensation 7 Item 12 Security Ownership of Certain Beneficial Owners and Management 7 Item 13 Certain Relationships and Related Transactions 7 PART IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 7 SIGNATURES 8 EXHIBIT INDEX E-1 * Not applicable PART I Forward-Looking Statements: From time to time the Corporation has made and may continue to make forward-looking statements about financial and business matters. As stated under the caption "Forward-Looking Statements" in the "Financial Review" on page 39 of the Annual Report to Shareholders, which is incorporated herein by reference, many factors could cause actual results for such matters to differ materially from such forward-looking statements. The Corporation assumes no duty to update forward-looking statements. ITEM 1 - BUSINESS BUSINESS OVERVIEW PNC Bank Corp. ("PNC Bank" or "Corporation") is a bank holding company registered under the Bank Holding Company Act of 1956, as amended ("BHC Act"). PNC Bank was incorporated under the laws of the Commonwealth of Pennsylvania in 1983 with the consolidation of Pittsburgh National Corporation and Provident National Corporation. Since 1983, PNC Bank has diversified its geographical presence and product capabilities through strategic bank and nonbank acquisitions and the formation of various nonbanking subsidiaries. The Corporation is one of the largest diversified financial services companies in the United States and operates seven lines of business: National Consumer Banking; Regional Community Banking; Private Banking; Secured Lending; Asset Management and Servicing; Corporate Banking; and Mortgage Banking. Financial products and services are customized for specific customer segments and offered nationally and in PNC Bank's primary geographic markets in Pennsylvania, New Jersey, Delaware, Ohio, Kentucky, Indiana, Massachusetts and Florida. At December 31, 1997, the Corporation's consolidated total assets, deposits and shareholders' equity were $75.1 billion, $47.6 billion and $5.4 billion, respectively. LINES OF BUSINESS Information relating to National Consumer Banking, Regional Community Banking, Private Banking, Secured Lending, Asset Management and Servicing, Corporate Banking and Mortgage Banking is set forth under the captions "Business Strategies" and "Line of Business Review" in the "Financial Review" included on pages 30 through 31 and 32 through 38, respectively, of the Annual Report to Shareholders, which is incorporated herein by reference. SUBSIDIARY BANKS While the Corporation manages seven lines of business, the corporate legal structure currently consists of five subsidiary banks and over 110 active nonbank subsidiaries. PNC Bank, National Association, headquartered in Pittsburgh, Pennsylvania is the Corporation's only bank subsidiary which is a significant subsidiary within the meaning of Rule 1-02(v) of Regulation S-X. At December 31, 1997, PNC Bank, National Association had total consolidated assets of $69.7 billion, representing 93% of the Corporation's consolidated assets. For additional information on subsidiaries, see Exhibit 21 to this Form 10-K, which is incorporated herein by reference. 2 3 STATISTICAL DISCLOSURES BY BANK HOLDING COMPANIES The following statistical information is included on the indicated pages of the Annual Report to Shareholders and is incorporated herein by reference: Page of Annual Report - ------------------------------------------------------ -------- Analysis of Year-to-Year Changes in Net Interest Income 77 Average Consolidated Balance Sheet and Net Interest Analysis 78-79 Book Values of Securities 51 and 61 Maturities and Weighted-Average Yield of Securities 61 Loan Types 62 Loan Maturities and Interest Sensitivity 80 Nonaccrual, Past Due and Restructured Loans 63 Potential Problem Loans 45 Summary of Loan Loss Experience 80 Allocation of Allowance for Credit Losses 81 Average Amount and Average Rate Paid on Deposits 78-79 Time Deposits of $100,000 or More 81 Selected Consolidated Financial Data 75 Short-Term Borrowings 81 RISK MANAGEMENT The Corporation's ordinary course of business involves varying degrees of risk taking, the most significant of which are credit, liquidity and interest rate risk. Market risk is also inherent in the Corporation's business operations. Although it cannot eliminate these risks, PNC Bank has risk management processes designed to provide for risk identification, measurement, monitoring and control. Information relating to credit, liquidity, interest rate and market risk and the Corporation's risk management processes is set forth under the section "Risk Management" in the "Financial Review" included on pages 44 through 47 of the Annual Report to Shareholders, which is incorporated herein by reference. EFFECT OF GOVERNMENTAL MONETARY AND OTHER POLICIES The earnings and operations of bank holding companies and their subsidiaries are affected by monetary, tax and other policies of the United States government and its agencies, including the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"). An important function of the Federal Reserve Board is to regulate the national supply of bank credit. The Federal Reserve Board employs open market operations in U.S. Government securities, changes in the discount rate on bank borrowings and changes in reserve requirements on bank deposits to implement its monetary policy objectives. These instruments of monetary policy are used in varying combinations to influence the overall level of bank loans, investments and deposits, the interest rates charged on loans and paid for deposits, the price of the dollar in foreign exchange markets and the level of inflation. The monetary policies of the Federal Reserve Board have had a significant effect on the operating results of banking institutions in the past and are expected to continue to do so in the future. It is not possible to predict the nature or timing of future changes in monetary, tax and other policies or the effect that they may have on the Corporation's business and earnings. IMPACT OF INFLATION The assets and liabilities of the Corporation are primarily monetary in nature. Accordingly, future changes in prices do not affect the obligations to pay or receive fixed and determinable amounts of money. During periods of inflation, monetary assets lose value in terms of purchasing power, and monetary liabilities have corresponding purchasing power gains. The concept of purchasing power, however, is not an adequate indicator of the effect of inflation on banks, because it does not take into account changes in interest rates, which are an important determinant of the Corporation's earnings. A discussion of interest rate risk is set forth under the section "Interest Rate Risk" in the "Financial Review" included on pages 46 and 47 of the Annual Report to Shareholders. SUPERVISION AND REGULATION The Corporation and its subsidiaries are subject to numerous governmental regulations, some of which are highlighted below and in "Note 14 - Regulatory Matters" of the "Notes to Consolidated Financial Statements" included on pages 65 and 66 of the Annual Report to Shareholders ("Note 14 - Regulatory Matters"), which is incorporated herein by reference. The coverage of the regulations includes activity, investment and dividend limitations on the bank holding company and its subsidiaries and consumer-related protections for loan, deposit, brokerage, fiduciary and mutual fund customers. As a bank holding company registered under the BHC Act, the Corporation is subject to the supervision and regular inspection by the Federal Reserve Board. Under the BHC Act, the Federal Reserve Board's prior approval is required in any case the Corporation proposes to acquire all or substantially all of the assets of any bank, acquire direct or indirect ownership or control of more than 5% of the voting shares of any bank, or merge or consolidate with any other bank holding company. The BHC Act also prohibits, with certain exceptions, the Corporation from acquiring direct or indirect ownership or control of more than 5% of any class of voting shares of any nonbanking corporation. Under the BHC Act, the Corporation may not engage in any business other than managing and controlling banks or furnishing certain specified services to subsidiaries and may not acquire voting control of nonbanking corporations unless the Federal Reserve Board determines such businesses and services to be closely related to banking. When reviewing bank acquisition applications for approval, the Federal Reserve Board considers, among other things, each subsidiary bank's record in meeting the credit needs of the communities it serves in accordance with the Community Reinvestment Act of 1977, as amended ("CRA"). At December 31, 1997, the Corporation's subsidiary banks were rated "Outstanding" or "Satisfactory" with respect to CRA. The Corporation's subsidiary banks are subject to supervision and examination by applicable federal and state banking agencies, including such federal agencies as the Office of the Comptroller of the Currency ("OCC") with respect to PNC 3 4 Bank, National Association and PNC National Bank, the Federal Deposit Insurance Corporation ("FDIC") with respect to PNC Bank, Delaware and PNC Bank, New England, and the Office of Thrift Supervision with respect to PNC Bank, FSB. The Corporation's subsidiary banks are subject to various federal and state restrictions on their ability to pay dividends to the Corporation, which constitutes the principal source of income to the parent company as discussed under the caption "Liquidity Risk" in the "Financial Review" on page 46 of the Annual Report to Shareholders, which is incorporated herein by reference. The Corporation's subsidiary banks are also subject to federal laws limiting extensions of credit to their parent holding company and nonbank affiliates as discussed in "Note 14 - Regulatory Matters." The federal banking agencies possess broad powers to take corrective action as deemed appropriate for an insured depository institution and its holding company. The extent of these powers depends upon whether the institution in question is considered "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" or "critically undercapitalized." Generally, as an institution is deemed to be less well capitalized, the scope and severity of the agencies' powers increase, ultimately permitting the agency to appoint a receiver for the institution. Business activities may also be influenced by an institution's capital classification. For instance, only a "well capitalized" depository institution may accept brokered deposits without prior regulatory approval and an "adequately capitalized" depository institution may accept brokered deposits only with prior regulatory approval. At December 31, 1997, all of the Corporation's subsidiary banks exceeded the required ratios for classification as "well capitalized." Additional discussion of capital adequacy requirements is set forth under the caption "Capital" in the "Financial Review" on pages 43 and 44 of the Annual Report to Shareholders, which is incorporated herein by reference. All of the subsidiary banks are insured by the FDIC and subject to premium assessments. The amount of FDIC assessments is based on the institution's relative risk as measured by regulatory capital ratios and certain other factors. Under current regulations, the Corporation's subsidiary banks are not assessed a premium on deposits insured by either the Bank Insurance Fund or the Savings Association Insurance Fund. However, insured depository institutions continue to pay premiums based on deposit levels to service debt on bonds issued by a governmental entity. The Corporation's subsidiary banks are subject to "cross-guarantee" provisions under federal law that provide if one FDIC-insured depository institution of a multi-bank holding company fails or requires FDIC assistance, the FDIC may assess a "commonly controlled" depository institution for the estimated losses suffered by the FDIC. Such liability could have a material adverse effect on the financial condition of any assessed bank and the Corporation. While the FDIC's claim is junior to the claims of depositors, holders of secured liabilities, general creditors and subordinated creditors, it is superior to the claims of shareholders and affiliates. Under Federal Reserve Board policy, a bank holding company is expected to act as a source of financial strength to each of its subsidiary banks and to commit resources to support each such bank. Consistent with the "source of strength" policy for subsidiary banks, the Federal Reserve Board has stated that, as a matter of prudent banking, a bank holding company generally should not maintain a rate of cash dividends unless its net income available to common shareholders has been sufficient to fund fully the dividends, and the prospective rate of earnings retention appears to be consistent with the corporation's capital needs, asset quality and overall financial condition. The Corporation's nonbank subsidiaries are subject to regulatory restrictions imposed by the Federal Reserve Board and other federal and state agencies as well. The Corporation's four registered broker-dealer subsidiaries are regulated by the Securities and Exchange Commission ("SEC") and monitored by the OCC in three instances and the Federal Reserve Board in the other instance. They are also subject to rules and regulations promulgated by the National Association of Securities Dealers, Inc., among others. Several nonbank subsidiaries which are registered investment advisers are subject to the regulations of the SEC and other agencies. Investment advisers which are national bank subsidiaries are also subject to OCC supervision. Over the past few years, the regulatory framework applicable to the Corporation and its subsidiaries has been subject to extensive Congressional and agency review, which has resulted in some liberalization and may result in further reforms. Current proposals include easing restrictions on insurance and investment banking activities and easing bank ownership requirements. There are also proposals to regulate further banking and financial services, some of which limit finance charges and other fees and charges earned by the Corporation. Management currently cannot predict the outcome of these proposals or the effect, if any, on the Corporation. Since 1995, the BHC Act has permitted bank holding companies from any state to acquire banks and bank holding companies located in any other state, subject to certain conditions. Effective June 1, 1997, the Federal Deposit Insurance Act gave the Corporation's subsidiary banks the ability, subject to certain restrictions, to consolidate with one another or to acquire by acquisition or merger branches outside their home state. Pursuant to these provisions, the Corporation merged certain subsidiary banks during 1997. Competition may increase further as banks branch across state lines and enter new markets. 4 5 COMPETITION The Corporation and its subsidiaries are subject to vigorous and intense competition from various financial institutions and increasingly from "nonbank" entities that engage in similar activities without being subject to bank regulatory supervision and restrictions. This is particularly true as the Corporation expands nationally beyond its primary geographic footprint, where expansion requires significant investments to penetrate new markets and respond to competition. In making loans, the subsidiary banks compete with traditional banking institutions as well as consumer finance companies, leasing companies and other nonbank lenders. Loan pricing and credit standards are under competitive pressure as lenders seek to deploy capital and a broader range of borrowers have access to capital markets. Traditional deposit activities are subject to pricing pressures and customer migration as the competition for consumer investment dollars intensifies among banks and other financial services companies. The Corporation's subsidiary banks compete for deposits not only with other commercial banks, savings banks, savings and loan associations and credit unions, but also insurance companies and issuers of commercial paper and other securities, including mutual funds. Various nonbank subsidiaries engaged in investment banking and venture capital activities compete with commercial banks, investment banking firms, insurance companies and venture capital firms. In providing asset management services, the Corporation's subsidiaries compete with many large banks, trust companies, brokerage houses, mutual fund managers, other registered investment advisers and insurance companies. The ability to access and use technology is an increasingly important competitive factor in the financial services industry. Technology is not only important with respect to delivery of financial services, but in processing information. Each of the Corporation's lines of business consistently must make technological investments to remain competitive. EXECUTIVE OFFICERS OF THE REGISTRANT Information concerning each executive officer of the Corporation as of March 1, 1998 is set forth below. Each executive officer held the position indicated or another senior executive position with the same entity or one of its affiliates or a predecessor corporation for the past five years. Name Age Position with Year Corporation Employed(1) - ---------------------- ----- ---------------------- ----------- Thomas H. O'Brien (2) 61 Chairman and Chief 1962 Executive Officer and Director James E. Rohr (2) 49 President and Director 1972 Walter E. Gregg, Jr. 56 Senior Executive Vice 1974 (2) President, Finance and Administration Richard C. Caldwell 53 Executive Vice President, 1990 Asset Management and Servicing Frederick J. Gronbacher 55 Executive Vice President, 1976 National Consumer Banking Robert L. Haunschild 48 Senior Vice President and 1990 Chief Financial Officer William J. Johns 50 Senior Vice President and 1974 Chief Accounting Officer Ralph S. Michael III 43 Executive Vice President 1979 and Chief Executive Officer, Corporate Banking Thomas E. Paisley III 50 Senior Vice President and 1972 Chairman, Corporate Credit Policy Committee Helen P. Pudlin 48 Senior Vice President and 1989 General Counsel Bruce E. Robbins 53 Executive Vice President 1973 and Chief Executive Officer, Secured Lending - ---------------------- ----- --------------------------- ------ (1) Where applicable, refers to year first employed by predecessor company or acquired company. (2) Office of the Chairman member. ITEM 2 - PROPERTIES The executive and administrative offices of the Corporation and PNC Bank, National Association ("PNC Bank, N.A."), are located at One PNC Plaza, Pittsburgh, Pennsylvania. The thirty-story structure is owned by PNC Bank, N.A. The Corporation and PNC Bank, N.A. occupy substantially all of the building. In addition, PNC Bank, N.A. owns a thirty-four story structure adjacent to One PNC Plaza, known as Two PNC Plaza, 620 Liberty Avenue, Pittsburgh, Pennsylvania, that houses additional office space. PNC Bank, N.A. also owns a data processing and telecommunications center located in a suburb of Pittsburgh, Pennsylvania. 5 6 The Corporation's subsidiaries own or lease numerous other premises for use in conducting business activities. The facilities owned or occupied under lease by the Corporation's subsidiaries are considered by management to be adequate. Additional information pertaining to the Corporation's properties is set forth in "Note 8 - Premises, Equipment and Leasehold Improvements" of the "Notes to Consolidated Financial Statements" included on pages 63 and 64 of the Annual Report to Shareholders, which is incorporated herein by reference. ITEM 3 - LEGAL PROCEEDINGS The Corporation's Annual Report on Form 10-K for the year ended December 31, 1996, included a description of a consolidated class action complaint against the Corporation, its Chairman and Chief Executive Officer and its Senior Vice President and Chief Financial Officer alleging violations of federal securities laws and related common law claims. The parties have reached an agreement in principle to settle this action, which is subject to documentation and court approval. Management believes that the final disposition will not be material to the Corporation's financial position or results of operations. The Corporation, in the normal course of business, is subject to various other pending and threatened lawsuits in which claims for monetary damages and other relief are asserted. Management, after consultation with legal counsel, does not anticipate that the ultimate aggregate liability, if any, arising out of such other lawsuits will have a material effect on the Corporation's financial position. At the present time, management is not in a position to determine whether any such pending or threatened litigation will have a material adverse effect on the Corporation's results of operations in any future reporting period. PART II ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Corporation's common stock is listed on the New York Stock Exchange and is traded under the symbol "PNC". At the close of business on February 28, 1998, there were 64,438 common shareholders of record. Holders of common stock are entitled to receive dividends when declared by the Board of Directors out of funds legally available therefor. The Board of Directors may not pay or set apart dividends on the common stock until dividends for all past dividend periods on any series of outstanding preferred stock have been paid or declared and set apart for payment. The Board presently intends to continue the policy of paying quarterly cash dividends. However, the amount of any future dividends will depend on earnings, the financial condition of the Corporation and other factors, including contractual restrictions and applicable government regulations and policies (such as those relating to the ability of the subsidiary banks and nonbank subsidiaries to upstream dividends to the parent company). The Federal Reserve Board has the power to prohibit the Corporation from paying dividends without prior regulatory approval. Further discussion concerning dividend restrictions is set forth under the caption "Supervision and Regulation" in Part I, Item 1 of this Form 10-K and in "Note 14 - - Regulatory Matters," which sections are incorporated herein by reference. Additional information relating to the common stock is set forth under the caption "Common Stock Prices/Dividends Declared" on page 82 of the Annual Report to Shareholders, which is incorporated herein by reference. ITEM 6 - SELECTED FINANCIAL DATA "Selected Consolidated Financial Data" on page 75 of the Annual Report to Shareholders is incorporated herein by reference. ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The discussion of the Corporation's financial position and results of operations set forth under the section "Financial Review" on pages 30 through 52 of the Annual Report to Shareholders is incorporated herein by reference. ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information set forth under the sections "Interest Rate Risk", "Market Risk" and "Financial Derivatives" on pages 46 through 49 of the Annual Report to Shareholders is incorporated herein by reference. ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The "Report of Ernst & Young LLP, Independent Auditors," "Consolidated Financial Statements," "Notes to Consolidated Financial Statements" and "Selected Quarterly Financial Data" on pages 53, 54 through 57, 58 through 74, and 76, respectively, of the Annual Report to Shareholders are incorporated herein by reference. PART III ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information relating to the principal occupations of directors of the Corporation, their ages, directorships in other companies, and respective terms of office, except for C.G. Grefenstette, 6 7 Thomas Marshall, Vincent A. Sarni and Garry J. Scheuring, who are not standing for reelection, is set forth under the heading "Election of Directors - Information Concerning Nominees" in the Proxy Statement and is incorporated herein by reference. Mr. Grefenstette, age 70, is the Chairman and Chief Executive Officer of The Hillman Company, a company engaged in diversified operations and investments, and a director of Owens & Minor, Inc. Mr. Marshall, age 69, is the Retired Chairman of Aristech Chemical Corporation, and a director of Arch Coal, Inc. Mr. Sarni, age 69, is the Retired Chairman and Chief Executive Officer of PPG Industries Inc., a manufacturer of glass, chemicals, coatings and resins. He is a director of PPG Industries, Inc., Hershey Foods Corporation and The LTV Corporation. Mr. Scheuring, age 58, is the Retired Vice Chairman of PNC Bank Corp., and became a director of the Corporation in connection with the Midlantic Corporation merger, effective December 31, 1995. Mr. Scheuring had been the Chairman, President and Chief Executive Officer of Midlantic Corporation. Each of Messrs. Grefenstette, Marshall and Sarni has been a director of the Corporation since 1989. Information regarding compliance with Section 16(a) of the Securities Exchange Act of 1934 set forth under the heading "Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy Statement is incorporated herein by reference. Information regarding executive officers of the Corporation is included in Part I of this Form 10-K under the caption "Executive Officers of the Registrant". Information regarding the involvement of the Corporation's Chairman and Chief Executive Officer and Senior Vice President and Chief Financial Officer in certain legal proceedings set forth under the heading "Legal Proceedings" in the Proxy Statement is incorporated herein by reference. ITEM 11 - EXECUTIVE COMPENSATION Information regarding compensation of directors and executive officers under the captions "Election of Directors - Compensation of Directors," "Election of Directors - Common Stock Purchase Guideline" and "Compensation of Executive Officers," excluding the "Personnel and Compensation Committee Report on Executive Compensation," in the Proxy Statement is incorporated herein by reference. ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information regarding the beneficial ownership of the equity securities of the Corporation by all directors, each of the five highest compensated executive officers and all directors and executive officers of the Corporation as a group under the heading "Security Ownership of Directors and Executive Officers" in the Proxy Statement is incorporated herein by reference. ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information regarding transactions and relationships with certain directors and executive officers of the Corporation and their associates under the heading "Compensation of Executive Officers-Compensation Committee Interlocks and Insider Participation" in the Proxy Statement is incorporated herein by reference. PART IV ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K FINANCIAL STATEMENTS The following report of independent auditors and consolidated financial information of the Corporation included in the Annual Report to Shareholders are incorporated herein by reference. Page of Annual Financial Statements Report - ------------------------------------------------------ -------- Report of Ernst & Young LLP, Independent Auditors 53 Consolidated Statement of Income for the three years ended December 31, 1997 54 Consolidated Balance Sheet as of December 31, 1997 and 1996 55 Consolidated Statement of Changes in Shareholders' Equity for the three years ended December 31, 1997 56 Consolidated Statement of Cash Flows for the three years ended December 31, 1997 57 Notes to Consolidated Financial Statements 58-74 Selected Quarterly Financial Data 76 - ------------------------------------------------------ -------- No financial statement schedules are being filed. REPORTS ON FORM 8-K The following reports on Form 8-K were filed during the quarter ended December 31, 1997, or thereafter: Form 8-K dated as of October 15, 1997, reporting the Corporation's consolidated financial results for the three and nine months ended September 30, 1997, filed pursuant to Item 5. Form 8-K dated as of January 15, 1998, reporting the Corporation's consolidated financial results for the three months and year ended December 31, 1997, filed pursuant to Item 5. EXHIBITS The exhibits listed on the Exhibit Index on pages E-1 and E-2 of this Form 10-K are filed herewith or are incorporated herein by reference. 7 8 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant, PNC Bank Corp., has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PNC BANK CORP. (Registrant) By: /s/ Robert L. Haunschild - ---------------------------------------------- Robert L. Haunschild, Senior Vice President and Chief Financial Officer March 20, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of PNC Bank Corp. and in the capacity indicated on March 20, 1998.
Signature Capacities - ----------------------------------------- ---------------------------------------------- /s/ Thomas H. O'Brien Chairman, Chief Executive - ----------------------------------------- Officer and Director (Principal Executive Thomas H. O'Brien Officer) /s/ Robert L. Haunschild Senior Vice President and - ----------------------------------------- Chief Financial Officer (Principal Financial Robert L. Haunschild Officer) /s/ William J. Johns Senior Vice President and Chief Accounting - ----------------------------------------- Officer (Principal Accounting Officer) William J. Johns * Paul W. Chellgren; Robert N. Clay; George A. A Majority of the Directors Davidson, Jr.; David F. Girard-diCarlo; C. G. Grefenstette; William R. Johnson; Bruce C. Lindsay; W. Craig McClelland; Thomas Marshall; Jane G. Pepper; Jackson H. Randolph; Roderic H. Ross; Vincent A. Sarni; Garry J. Scheuring; Richard P. Simmons; Thomas J. Usher; Milton A. Washington; and Helge H. Wehmeier * James E. Rohr President and Director
*By: /s/ Melanie S. Cibik ------------------------------------------ Melanie S. Cibik, Attorney-in-Fact, pursuant to Power of Attorney filed herewith 8 9 EXHIBIT INDEX
Exhibit No. Description Method of Filing + - ---------- -------------------------------------------------------------------- -------------------------------------------- 3.1 Articles of Incorporation of the Corporation, as amended. Incorporated herein by reference to Exhibit 99.1 and 99.2 of the Current Report on Form 8-K dated October 7, 1996. 3.2 By-Laws of the Corporation, as amended. Incorporated herein by reference to Exhibit 99.2 of the Current Report on Form 8-K dated January 15, 1998. 4.1 Instruments defining the rights of holders of long-term debt of the Corporation and its subsidiaries are not filed as Exhibits because the amount of debt under each instrument is less than 10 percent of the consolidated assets of the Corporation. The Corporation undertakes to file these instruments with the Commission on request. 4.2 Designation of Series: $1.80 Cumulative Convertible Preferred Incorporated herein as part of Exhibit 3.1. Stock -- Series A. 4.3 Designation of Series: $1.80 Cumulative Convertible Preferred Incorporated herein as part of Exhibit 3.1. Stock -- Series B. 4.4 Designation of Series: $1.60 Cumulative Convertible Preferred Incorporated herein as part of Exhibit 3.1. Stock -- Series C. 4.5 Designation of Series: $1.80 Cumulative Convertible Preferred Incorporated herein as part of Exhibit 3.1. Stock -- Series D. 4.6 Designation of Series: Fixed/Adjustable Rate Noncumulative Incorporated herein as part of Exhibit 3.1. Preferred Stock -- Series F. 10.1 Supplemental Executive Retirement Income and Disability Plan of Incorporated herein by reference to the Corporation. Exhibit 10.2 of the Annual Report on Form 10-K for the year ended December 31, 1990 ("1990 Form 10-K"). * 10.2 Amendments to Supplemental Executive Retirement Income and Incorporated herein by reference to Disability Plan. Exhibit 10.2 of the Annual Report on Form 10-K for the year ended December 31, 1996 ("1996 Form 10-K). * 10.3 Supplemental Executive Life Insurance and Spouse's Benefit Plan of Incorporated herein by reference to the Corporation. Exhibit 10.3 of the 1990 Form 10-K. * 10.4 November 21, 1996 Amendment to Supplemental Executive Life Incorporated herein by reference to Insurance and Spouse's Benefit Plan. Exhibit 10.4 of the 1996 Form 10-K. * 10.5 1997 Long-Term Incentive Award Plan of the Corporation ("1997 Incorporated herein by reference to Award Plan"). Exhibit 4.3 of the Corporation's Post-Effective Amendment No. 1 to Registration Statement on Form S-8 at File No. 33-54960. * 10.6 Form of Nonstatutory Stock Option Agreement under 1997 Award Plan. Filed herewith. * 10.7 Form of Incentive Share Agreement under 1992 Award Plan (June Incorporated herein by reference to 1995), as amended November 21, 1996. Exhibit 10.7 of the 1996 Form 10-K. * 10.8 Form of Addendum to Nonstatutory Stock Option Agreement relating Filed herewith. * to Reload Nonstatutory Stock Options. 10.9 Form of Reload Nonstatutory Stock Option Agreement. Filed herewith. * 10.10 Form of Incentive Share Agreement - Share Price, RSR and ROCE Filed herewith. * Performance Goals.
E-1 10 10.11 PNC Bank Corp. 1994 Annual Incentive Award Plan. Incorporated by reference to Exhibit 10.6 of the Annual Report on Form 10-K for the year ended December 31, 1994 ("1994 Form 10-K"). * 10.12 PNC Bank Corp. 1996 Executive Incentive Award Plan. Incorporated by reference to Exhibit 10.2 of the Quarterly Report on Form 10-Q for the quarter ended September 30, 1996 ("3Q 1996 Form 10-Q"). * 10.13 PNC Bank Corp. and Affiliates Deferred Compensation Plan. Incorporated by reference to Exhibit 4.2 to the Corporation's Registration Statement on Form S-8 at File No. 333-18069. * 10.14 PNC Bank Corp. Supplemental Incentive Savings Plan as amended. Incorporated by reference to Exhibit 4.1 to the Corporation's Registration Statement on Form S-8 at File No. 333-18069. * 10.15 PNC Bank Corp. Supplemental Pension Plan, as amended. Incorporated herein by reference to Exhibit 10.12 of the 1996 Form 10-K. * 10.16 1992 Director Share Incentive Plan. Incorporated herein by reference to Exhibit 10.6 of the Annual Report on Form 10-K for the year ended December 31, 1992. * 10.17 PNC Bank Corp. Directors Retirement Plan. Incorporated by reference to Exhibit 10.7 of the 1994 Form 10-K. * 10.18 PNC Bank Corp. Directors Deferred Compensation Plan. Incorporated by reference to Exhibit 10.1 of the 3Q 1996 Form 10-Q. * 10.19 Form of Change in Control Severance Agreement. Incorporated herein by reference to Exhibit 10.17 of the 1996 Form 10-K. * 10.20 Amended and Restated Trust Agreement between the Corporation, as Incorporated herein by reference to Settlor, and NationsBank, N.A., as Trustee (who has been Exhibit 10.18 of the 1996 Form 10-K. * replaced by Hershey Trust Company, as successor Trustee). 12.1 Computation of Ratio of Earnings to Fixed Charges. Filed herewith. 12.2 Computation of Ratio of Earnings to Combined Fixed Charges and Filed herewith. Preferred Dividends. 13 Excerpts from the Annual Report to Shareholders for the year Filed herewith. ended December 31, 1997. Such Annual Report, except for those portions thereof that are expressly incorporated by reference herein, is furnished for information of the SEC only and is not deemed to be "filed" as part of this Form 10-K. 21 Schedule of Certain Subsidiaries of the Corporation. Filed herewith. 23 Consent of Ernst & Young LLP, independent auditors for the Filed herewith. Corporation. 24 Power of Attorney of directors and officers of the Corporation. Filed herewith. 27.1 Financial Data Schedule. Filed herewith. 27.2 Restated Financial Data Schedule. Filed herewith. 27.3 Restated Financial Data Schedule. Filed herewith.
- -------------------------------------------------------------------- + Except where otherwise expressly noted, incorporated document references are to Commission File No. 1-9718. * Denotes management contract or compensatory plan. E-2 EX-10.6 2 PNC BANK CORP. 1 EXHIBIT 10.6 PNC BANK CORP. 1997 LONG-TERM INCENTIVE AWARD PLAN NONSTATUTORY STOCK OPTION AGREEMENT OPTIONEE: DATE OF GRANT: OPTION PRICE PER SHARE: COVERED SHARES: Terms defined in the 1997 Long-Term Incentive Award Plan ("PLAN") of PNC Bank Corp. ("CORPORATION") are used in this Agreement as defined in the Plan unless otherwise defined in this Agreement. For certain definitions, see Annex C attached hereto and incorporated herein by reference. 1. GRANT OF OPTION. Pursuant to the Plan and subject to the terms of this Agreement, the Corporation hereby grants to the Optionee an Option to purchase from the Corporation that number of Shares specified above as the "Covered Shares," exercisable at the Option Price. 2. TERMS OF THE OPTION. 2.1 TYPE OF OPTION. The Option is intended to be a Nonstatutory Stock Option without Rights. 2.2 OPTION PERIOD. The Option is exercisable, in whole or in part, at any time and from time to time upon the earliest to occur of (i) the first anniversary of the Date of Grant, (ii) the date of termination of the Optionee's employment with the Corporation by reason of death or permanent and total disability, and (iii) the date of termination of the Optionee's employment during a Coverage Period either by the Corporation without Cause or by the Optionee with Good Reason, provided that in the case of clause (iii) that such termination is at least six months after the Date of Grant. The Option shall remain exercisable until the Date of Expiration. 2.3 NONTRANSFERABILITY. The Option is not transferable by the Optionee other than by will or by the laws of descent and distribution, and is exercisable, during the Optionee's lifetime, only by the Optionee or, in the event of the Optionee's legal disability, by the Optionee's legal representative. 3. CAPITAL ADJUSTMENTS. The number and class of unexercised Covered Shares and the Option Price shall be subject to such adjustment, if any, as the Committee in its sole discretion deems appropriate to reflect such events as stock dividends, stock splits, recapitalizations, mergers, consolidations or reorganizations. 4. EXERCISE OF OPTION. 4.1 NOTICE AND EFFECTIVE DATE. The Option may be exercised, in whole or in part, by delivering to the Corporation written notice of such exercise, in such form as the Committee may from time to time prescribe, accompanied by full payment of (a) the Option Price with respect to that portion of the Option being exercised and (b) any amounts required to be withheld pursuant to applicable tax laws in connection with such exercise. In addition, the Optionee may elect to use the cashless exercise procedure provided for pursuant to Section 4.2 hereof. The effective date of such exercise shall be the Date of Exercise. Until the Committee notifies the Optionee to the contrary, the form attached to this Agreement as Annex A shall be used to exercise the Option granted hereunder. 4.2 PAYMENT OF THE OPTION PRICE. Upon exercise of the Option, in whole or in part, the Optionee may pay the aggregate Option Price in cash, by delivering duly endorsed certificates representing whole Shares having aggregate Fair Market Value on the Date of Exercise not exceeding that portion of the Option Price being paid by delivery of such Shares, or through a combination of cash and Shares; provided, however, that no Shares may be used to pay any portion of the Option Price that have not been held for at least six months prior to the Date of Exercise or such other period as may be specified by the Committee. Notwithstanding the foregoing, the Optionee may elect to complete his or her option exercise through a brokerage service/margin account pursuant to the cashless option exercise procedure under Regulation T of the Board of Governors of the Federal Reserve System and in such manner as may be permitted by the Committee from time to time, consistent with said Regulation. 4.3 PAYMENT OF TAXES. The Optionee may elect to satisfy applicable tax withholding requirements by payment of cash or, subject to such terms and conditions as the Committee may from time to time establish to satisfy any or all federal, state, or local tax liabilities incurred upon such exercise, through retention by the Corporation of Shares otherwise issuable upon such exercise or by delivery to the Corporation of previously acquired Shares. Until the Committee notifies the Optionee to the contrary, the form attached to this Agreement as Annex B shall be used to make such election. 4.4 EFFECT. The exercise, in whole or in part, of the Option shall cause a reduction in the number of unexercised Covered Shares equal to the number of Shares with respect to which the Option is exercised. 5. RESTRICTIONS ON EXERCISE AND UPON SHARES ISSUED UPON EXERCISE. Notwithstanding any other provision of this Agreement, the Optionee agrees, for himself (herself) and his (her) successors, that the Option may not be exercised at any time that the Corporation does not have in effect a registration statement under the Securities Act of 1933, as amended, relating to the offer of Shares under the Plan, unless the Corporation agrees to permit such exercise. The Optionee further agrees, for himself (herself) and his (her) successors, that, upon the issuance of any Shares pursuant to the exercise of the Option, he (she) will, upon the request of the Corporation, agree in writing that he (she) is acquiring such Shares for investment only and not with a view to resale, and that he (she) will not sell, pledge, or otherwise dispose of such Shares unless and until (a) the Corporation is furnished with an opinion of counsel to the effect 2 that registration of such Shares pursuant to the Securities Act of 1933, as amended, is not required by that Act or by rules and regulations promulgated thereunder; (b) the staff of the Securities and Exchange Commission has issued a "no-action" letter with respect to such disposition; or (c) such registration or notification as is, in the opinion of counsel for the Corporation, required for the lawful disposition of such Shares has been filed and has become effective; provided, however, that the Corporation is not obligated hereby to file any such registration or notification. The Optionee further agrees that the Corporation may place a legend embodying such restriction on the certificates evidencing such Shares. 6. RIGHTS AS SHAREHOLDER. The Optionee shall have no rights as a Shareholder with respect to any Covered Shares until such time as the Option is exercised and then only with respect to those Shares issued upon such exercise. 7. EMPLOYMENT. Neither the granting of the Option evidenced by this Agreement nor any term or provision of this Agreement shall constitute or be evidence of any understanding, expressed or implied, on the part of the Corporation or any of its subsidiaries to employ the Optionee for any period. References in this Agreement to the employment of the Optionee with the Corporation shall include employment with any subsidiary of the Corporation. 8. SUBJECT TO THE PLAN. The Option evidenced by this Agreement and the exercise thereof are subject to the terms and conditions of the Plan, which is incorporated by reference herein and made a part hereof, but the terms of the Plan shall not be considered an enlargement of any benefits under this Agreement. In addition, the Option is subject to any rules and regulations promulgated by the Committee. IN WITNESS WHEREOF, the Corporation has caused this Agreement to be signed on its behalf effective as of the Date of Grant. PNC BANK CORP. By: ________________________________ Chairman and Chief Executive Officer ATTEST: ____________________________________ Secretary ACCEPTED AND AGREED TO AS OF THE DATE OF GRANT. Optionee Annex A - Option Exercise Form (Intentionally omitted) Annex B - Tax Payment Election From (Intentionally omitted) Annex C - Certain Definitions 2 3 ANNEX C TO PNC BANK CORP. 1997 LONG-TERM INCENTIVE AWARD PLAN NONSTATUTORY STOCK OPTION AGREEMENT CERTAIN DEFINITIONS Except where the context otherwise indicates, the following definitions apply to the Nonstatutory Stock Option Agreement (the "AGREEMENT") to which this Annex C is attached: C.1 "CAUSE" means: (a) the willful and continued failure of the Optionee to substantially perform the Optionee's duties with the Corporation (other than any such failure resulting from incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to the Optionee by the Board or the Chief Executive Officer of the Corporation which specifically identifies the manner in which the Board or Chief Executive Officer believes that the Optionee has not substantially performed the Optionee's duties; or (b) the willful engaging by the Optionee in illegal conduct or gross misconduct that is materially and demonstrably injurious to the Corporation. For purposes of the preceding clauses (a) and (b), no act or failure to act, on the part of the Optionee, shall be considered "willful" unless it is done, or omitted to be done, by the Optionee in bad faith and without reasonable belief that the Optionee's action or omission was in the best interests of the Corporation. Any act, or failure to act, based upon the instructions or prior approval of the Board, the Chief Executive Officer or the Optionee's superior or based upon the advice of counsel for the Corporation, shall be conclusively presumed to be done, or omitted to be done, by the Optionee in good faith and in the best interests of the Corporation. The cessation of employment of the Optionee shall not be deemed to be for Cause unless and until there shall have been delivered to the Optionee, as part of the notice of the Optionee's termination, a copy of a resolution duly adopted by the affirmative vote of not less than a majority of the entire membership of the Board, at a Board meeting called and held for the purpose of considering such termination, finding that, in the good faith opinion of the Board, the Optionee is guilty of the conduct described in clause (a) or (b) above and specifying the particulars thereof in detail. Such resolution shall be adopted only after reasonable notice of such Board meeting is provided to the Optionee and the Optionee is given an opportunity, together with counsel, to be heard before the Board. C.2 "CHANGE IN CONTROL" means a change of control of the Corporation of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A (or in response to any similar item on any similar schedule or form) promulgated under the Exchange Act, whether or not the Corporation is then subject to such reporting requirement; provided, however, that without limitation, a Change in Control shall be deemed to have occurred if: (a) any Person, excluding employee benefit plans of the Corporation, is or becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act or any successor provisions thereto), directly or indirectly, of securities of the Corporation representing twenty percent (20%) or more of the combined voting power of the Corporation's then outstanding securities, provided, however, that such an acquisition of beneficial ownership representing between twenty percent (20%) and forty percent (40%), inclusive, of such voting power shall not be considered a Change in Control if the Board approves such acquisition either prior to or immediately after its occurrence; (b) the Corporation consummates a merger, consolidation, share exchange, division or other reorganization or transaction of the Corporation (a "FUNDAMENTAL TRANSACTION") with any other corporation, other than a Fundamental Transaction that results in the voting securities of the Corporation outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least sixty percent (60%) of the combined voting power immediately after such Fundamental Transaction of (i) the Corporation's outstanding securities, (ii) the surviving entity's outstanding securities, or (iii) in the case of a division, the outstanding securities of each entity resulting from the division; (c) the shareholders of the Corporation approve a plan of complete liquidation or winding-up of the Corporation or an agreement for the sale or disposition (in one transaction or a series of transactions) of all or substantially all of the Corporation's assets; (d) as a result of a proxy contest, individuals who prior to the conclusion thereof constituted the Board (including for this purpose any new director whose election or nomination for election by the Corporation's shareholders in connection with such proxy contest was approved by a vote of at least two-thirds (2/3) of the directors then still in office who were directors prior to such proxy contest) cease to constitute at least a majority of the Board (excluding any Board seat that is vacant or otherwise unoccupied); (e) during any period of twenty-four consecutive months, individuals who at the beginning of such period constituted the Board (including for this purpose any new director whose election or nomination for election by the Corporation's shareholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who were directors at the beginning of such period) cease for any reason to constitute at least a majority of the Board (excluding any Board seat that is vacant or otherwise unoccupied); or (f) the Board determines that a Change in Control has occurred. Notwithstanding anything to the contrary herein, a divestiture or spin-off of a subsidiary or division of the Corporation shall not by itself constitute a "Change in Control." C.3 "CIC FAILURE" means the following: (a) with respect to a CIC Triggering Event described in Section C.4(a), the Corporation's shareholders vote against the transaction approved by the Board or the agreement to consummate the transaction is terminated; or C-1 4 (b) with respect to a CIC Triggering Event described in Section C.4(b), the proxy contest fails to replace or remove a majority of the members of the Board. C.4 "CIC TRIGGERING EVENT" means the occurrence of either of the following: (a) the Board or the Corporation's shareholders approve a transaction described in Subsection (b) of the definition of Change in Control contained in Section C.2 hereof; or (b) the commencement of a proxy contest in which any Person seeks to replace or remove a majority of the members of the Board. C.5 "COVERAGE PERIOD" means a period commencing on the earlier to occur of (i) the date of a CIC Triggering Event and (ii) the date of a Change in Control, and ending on the date that is two years after the date of the Change in Control, provided, however, that in the event that a Coverage Period commences on the date of a CIC Triggering Event such Coverage Period shall terminate upon the earlier to occur of (x) the date of a CIC Failure and (y) the date that is two years after the date of the Change in Control triggered by the CIC Triggering Event. After the termination of any Coverage Period, another Coverage Period shall commence upon the earlier to occur of clauses (i) and (ii) in the preceding sentence. C.6 "DATE OF EXERCISE" means the date on which the Corporation receives written notice of the exercise in such form as the Committee may from time to time prescribe, in whole or in part, of the Option pursuant to the terms of the Agreement. C.7 "DATE OF EXPIRATION" means the date on which the Option shall expire, which shall be the earliest of the following times: (a) upon retirement of the Optionee from employment with the Corporation prior to the date that the Option becomes exercisable pursuant to Section 2.2 of the Agreement; (b) upon termination of the Optionee's employment with the Corporation for Cause; (c) upon termination of the Optionee's employment with the Corporation for any reason other than (i) Cause, (ii) retirement, (iii) death, (iv) permanent and total disability or (v) termination during a Coverage Period by the Corporation without Cause or by the Optionee with Good Reason, unless the Committee determines otherwise; (d) one year after termination of the Optionee's employment with the Corporation by reason of death; (e) three years after the termination of the Optionee's employment with the Corporation by reason of (i) retirement on or after the date that the Option becomes exercisable pursuant to Section 2.2 of the Agreement, (ii) permanent and total disability, or (iii) termination during a Coverage Period by the Corporation without Cause or by the Optionee with Good Reason; and (f) ten years after the Date of Grant. C.8 "DATE OF GRANT" means the date set forth as the "Date of Grant" on page 1 of the Agreement. C.9 "GOOD REASON" means: (a) the assignment to the Optionee of any duties inconsistent in any respect with the Optionee's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities immediately prior to either the CIC Triggering Event or the Change in Control, or any other action by the Corporation which results in a diminution in any respect in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith that is remedied by the Corporation promptly after receipt of notice thereof given by the Optionee; (b) a reduction by the Corporation in the Optionee's annual base salary as in effect on the Date of Grant, as the same may be increased from time to time; (c) the Corporation's requiring the Optionee to be based at any office or location that is more than fifty (50) miles from the Optionee's office or location immediately prior to either the CIC Triggering Event or the Change in Control; (d) the failure by the Corporation (i) to continue in effect any bonus, stock option or other cash or equity-based incentive plan in which the Optionee participates immediately prior to either the CIC Triggering Event or the Change in Control that is material to the Optionee's total compensation, unless a substantially equivalent arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan, or (ii) to continue the Optionee's participation in such plan (or in such substitute or alternative plan) on a basis at least as favorable, both in terms of the amount of benefits provided and the level of the Optionee's participation relative to other participants, as existed immediately prior to the CIC Triggering Event or the Change in Control; or (e) the failure by the Corporation to continue to provide the Optionee with benefits substantially similar to those received by the Optionee under any of the Corporation's pension (including, but not limited to, tax-qualified plans), life insurance, health, accident, disability or other welfare plans in which the Optionee was participating, at costs substantially similar to those paid by the Optionee, immediately prior to the CIC Triggering Event or the Change in Control. C.10 "OPTION" means the Nonstatutory Stock Option granted to the Optionee in Section 1 of the Agreement pursuant to which the Optionee may purchase Shares as provided in the Agreement. C.11 "OPTION PRICE" means the dollar amount per Share set forth as the "Option Price" on page 1 of the Agreement. C.12 "OPTIONEE" means the person identified as the "Optionee" on page 1 of the Agreement. C.13 "PERSON" has the meaning given in Section 3(a)(9) of the Exchange Act and also includes any syndicate or group deemed to be a "person" under Section 13(d)(3) of the Exchange Act. C-2 EX-10.8 3 PNC BANK CORP. 1 EXHIBIT 10.8 PNC BANK CORP. 1997 LONG-TERM INCENTIVE AWARD PLAN ADDENDUM TO NONSTATUTORY STOCK OPTION AGREEMENT ("AGREEMENT") DATED OPTIONEE: DATE OF GRANT: OPTION PRICE PER SHARE: COVERED SHARES: THIS ADDENDUM to the Agreement is made and entered into by and between PNC Bank Corp. ("CORPORATION") and the Optionee identified above in order to provide for the grant of a certain additional option ("RELOAD OPTION") upon the terms and conditions set forth in this Addendum and a Reload Nonstatutory Stock Option Agreement subsequently signed by the parties. 1. DEFINITIONS. Terms defined in the Corporation's 1997 Long-Term Incentive Award Plan, as amended from time to time ("PLAN") or the Agreement are used in this Addendum as defined in the Plan or the Agreement, unless otherwise defined in this Addendum. 2. GRANT OF RELOAD OPTION. Provided that the Optionee exercises all or a portion of the original Option while a Senior Executive and in the manner specified in Section 3 below, the Optionee shall be granted a Reload Option upon the terms and conditions set forth in a Reload Nonstatutory Stock Option Agreement to be entered into by the Optionee and the Corporation following the exercise of the original Option; provided, however, that the Committee in its sole discretion may cancel the Optionee's right to receive a Reload Option at any time prior to the first anniversary of the Date of Grant shown above. 3. REQUIRED MANNER OF ORIGINAL OPTION EXERCISE. In order to receive a Reload Option, the Optionee must exercise all or a portion of the original Option, or satisfy any related tax withholding obligation, through the surrender (including by means of an attestation procedure) of whole shares of Common Stock which are not subject to any contractual restriction, pledge or other encumbrance and which have been owned by the Optionee for at least six months prior to the Date of Exercise ("ELIGIBLE SHARES"). The Optionee may also elect to satisfy any related tax withholding obligation by the use of shares of Common Stock acquired upon exercise of the Option, but shall be entitled to receive a Reload Option with respect to such shares only to the extent permitted in Section 4(b) below. 4. NATURE OF RELOAD OPTION. (a) A Reload Option will be to purchase, at Fair Market Value as of the original Option's Date of Exercise, a number of shares of Common Stock equal to the number of Eligible Shares surrendered (including by means of an attestation procedure) by the Optionee to exercise the original Option or to satisfy any related tax withholding obligation. (b) If the Optionee elects to satisfy any related tax withholding obligation by the use of shares of Common Stock acquired upon exercise of the Option ("TAX SHARES"), the Optionee shall be granted a Reload Option with respect to those shares only if he or she has first attested to the ownership of a number of Eligible Shares at least equal to the number of Tax Shares for which a Reload Option is sought and in excess of the number of Eligible Shares surrendered (including by means of an attestation procedure) to exercise the original Option. (c) Subject generally to the lapse of a one-year vesting period beginning upon the Reload Option's Date of Grant, a Reload Option will be exercisable only between its Date of Grant and the original Option's Date of Expiration, and only in accordance with the terms and conditions of the governing Reload Nonstatutory Stock Option Agreement. 5. NO ADDITIONAL RELOAD OPTION. No Reload Option will entitle the Optionee to receive a Reload Option upon its exercise. IN WITNESS WHEREOF, the Corporation has caused this Addendum to be signed on its behalf, effective as of the Date of Grant. PNC BANK CORP. By: ________________________________ Chairman and Chief Executive Officer ATTEST ____________________________________ Secretary ACCEPTED AND AGREED TO AS OF THE DATE OF GRANT: ____________________________________ Optionee EX-10.9 4 PNC BANK CORP. 1 EXHIBIT 10.9 PNC BANK CORP. 1997 LONG-TERM INCENTIVE AWARD PLAN RELOAD NONSTATUTORY STOCK OPTION AGREEMENT OPTIONEE: DATE OF EXERCISED OPTION GRANT: DATE OF RELOAD OPTION GRANT: RELOAD OPTION PRICE PER SHARE: COVERED SHARES: The Optionee, having exercised all or a portion of the Nonstatutory Stock Option granted under that Nonstatutory Stock Option Agreement effective as of _________________, 19____ in a manner specified in the Addendum to that Agreement, is entitled to receive and is hereby granted (upon complete execution of this Agreement) a reload option, upon the terms and conditions set forth in this Reload Nonstatutory Stock Option Agreement. Terms defined in the 1997 Long-Term Incentive Award Plan ("PLAN") of PNC Bank Corp. ("CORPORATION") are used in this Agreement as defined in the Plan unless otherwise defined in this Agreement. For certain definitions, see Annex C attached hereto and incorporated herein by reference. 1. GRANT OF OPTION. Pursuant to the Plan and subject to the terms of this Agreement, the Corporation hereby grants to the Optionee an Option to purchase from the Corporation that number of Shares specified above as the "Covered Shares," exercisable at the Option Price. 2. TERMS OF THE OPTION. 2.1 TYPE OF OPTION. The Option is intended to be a Nonstatutory Stock Option without Rights. 2.2 OPTION PERIOD. The Option is exercisable, in whole or in part, at any time and from time to time upon the earliest to occur of (i) the first anniversary of the Date of Grant, (ii) the date of termination of the Optionee's employment with the Corporation by reason of death or permanent and total disability, and (iii) the date of termination of the Optionee's employment during a Coverage Period either by the Corporation without Cause or by the Optionee with Good Reason, provided in the case of clause (iii) that such termination is at least six months after the Date of Grant. The Option shall remain exercisable until the Date of Expiration. 2.3 NONTRANSFERABILITY. The Option is not transferable by the Optionee other than by will or by the laws of descent and distribution, and is exercisable, during the Optionee's lifetime, only by the Optionee or, in the event of the Optionee's legal disability, by the Optionee's legal representative. 3. CAPITAL ADJUSTMENTS. The number and class of unexercised Covered Shares and the Option Price shall be subject to such adjustment, if any, as the Committee in its sole discretion deems appropriate to reflect such events as stock dividends, stock splits, recapitalizations, mergers, consolidations or reorganizations. 4. EXERCISE OF OPTION. 4.1 NOTICE AND EFFECTIVE DATE. The Option may be exercised, in whole or in part, by delivering to the Corporation written notice of such exercise, in such form as the Committee may from time to time prescribe, accompanied by full payment of (a) the Option Price with respect to that portion of the Option being exercised and (b) any amounts required to be withheld pursuant to applicable tax laws in connection with such exercise. In addition, the Optionee may elect to use the cashless exercise procedure provided for pursuant to Section 4.2 hereof. The effective date of such exercise shall be the Date of Exercise. Until the Committee notifies the Optionee to the contrary, the form attached to this Agreement as Annex A shall be used to exercise the Option granted hereunder. 4.2 PAYMENT OF THE OPTION PRICE. Upon exercise of the Option, in whole or in part, the Optionee may pay the aggregate Option Price in cash, by delivering (including through the use of an attestation procedure approved or ratified by the Committee) duly endorsed certificates representing whole Shares having aggregate Fair Market Value on the Date of Exercise not exceeding that portion of the Option Price being paid by delivery of such Shares, or through a combination of cash and Shares; provided, however, that no Shares may be used to pay any portion of the Option Price that have not been held for at least six months prior to the Date of Exercise or such other period as may be specified by the Committee. Notwithstanding the 2 foregoing, the Optionee may elect to complete his or her option exercise through a brokerage service/margin account pursuant to the cashless option exercise procedure under Regulation T of the Board of Governors of the Federal Reserve System and in such manner as may be permitted by the Committee from time to time, consistent with said Regulation. 4.3 PAYMENT OF TAXES. The Optionee may elect to satisfy applicable tax withholding requirements by payment of cash or, subject to such terms and conditions as the Committee may from time to time establish to satisfy any or all federal, state, or local tax liabilities incurred upon such exercise, through retention by the Corporation of Shares otherwise issuable upon such exercise or by delivery to the Corporation (including through the use of an attestation procedure approved or ratified by the Committee) of previously acquired Shares. Until the Committee notifies the Optionee to the contrary, the form attached to this Agreement as Annex B shall be used to make such election. 4.4 EFFECT. The exercise, in whole or in part, of the Option shall cause a reduction in the number of unexercised Covered Shares equal to the number of Shares with respect to which the Option is exercised. 4.5 NO ADDITIONAL RELOAD OPTION. The exercise of the Option shall not entitle the Optionee to receive an additional reload option, regardless of the manner in which the Option is exercised. 5. RESTRICTIONS ON EXERCISE AND UPON SHARES ISSUED UPON EXERCISE. Notwithstanding any other provision of this Agreement, the Optionee agrees, for himself (herself) and his (her) successors, that the Option may not be exercised at any time that the Corporation does not have in effect a registration statement under the Securities Act of 1933, as amended, relating to the offer of Shares under the Plan, unless the Corporation agrees to permit such exercise. The Optionee further agrees, for himself (herself) and his (her) successors, that, upon the issuance of any Shares pursuant to the exercise of the Option, he (she) will, upon the request of the Corporation, agree in writing that he (she) is acquiring such Shares for investment only and not with a view to resale, and that he (she) will not sell, pledge, or otherwise dispose of such Shares unless and until (a) the Corporation is furnished with an opinion of counsel to the effect that registration of such Shares pursuant to the Securities Act of 1933, as amended, is not required by that Act or by rules and regulations promulgated thereunder; (b) the staff of the Securities and Exchange Commission has issued a "no-action" letter with respect to such disposition; or (c) such registration or notification as is, in the opinion of counsel for the Corporation, required for the lawful disposition of such Shares has been filed and has become effective; provided, however, that the Corporation is not obligated hereby to file any such registration or notification. The Optionee further agrees that the Corporation may place a legend embodying such restriction on the certificates evidencing such Shares. 6. RIGHTS AS SHAREHOLDER. The Optionee shall have no rights as a Shareholder with respect to any Covered Shares until such time as the Option is exercised and then only with respect to those Shares issued upon such exercise. 7. EMPLOYMENT. Neither the granting of the Option evidenced by this Agreement nor any term or provision of this Agreement shall constitute or be evidence of any understanding, expressed or implied, on the part of the Corporation or any of its subsidiaries to employ the Optionee for any period. References in this Agreement to the employment of the Optionee with the Corporation shall include employment with any subsidiary of the Corporation. 8. SUBJECT TO THE PLAN. The Option evidenced by this Agreement and the exercise thereof are subject to the terms and conditions of the Plan, which is incorporated by reference herein and made a part hereof, but the terms of the Plan shall not be considered an enlargement of any benefits under this Agreement. In addition, the Option is subject to any rules and regulations promulgated by the Committee. IN WITNESS WHEREOF, the Corporation has caused this Agreement to be signed on its behalf, effective as of the Date of Grant. PNC BANK CORP. By: ________________________________ Chairman and Chief Executive Officer ATTEST: ____________________________________ Secretary ACCEPTED AND AGREED TO AS OF THE DATE OF GRANT. ____________________________________ Optionee Annex A - Option Exercise Form (Intentionally omitted) Annex B - Tax Payment Election Form (Intentionally omitted) Annex C - Certain Definitions 2 3 ANNEX C TO PNC BANK CORP. 1997 LONG-TERM INCENTIVE AWARD PLAN RELOAD NONSTATUTORY STOCK OPTION AGREEMENT CERTAIN DEFINITIONS Except where the context otherwise indicates, the following definitions apply to the Reload Nonstatutory Stock Option Agreement (the "AGREEMENT") to which this Annex C is attached: C.1 "CAUSE" means: (a) the willful and continued failure of the Optionee to substantially perform the Optionee's duties with the Corporation (other than any such failure resulting from incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to the Optionee by the Board or the Chief Executive Officer of the Corporation which specifically identifies the manner in which the Board or Chief Executive Officer believes that the Optionee has not substantially performed the Optionee's duties; or (b) the willful engaging by the Optionee in illegal conduct or gross misconduct that is materially and demonstrably injurious to the Corporation. For purposes of the preceding clauses (a) and (b), no act or failure to act, on the part of the Optionee, shall be considered "willful" unless it is done, or omitted to be done, by the Optionee in bad faith and without reasonable belief that the Optionee's action or omission was in the best interests of the Corporation. Any act, or failure to act, based upon the instructions or prior approval of the Board, the Chief Executive Officer or the Optionee's superior or based upon the advice of counsel for the Corporation, shall be conclusively presumed to be done, or omitted to be done, by the Optionee in good faith and in the best interests of the Corporation. The cessation of employment of the Optionee shall not be deemed to be for Cause unless and until there shall have been delivered to the Optionee, as part of the notice of the Optionee's termination, a copy of a resolution duly adopted by the affirmative vote of not less than a majority of the entire membership of the Board, at a Board meeting called and held for the purpose of considering such termination, finding that, in the good faith opinion of the Board, the Optionee is guilty of the conduct described in clause (a) or (b) above and specifying the particulars thereof in detail. Such resolution shall be adopted only after reasonable notice of such Board meeting is provided to the Optionee and the Optionee is given an opportunity, together with counsel, to be heard before the Board. C.2 "CHANGE IN CONTROL" means a change of control of the Corporation of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A (or in response to any similar item on any similar schedule or form) promulgated under the Exchange Act, whether or not the Corporation is then subject to such reporting requirement; provided, however, that without limitation, a Change in Control shall be deemed to have occurred if: (a) any Person, excluding employee benefit plans of the Corporation, is or becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act or any successor provisions thereto), directly or indirectly, of securities of the Corporation representing twenty percent (20%) or more of the combined voting power of the Corporation's then outstanding securities, provided, however, that such an acquisition of beneficial ownership representing between twenty percent (20%) and forty percent (40%), inclusive, of such voting power shall not be considered a Change in Control if the Board approves such acquisition either prior to or immediately after its occurrence; (b) the Corporation consummates a merger, consolidation, share exchange, division or other reorganization or transaction of the Corporation (a "FUNDAMENTAL TRANSACTION") with any other corporation, other than a Fundamental Transaction that results in the voting securities of the Corporation outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least sixty percent (60%) of the combined voting power immediately after such Fundamental Transaction of (i) the Corporation's outstanding securities, (ii) the surviving entity's outstanding securities, or (iii) in the case of a division, the outstanding securities of each entity resulting from the division; (c) the shareholders of the Corporation approve a plan of complete liquidation or winding-up of the Corporation or an agreement for the sale or disposition (in one transaction or a series of transactions) of all or substantially all of the Corporation's assets; (d) as a result of a proxy contest, individuals who prior to the conclusion thereof constituted the Board (including for this purpose any new director whose election or nomination for election by the Corporation's shareholders in connection with such proxy contest was approved by a vote of at least two-thirds (2/3) of the directors then still in office who were directors prior to such proxy contest) cease to constitute at least a majority of the Board (excluding any Board seat that is vacant or otherwise unoccupied); (e) during any period of twenty-four consecutive months, individuals who at the beginning of such period constituted the Board (including for this purpose any new director whose election or nomination for election by the Corporation's shareholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who were directors at the beginning of such period) cease for any reason to constitute at least a majority of the Board (excluding any Board seat that is vacant or otherwise unoccupied); or (f) the Board determines that a Change in Control has occurred. Notwithstanding anything to the contrary herein, a divestiture or spin-off of a subsidiary or division of the Corporation shall not by itself constitute a "Change in Control." C.3 "CIC FAILURE" means the following: (a) with respect to a CIC Triggering Event described in Section C.4(a), the Corporation's shareholders vote against the transaction approved by the Board or the agreement to consummate the transaction is terminated; or C-1 4 (b) with respect to a CIC Triggering Event described in Section C.4(b), the proxy contest fails to replace or remove a majority of the members of the Board. C.4 "CIC TRIGGERING EVENT" means the occurrence of either of the following: (a) the Board or the Corporation's shareholders approve a transaction described in Subsection (b) of the definition of Change in Control contained in Section C.2 hereof; or (b) the commencement of a proxy contest in which any Person seeks to replace or remove a majority of the members of the Board. C.5 "COVERAGE PERIOD" means a period commencing on the earlier to occur of (i) the date of a CIC Triggering Event and (ii) the date of a Change in Control, and ending on the date that is two years after the date of the Change in Control, provided, however, that in the event that a Coverage Period commences on the date of a CIC Triggering Event such Coverage Period shall terminate upon the earlier to occur of (x) the date of a CIC Failure and (y) the date that is two years after the date of the Change in Control triggered by the CIC Triggering Event. After the termination of any Coverage Period, another Coverage Period shall commence upon the earlier to occur of clauses (i) and (ii) in the preceding sentence. C.6 "DATE OF EXERCISE" means the date on which the Corporation receives written notice of the exercise in such form as the Committee may from time to time prescribe, in whole or in part, of the Option pursuant to the terms of the Agreement. C.7 "DATE OF EXPIRATION" means the date on which the Option shall expire, which shall be the earliest of the following times: (a) upon retirement of the Optionee from employment with the Corporation prior to the date that the Option becomes exercisable pursuant to Section 2.2 of the Agreement; (b) upon termination of the Optionee's employment with the Corporation for Cause; (c) upon termination of the Optionee's employment with the Corporation for any reason other than (i) Cause, (ii) retirement, (iii) death, (iv) permanent and total disability or (v) termination during a Coverage Period by the Corporation without Cause or by the Optionee with Good Reason, unless the Committee determines otherwise; (d) one year after termination of the Optionee's employment with the Corporation by reason of death; (e) three years after the termination of the Optionee's employment with the Corporation by reason of (i) retirement on or after the date that the Option becomes exercisable pursuant to Section 2.2 of the Agreement, (ii) permanent and total disability, or (iii) termination during a Coverage Period by the Corporation without Cause or by the Optionee with Good Reason; and (f) ten years after the Date of Exercised Option Grant set forth on page 1 of the Agreement. C.8 "DATE OF GRANT" means the date set forth as the "Date of Reload Option Grant" on page 1 of the Agreement. C.9 "GOOD REASON" means: (a) the assignment to the Optionee of any duties inconsistent in any respect with the Optionee's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities immediately prior to either the CIC Triggering Event or the Change in Control, or any other action by the Corporation which results in a diminution in any respect in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith that is remedied by the Corporation promptly after receipt of notice thereof given by the Optionee; (b) a reduction by the Corporation in the Optionee's annual base salary as in effect on the Date of Grant, as the same may be increased from time to time; (c) the Corporation's requiring the Optionee to be based at any office or location that is more than fifty (50) miles from the Optionee's office or location immediately prior to either the CIC Triggering Event or the Change in Control; (d) the failure by the Corporation (i) to continue in effect any bonus, stock option or other cash or equity-based incentive plan in which the Optionee participates immediately prior to either the CIC Triggering Event or the Change in Control that is material to the Optionee's total compensation, unless a substantially equivalent arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan, or (ii) to continue the Optionee's participation in such plan (or in such substitute or alternative plan) on a basis at least as favorable, both in terms of the amount of benefits provided and the level of the Optionee's participation relative to other participants, as existed immediately prior to the CIC Triggering Event or the Change in Control; or (e) the failure by the Corporation to continue to provide the Optionee with benefits substantially similar to those received by the Optionee under any of the Corporation's pension (including, but not limited to, tax-qualified plans), life insurance, health, accident, disability or other welfare plans in which the Optionee was participating, at costs substantially similar to those paid by the Optionee, immediately prior to the CIC Triggering Event or the Change in Control. C.10 "OPTION" means the Reload Nonstatutory Stock Option granted to the Optionee in Section 1 of the Agreement pursuant to which the Optionee may purchase Shares as provided in the Agreement. C.11 "OPTION PRICE" means the dollar amount per Share set forth as the "Reload Option Price Per Share" on page 1 of the Agreement. C.12 "OPTIONEE" means the person identified as the "Optionee" on page 1 of the Agreement. C.13 "PERSON" has the meaning given in Section 3(a)(9) of the Exchange Act and also includes any syndicate or group deemed to be a "person" under Section 13(d)(3) of the Exchange Act. C-2 EX-10.10 5 PNC BANK CORP. 1 EXHIBIT 10.10 Share Price, RSR and ROCE Performance Goals PNC BANK CORP. 1997 LONG-TERM INCENTIVE AWARD PLAN * * * INCENTIVE SHARE AGREEMENT GRANTEE: DATE OF GRANT: INCENTIVE SHARES: ADDITIONAL INCENTIVE SHARES (EQUALS 50% OF INCENTIVE SHARES): 1. DEFINITIONS. Terms defined in the 1997 Long-Term Incentive Award Plan ("Plan") of PNC Bank Corp. ("Corporation") are used in this Agreement as defined in the Plan unless otherwise defined in this Agreement. In addition, except where the context otherwise indicates, the following definitions apply: 1.1 "Award Date" means the first Business Day following the achievement of the Share Price Performance Goal, except as provided in Section 3.2. An Award Date shall in no event be a date later than the Termination Date. 1.2 "Awarded Shares" mean any and all Incentive Shares and Additional Incentive Shares issued to the Grantee pursuant to Section 3.1(a), Section 3.1(b) or Section 3.2 of this Agreement. 1.3 "Business Day" means any day when the New York Stock Exchange is open for business. 1.4 "Cause" means: (a) the willful and continued failure of the Grantee to substantially perform the Grantee's duties with the Corporation (other than any such failure resulting from incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to the Grantee by the Board or the Chief Executive Officer of the Corporation which specifically identifies the manner in which the Board or Chief Executive Officer believes that the Grantee has not substantially performed the Grantee's duties; or (b) the willful engaging by the Grantee in illegal conduct or gross misconduct that is materially and demonstrably injurious to the Corporation. For purposes of the preceding clauses (a) and (b), no act or failure to act, on the part of the Grantee, shall be considered "willful" unless it is done, or omitted to be done, by the Grantee in bad faith and without reasonable belief that the Grantee's action or omission was in the best interests of the Corporation. Any act, or failure to act, based upon the instructions or prior approval of the Board, the Chief Executive Officer or the Grantee's superior or based upon the advice of counsel for the Corporation, shall be conclusively presumed to be done, or omitted to be done, by the Grantee in good faith and in the best interests of the Corporation. The cessation of employment of the Grantee shall not be deemed to be for 2 Cause unless and until there shall have been delivered to the Grantee, as part of the notice of the Grantee's termination, a copy of a resolution duly adopted by the affirmative vote of not less than a majority of the entire membership of the Board, at a Board meeting called and held for the purpose of considering such termination, finding that, in the good faith opinion of the Board, the Grantee is guilty of the conduct described in clause (a) or (b) above and specifying the particulars thereof in detail. Such resolution shall be adopted only after reasonable notice of such Board meeting is provided to the Grantee and the Grantee is given an opportunity, together with counsel, to be heard before the Board. 1.5 "Change in Control" means a change of control of the Corporation of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A (or in response to any similar item on any similar schedule or form) promulgated under the Exchange Act, whether or not the Corporation is then subject to such reporting requirement; provided, however, that without limitation, a Change in Control shall be deemed to have occurred if: (a) any Person, excluding employee benefit plans of the Corporation, is or becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act or any successor provisions thereto), directly or indirectly, of securities of the Corporation representing twenty percent (20%) or more of the combined voting power of the Corporation's then outstanding securities, provided, however, that such an acquisition of beneficial ownership representing between twenty percent (20%) and forty percent (40%), inclusive, of such voting power shall not be considered a Change in Control if the Board approves such acquisition either prior to or immediately after its occurrence; (b) the Corporation consummates a merger, consolidation, share exchange, division or other reorganization or transaction of the Corporation (a "Fundamental Transaction") with any other corporation, other than a Fundamental Transaction that results in the voting securities of the Corporation outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least sixty percent (60%) of the combined voting power immediately after such Fundamental Transaction of (i) the Corporation's outstanding securities, (ii) the surviving entity's outstanding securities, or (iii) in the case of a division, the outstanding securities of each entity resulting from the division; 2 3 (c) the shareholders of the Corporation approve a plan of complete liquidation or winding-up of the Corporation or an agreement for the sale or disposition (in one transaction or a series of transactions) of all or substantially all of the Corporation's assets; (d) as a result of a proxy contest, individuals who prior to the conclusion thereof constituted the Board (including for this purpose any new director whose election or nomination for election by the Corporation's shareholders in connection with such proxy contest was approved by a vote of at least two-thirds (2/3) of the directors then still in office who were directors prior to such proxy contest) cease to constitute at least a majority of the Board (excluding any Board seat that is vacant or otherwise unoccupied); (e) during any period of twenty-four consecutive months, individuals who at the beginning of such period constituted the Board (including for this purpose any new director whose election or nomination for election by the Corporation's shareholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who were directors at the beginning of such period) cease for any reason to constitute at least a majority of the Board (excluding any Board seat that is vacant or otherwise unoccupied); or (f) the Board determines that a Change in Control has occurred. Notwithstanding anything to the contrary herein, a divestiture or spin-off of a subsidiary or division of the Corporation shall not by itself constitute a "Change in Control." 1.6 "CIC Failure" means the following: (a) with respect to a CIC Triggering Event described in Section 1.7(a), the Corporation's shareholders vote against the transaction approved by the Board or the agreement to consummate the transaction is terminated; or (b) with respect to a CIC Triggering Event described in Section 1.7(b), the proxy contest fails to replace or remove a majority of the members of the Board. 1.7 "CIC Triggering Event" means the occurrence of either of the following: (a) the Board or the Corporation's shareholders approve a transaction described in Subsection (b) of the definition of Change in Control contained in Section 1.5 hereof; or (b) the commencement of a proxy contest in which any Person seeks to replace or remove a majority of the members of the Board. 1.8 "Coverage Period" means a period commencing on the earlier to occur of (a) the date of a CIC Triggering Event and (b) the date of a Change in Control, and ending on the date that is two years after the date of the Change in Control, provided, however, that in the event that a Coverage Period commences on the date of a CIC Triggering Event such Coverage Period shall terminate upon the earlier to occur of (i) the date of a CIC Failure and (ii) the date that is two years after the date of the Change in Control triggered by the CIC Triggering Event. After the termination of any Coverage Period, another Coverage Period shall commence upon the earlier to occur of clauses (a) and (b) in the preceding sentence. 3 4 1.9 "Good Reason" means (a) the assignment to the Grantee of any duties inconsistent in any respect with the Grantee's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities immediately prior to either the CIC Triggering Event or the Change in Control, or any other action by the Corporation which results in a diminution in any respect in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith that is remedied by the Corporation promptly after receipt of notice thereof given by the Grantee; (b) a reduction by the Corporation in the Grantee's annual base salary as in effect on the Date of Grant as set forth above, as the same may be increased from time to time; (c) the Corporation's requiring the Grantee to be based at any office or location that is more than fifty (50) miles from the Grantee's office or location immediately prior to either the CIC Triggering Event or the Change in Control; (d) the failure by the Corporation (i) to continue in effect any bonus, stock option or other cash or equity-based incentive plan in which the Grantee participates immediately prior to either the CIC Triggering Event or the Change in Control that is material to the Grantee's total compensation, unless a substantially equivalent arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan, or (ii) to continue the Grantee's participation in such plan (or in such substitute or alternative plan) on a basis at least as favorable, both in terms of the amount of benefits provided and the level of the Grantee's participation relative to other participants, as existed immediately prior to the CIC Triggering Event or the Change in Control; or (e) the failure by the Corporation to continue to provide the Grantee with benefits substantially similar to those received by the Grantee under any of the Corporation's pension (including, but not limited to, tax-qualified plans), life insurance, health, accident, disability or other welfare plans in which the Grantee was participating, at costs substantially similar to those paid by the Grantee, immediately prior to the CIC Triggering Event or the Change in Control. 1.10 "Grant" means the total number of Incentive Shares and Additional Incentive Shares granted pursuant to Section 2 of this Agreement. 1.11 "Median" means the position in the Peer Group below and above which there is an equal number of positions or if there is no one middle position, the two middle positions. 1.12 "Median Range" means within three (3) positions (either direction) of the Peer Group Median. 1.13 "Peer Group" means Banc One Corporation, BankAmerica Corporation, Bank of Boston Corporation, Bank of New York Company, Inc., Barnett Banks, Inc., Chase Manhattan Corporation, Corestates Financial Corp., First Chicago NBD Corporation, First Union Corporation, Fleet Financial Group, Inc., KeyCorp., Mellon Bank Corporation, National City Corporation, NationsBank Corporation, Norwest Corporation, SunTrust Banks, Inc., Wachovia Corporation, and Wells Fargo & Company. The Peer Group may be adjusted from time to time by the Committee to reflect mergers or consolidations or at any time at the discretion of the Committee. 4 5 1.14 "Person" has the meaning given in Section 3(a)(9) of the Exchange Act and also includes any syndicate or group deemed to be a "person" under Section 13(d)(3) of the Exchange Act. 1.15 "Restricted Period" means the period that begins on an Award Date and ends on the earlier to occur of (a) the second anniversary of the Award Date and (b) the day immediately preceding the date of termination of the Grantee's employment during a Coverage Period by the Corporation or a Subsidiary without Cause or by the Grantee for Good Reason. 1.16 "ROCE" or "Return on Common Equity" means, with respect to each of the Corporation and members of the Peer Group, the annualized cumulative return on common equity for the period commencing January 1, 1997 through the last day of the calendar quarter immediately preceding the last day on which the Share Price Performance Goal is met or, for the purpose of Section 3.2, through the Termination Date. The Return on Common Equity of any Peer Group member and the Corporation may be adjusted to reflect significant nonrecurring items, including without limitation, merger-related charges or gains/losses on a sale of a business unit, as approved by the Committee. ROCE shall be expressed as a percent rounded to the nearest one-hundredths (e.g., 0.00%, with 0.005% being rounded upward to 0.01%). 1.17 "ROCE Performance Goal" means the Corporation's ROCE is within the Median Range of the Peer Group or higher. 1.18 "RSR" or "Relative Shareholder Return" means the cumulative total shareholder return with respect to the Corporation on the Common Stock and with respect to the other members of the Peer Group on a class of common stock registered under Section 12 of the Exchange Act. For each of the Corporation and members of the Peer Group, cumulative total shareholder return shall be calculated by dividing: (a) the sum of: (i) the cumulative amount of dividends for the measurement period, assuming dividend reinvestment, and (ii) the difference between the share price at the end and the beginning of the measurement period; by (b) the closing share price on December 31, 1996. The term "measurement period" shall be the period beginning at the "measurement point" established by the market close on December 31, 1996, and continuing through (and including) the market close on the last day on which the Share Price Performance Goal is met or, for the purpose of Section 3.2, the Termination Date. With respect to dividends, it should be assumed that dividends are reinvested into additional shares of the same class of equity securities at the frequency with which dividends are paid on such securities during the applicable period. RSR shall be expressed as a percent rounded to the nearest one-hundredths (e.g., 0.00%, with 0.005% being rounded upward to 0.01%). 1.19 "RSR Performance Goal" means the Corporation's RSR is within the Median Range of the Peer Group or higher. 1.20 "Share Price Performance Goal" means the first consecutive 20 Business Day period that begins when the closing price of a share of Common Stock in the New York Stock Exchange composite transactions, as reported in The Wall Street Journal or other authoritative source, is $57.00 and during which period the cumulative average of the closing prices of a share of Common Stock in New York Stock Exchange composite transactions, as reported in The Wall Street Journal or other authoritative source, equals or exceeds $57.00. 1.21 "Termination Date" means (and includes) December 31, 1999. 2. GRANT OF INCENTIVE SHARES. Pursuant to Article 12 of the Plan and subject to the terms and conditions of this Agreement, the Corporation hereby grants to the Grantee named above that number of shares of Common Stock specified above as Incentive Shares and, subject to the proviso of Section 3.1(a) as well, that number of shares of Common Stock specified above as Additional Incentive Shares. 5 6 3. TERMS OF GRANT. The Grant shall be subject to the following terms and conditions: 3.1 On the Award Date, (a) the Corporation shall issue to the Grantee one hundred percent (100%) of the Incentive Shares if (1) the Share Price Performance Goal is achieved, and (2) (i) the ROCE Performance Goal is achieved and (ii) the RSR Performance Goal is achieved; provided, however, that, if the goals referred to in the foregoing clauses (1) and (2) are all achieved, (x) the Corporation shall also issue to the Grantee fifty percent (50%) of the Additional Incentive Shares if the Corporation's RSR is within the top five of the Peer Group, and/or (y) the Corporation shall also issue to the Grantee fifty percent (50%) of the Additional Incentive Shares if the Corporation's ROCE is within the top five of the Peer Group; or (b) the Corporation shall issue to the Grantee fifty percent (50%) of the Incentive Shares if the Share Price Performance Goal is achieved, but either or both of the ROCE Performance Goal and the RSR Performance Goal are not achieved. 3.2 In the event that the Share Price Performance Goal has not been achieved on or before the Termination Date, on the Termination Date, the Corporation shall issue to the Grantee fifty percent (50%) of the Incentive Shares if both the Corporation's RSR and the Corporation's ROCE are within the top third of the Peer Group. If Incentive Shares are issued on the Termination Date pursuant to this Section 3.2, such date shall be referred to as the "Award Date". 3.3 Except as provided in Section 10 as the result of the Committee's discretion in the event of the Grantee's retirement, death or total disability, Incentive Shares and Additional Incentive Shares shall not be issued unless the Grantee has been continuously employed by the Corporation or a Subsidiary for the period beginning on the Date of Grant through the Award Date. 3.4 Awarded Shares shall be deposited with the Corporation or its designee during the term of the Restricted Period, unless released and reissued sooner as provided in Section 6 below, and any certificates representing such Awarded Shares shall contain the following legend: "This certificate and the shares of stock represented hereby are subject to the terms and conditions (including forfeiture and restrictions against transfer) contained in the PNC Bank Corp. 1997 Long-Term Incentive Award Plan and an Agreement entered into between the registered owner and PNC Bank Corp. Release from such terms and conditions shall be made only in accordance with the provisions of the Plan and the Agreement, a copy of each of which is on file in the office of the Corporate Secretary of PNC Bank Corp." If a book-entry system is used with respect to Awarded Shares, appropriate notation of such forfeiture possibility and transfer restriction shall be made on the system with respect to the account or accounts to which the Awarded Shares are credited. 3.5. If the Grantee has been continuously employed by the Corporation or a Subsidiary throughout the Restricted Period, the Awarded Shares deposited with the Corporation or its designee shall be released and reissued to the Grantee as soon as practicable following the end of the Restricted Period pursuant to Section 7 below. 6 7 3.6 If the conditions specified in Section 3.1(a), Section 3.1(b) or Section 3.2 are not met on or before the Termination Date, none of the Incentive Shares or Additional Incentive Shares shall be issued to the Grantee. 3.7 In the event the Corporation is unable to make the ROCE and RSR calculations for the Peer Group and the Corporation on the Award Date, such calculations and any issuances of Awarded Shares shall be made as soon thereafter as practicable. 4. RIGHTS AS SHAREHOLDER. Except as provided in Section 5 below, the Grantee shall have all the rights and privileges of a shareholder with respect to the Awarded Shares including, but not limited to, the right to vote the Awarded Shares and the right to receive dividends thereon. All such rights and privileges shall cease upon forfeiture of the Awarded Shares. 5. PROHIBITIONS AGAINST SALE, ASSIGNMENT, ETC. The Grant, the Awarded Shares, the right to vote Awarded Shares and the right to receive dividends thereon may not be sold, assigned, transferred, exchanged, pledged, hypothecated or otherwise encumbered until (except with respect to the Grant) released by the Corporation to the Grantee pursuant to Section 7 below. 6. FORFEITURE. In the event the Grantee's employment with the Corporation or a Subsidiary terminates prior to the lapse of a Restricted Period, all Awarded Shares shall be forfeited by the Grantee to the Corporation without payment of any consideration by the Corporation, and neither the Grantee nor any successors, heirs, assigns or personal representatives of the Grantee shall thereafter have any further rights or interest in the Awarded Shares or the certificates representing the Awarded Shares. Notwithstanding the foregoing, in the event of the Grantee's death or total disability during a Restricted Period, all Awarded Shares will be released and reissued by the Corporation to the Grantee or his or her legal representative pursuant to Section 7 below. In the event of the Grantee's retirement during a Restricted Period, all Awarded Shares will be forfeited, unless the Committee determines that such Awarded Shares shall be released and reissued by the Corporation to the Grantee in light of the facts and circumstances applicable to the Grantee and the Corporation. When making such determination, the Committee may consider advice from its outside auditors that such termination of the Restricted Period would not prevent accounting for a business combination as a pooling of interests if such accounting treatment is desired by the Corporation. 7. TERMINATION OF PROHIBITIONS. At the end of the Restricted Period and in the event of the Grantee's death, total disability or retirement during the periods described in Section 6 above (and subject to the Committee's discretion, if any, as described in such Section), the Corporation shall release and reissue the certificate representing such Awarded Shares without the legend referred to in Section 3.4 above and shall deliver such certificate to the Grantee or his or her legal representative. 8. PAYMENT OF WITHHOLDING. The Grantee may satisfy any applicable federal, state or local income tax withholding requirements arising from the vesting (and, hence, reissuance) of Awarded Shares pursuant to this Agreement by payment of cash or through retention by the Corporation of Awarded Shares then to be reissued to the Grantee hereunder or by delivery to the Corporation of previously acquired shares of Common Stock. However, payment of any applicable federal, state or local income tax withholding requirements arising from a Code Section 83(b) election shall be satisfied by payment of cash or by delivery to the Corporation of previously acquired shares of Common Stock. 9. EMPLOYMENT. Neither the granting of the Incentive Shares or Additional Incentive Shares evidenced by this Agreement nor any term or provision of this Agreement shall constitute or be evidence of any understanding, expressed or implied, on the part of the Corporation or any Subsidiary to employ the Grantee for 7 8 any period or in any way alter the Grantee's status as an employee at will. 10. TERMINATION. The Grant shall terminate upon the earlier to occur of the following: (a) the Termination Date; or (b) the termination of the Grantee's employment with the Corporation or a Subsidiary, unless such termination is due to Grantee's retirement, death or total disability and the Committee determines that such Grant shall continue to a date no later than the Termination Date in light of the facts and circumstances applicable to the Grantee. 11. SUBJECT TO THE PLAN AND THE COMMITTEE. The Grant and this Agreement are subject to the terms and conditions of the Plan, which are incorporated herein by reference and made a part hereof, but the terms of the Plan shall not be considered an enlargement of any benefits under this Agreement. If the Plan is not approved by the Corporation's shareholders at the Corporation's 1997 Annual Meeting, all references to the Plan shall mean the 1992 Long-Term Incentive Award Plan. In addition, the Grant and this Agreement are subject to any interpretations of or any rules and regulations issued by the Committee. IN WITNESS WHEREOF, the Corporation has caused this Agreement to be signed on its behalf as of the Date of Grant. ATTEST: PNC BANK CORP. _____________________________ By ___________________________ Accepted and agreed to as of the Date of Grant set forth above. ______________________________ Grantee 8 EX-12.1 6 PNC BANK CORP. 1 PNC BANK CORP. AND SUBSIDIARIES EXHIBIT 12.1 COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES
Year ended December 31 Dollars in thousands 1997 1996 1995 1994 1993 - ----------------------------------------------------------------------------------------------------------------------------------- EARNINGS Income before taxes and cumulative effect of changes in accounting principles $1,618,599 $1,527,551 $627,012 $1,209,916 $1,140,487 Fixed charges excluding interest on deposits 1,171,648 1,096,893 1,487,279 1,104,573 704,228 ----------------------------------------------------------------- Subtotal 2,790,247 2,624,444 2,114,291 2,314,489 1,844,715 Interest on deposits 1,456,587 1,428,771 1,551,816 1,159,242 1,005,658 ----------------------------------------------------------------- Total $4,246,834 $4,053,215 $3,666,107 $3,473,731 $2,850,373 ================================================================= FIXED CHARGES Interest on borrowed funds $1,098,365 $1,064,847 $1,455,069 $1,070,565 $676,319 Interest component of rentals 29,312 29,839 31,283 32,247 26,491 Amortization of notes and debentures 833 816 927 1,761 1,418 Distributions on Mandatorily Redeemable Capital Securities of Subsidiary Trust 43,138 1,391 ----------------------------------------------------------------- Subtotal 1,171,648 1,096,893 1,487,279 1,104,573 704,228 Interest on deposits 1,456,587 1,428,771 1,551,816 1,159,242 1,005,658 ----------------------------------------------------------------- Total $2,628,235 $2,525,664 $3,039,095 $2,263,815 $1,709,886 ================================================================= RATIO OF EARNINGS TO FIXED CHARGES Excluding interest on deposits 2.38x 2.39x 1.42x 2.10x 2.62x Including interest on deposits 1.62 1.60 1.21 1.53 1.67 ====================================================================================================================================
EX-12.2 7 PNC BANK CORP. 1 PNC BANK CORP. AND SUBSIDIARIES EXHIBIT 12.2 COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
Year ended December 31 Dollars in thousands 1997 1996 1995 1994 1993 - ----------------------------------------------------------------------------------------------------------------------------------- EARNINGS Income before taxes and cumulative effect of changes in accounting principles $1,618,599 $1,527,551 $627,012 $1,209,916 $1,140,487 Fixed charges and preferred stock dividends excluding interest on 1,201,582 1,105,324 1,492,391 1,112,564 712,339 deposits --------------------------------------------------------------- Subtotal 2,820,181 2,632,875 2,119,403 2,322,480 1,852,826 Interest on deposits 1,456,587 1,428,771 1,551,816 1,159,242 1,005,658 --------------------------------------------------------------- Total $4,276,768 $4,061,646 $3,671,219 $3,481,722 $2,858,484 =============================================================== FIXED CHARGES Interest on borrowed funds $1,098,365 $1,064,847 $1,455,069 $1,070,565 $676,319 Interest component of rentals 29,312 29,839 31,283 32,247 26,491 Amortization of notes and debentures 833 816 927 1,761 1,418 Distributions on Mandatorily Redeemable Capital Securities of Subsidiary Trust 43,138 1,391 Preferred stock dividend requirements 29,934 8,431 5,112 7,991 8,111 --------------------------------------------------------------- Subtotal 1,201,582 1,105,324 1,492,391 1,112,564 712,339 Interest on deposits 1,456,587 1,428,771 1,551,816 1,159,242 1,005,658 --------------------------------------------------------------- Total $2,658,169 $2,534,095 $3,044,207 $2,271,806 $1,717,997 ============================================================== RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS Excluding interest on deposits 2.35x 2.38x 1.42x 2.09x 2.60x Including interest on deposits 1.61 1.60 1.21 1.53 1.66 ===================================================================================================================================
EX-13 8 PNC BANK CORP. 1 EXHIBIT 13 FINANCIAL REVIEW 1997 VERSUS 1996 This Financial Review should be read in conjunction with PNC Bank Corp. and subsidiaries' ("Corporation" or "PNC Bank") Consolidated Financial Statements and Statistical Information included herein. OVERVIEW PNC BANK CORP. The Corporation is one of the largest diversified financial services companies in the United States and operates seven lines of business: National Consumer Banking, Regional Community Banking, Private Banking, Secured Lending, Asset Management and Servicing, Corporate Banking and Mortgage Banking. Financial products and services are customized for specific customer segments and offered nationally and in PNC Bank's primary geographic markets in Pennsylvania, New Jersey, Delaware, Ohio, Kentucky, Indiana, Massachusetts and Florida. SUMMARY FINANCIAL RESULTS Net income for 1997 was $1.052 billion or $3.28 per diluted share compared with $992 million and $2.88, respectively, a year ago. Returns on average common shareholders' equity and average assets were 20.01% and 1.49% compared with 17.18% and 1.40%, respectively, in 1996. Results for 1996 include a $22 million after-tax charge to recapitalize the Savings Association Insurance Fund ("SAIF"). Excluding the SAIF assessment, earnings for 1996 totaled $1.015 billion or $2.94 per diluted share. On this basis, returns on average common shareholders' equity and average assets were 17.58% and 1.43%, respectively. Earnings are impacted by noncash expenses associated with purchase acquisitions. Excluding the impact of goodwill and other amortization related to purchase transactions, diluted earnings per share for 1997 and 1996 were $3.51 and $3.04, respectively. Total revenue for 1997 increased 11.8% compared with the same period in 1996 primarily due to noninterest income growth. Noninterest income increased to $1.808 billion for 1997, a 29.6% increase over 1996 reflecting significant growth in nearly all categories of noninterest revenue. Noninterest income represented 42% of total revenue compared with 36% in 1996. Taxable-equivalent net interest income increased $45 million for 1997 and the net interest margin widened 11 basis points to 3.94% compared with 3.83% in the prior year. These increases resulted from a higher-yielding earning asset mix which offset the impact of spread compression, change in deposit mix and lower average deposit levels. The provision for credit losses was $70 million for 1997. No provision was recorded in the prior year. Operating expenses increased $303 million to $2.615 billion largely due to $187 million of incremental costs associated with AAA Financial Services and credit card-related initiatives. The efficiency ratio, computed excluding distributions on capital securities from expense, was 59.4% for 1997 compared with 59.6% a year ago. Total assets were $75.1 billion at December 31, 1997 compared to $73.3 billion at December 31, 1996. Average earning assets declined $708 million in the year-to-year comparison to $64.0 billion as loan growth was more than offset by securities portfolio reductions. Average loans grew 7.7% to $52.9 billion, a $3.8 billion increase from the prior year. Loans represented 82.6% of average earning assets compared with 75.9% a year ago. Growth in credit cards, residential mortgages and middle market commercial loans more than offset downsizing of the indirect automobile lending portfolio and the impact of loan securitizations. Average securities declined $4.8 billion to $8.8 billion or 13.7% of average earning assets. Asset quality and coverage ratios remained strong. The ratio of nonperforming assets to loans and foreclosed assets was .61% at December 31, 1997 compared with .88% at December 31, 1996. The allowance for credit losses was 352% of nonperforming loans and 1.79% of total loans at December 31, 1997 compared to 334% and 2.25%, respectively, a year ago. Net charge-offs were .51% of average loans in 1997 compared with .33% in 1996. The increase in net charge-offs was primarily associated with higher credit card outstandings. Shareholders' equity totaled $5.4 billion at December 31, 1997. The leverage ratio was 7.30% and Tier I and total risk-based capital ratios were 7.43% and 11.11%, respectively. As part of the Corporation's capital management initiatives, 29.3 million shares of common stock were repurchased during 1997. BUSINESS STRATEGIES Financial services providers today are challenged by intense competition, changing customer demands, increased pricing pressures and the ongoing impact of deregulation. Traditional loan and deposit activities face particularly challenging competitive pressures as both banks and nonbanks compete for customers with access to a broad array of banking, investment and capital markets products. Many of these traditional businesses have moderate growth expectations and require significant capital to support balance sheet leverage that entails credit and interest rate risk. PNC BANK CORP. 30 2 PNC Bank has responded to these challenges by transitioning to an organization comprised of autonomous lines of business with highly focused customer segments. This approach provides the basis for developing differentiated businesses capable of competing in today's environment where banks and other financial service providers seek the same customers. The Corporation has focused on altering the business mix and investing in specialized financial services businesses including asset management, mutual fund servicing, private banking, treasury management and capital markets. These businesses are largely fee-based, less capital intensive and have superior growth outlooks on a national scale. More meaningful contributions from these businesses, coupled with disciplined management of traditional banking activities, expansion of national distribution capabilities and reduction of our wholesale leverage activities have allowed PNC Bank to significantly improve the composition of the earnings stream. NATIONAL CONSUMER BANKING offers a full range of consumer products and services through technologically advanced cost efficient channels. National Consumer Banking's focus is on delivering convenient value-added financial services nationally by expanding direct marketing and through establishing affinity relationships such as those with AAA and mall owners nationwide. REGIONAL COMMUNITY BANKING offers a full range of products and services to small business and retail customers within PNC Bank's geographic footprint. Regional Community Banking's focus is on employing information and customer knowledge to identify and meet consumer preferences for traditional and automated products and services through retail branches and automated distribution channels. PRIVATE BANKING offers personalized investment management, brokerage, personal trust, estate planning and traditional banking services to the affluent. Services are provided by teams of highly qualified specialists working together to provide trusted advice and creative financial solutions. SECURED LENDING is engaged in commercial real estate banking, business credit and equipment leasing activities. Real estate banking provides comprehensive credit and noncredit services to a broad base of clients including commercial and residential developers, investors, mortgage bankers and property management companies. On January 28, 1998, PNC Bank announced a definitive agreement to acquire the assets of Midland Loan Services, L.P. ("Midland"), one of the largest commercial loan servicers in the nation. Business credit offers asset-based lending, syndication and treasury management services within the PNC Bank primary geographic markets and nationally. Leasing provides equipment lease financing for a wide range of customers and is focused on growth from the existing PNC Bank corporate customer base and national markets. ASSET MANAGEMENT AND SERVICING includes the BlackRock organization which offers a full range of fixed income, domestic and international equity and liquidity products; PFPC Inc., the Corporation's mutual fund servicing business; HAWTHORN, a PNC Company, which serves the ultra-affluent market, and PNC Bank's institutional trust business. BlackRock represents the recent integration of PNC Bank's investment advisory and asset management capabilities under a single organization and brand. This integration provides the opportunity to grow into one of the largest asset managers in the country, leveraging the BlackRock Financial Management reputation as an established world-class fixed income manager. BlackRock's initiatives focus on expanding marketing and delivery channels for a full range of institutional and retail investment products. PFPC Inc., the Corporation's mutual fund servicing business, specializes in providing institutional money managers, brokerage firms, pension managers and insurance companies with custom designed products including accounting and administration, transfer agent and custody services. PFPC is the second largest mutual fund accounting agent and the third largest full-service transfer agent in the United States and is focused on domestic and international expansion. CORPORATE BANKING provides a full range of credit, capital markets and treasury management products and services to large and mid-size businesses, institutions and government entities. Client relationship teams possessing specific expertise focus on the individual customer needs to provide customized service. Teams of specialists also focus on specific industry segments, including communications, dealer finance, health care and public finance, large corporate, financial institutions, energy, metals and mining and emerging growth. MORTGAGE BANKING is focused on efficiently delivering high quality mortgage originations and servicing, and expanding nonmortgage product offerings including second mortgages, home equity lines of credit, credit cards and insurance products. PNC BANK CORP. 31 3 FINANCIAL REVIEW 1997 VERSUS 1996 LINE OF BUSINESS REVIEW Financial results for PNC Bank's lines of business are derived from the Corporation's management accounting system. Line of business information is based on management accounting practices which conform to and support PNC Bank's current management structure and is not necessarily comparable with similar information for any other financial services institution. The management accounting process uses various balance sheet and income statement allocations and transfers to measure business unit performance. Allocations and transfers change from time to time as the management accounting system is enhanced and business or product lines change. There is no comprehensive, authoritative body of guidance for management accounting equivalent to generally accepted accounting principles. The financial results presented herein reflect each line of business as if operated on a stand-alone basis. Securities or borrowings and related interest rate spreads have been assigned to the lines of business based on their net asset or liability position. Capital is assigned to each business unit based on management's assessment of inherent risks and equity levels at independent companies providing similar products and services. Capital assignments are not equivalent to regulatory capital guidelines and the total capital assigned will differ from consolidated shareholders' equity. Total line of business financial results differ from consolidated financial results primarily due to eliminations, different provision for credit loss methodologies and corporate and other unassigned items. Eliminations offset transactions between the lines of business which primarily relate to assigned securities or borrowings. Corporate administration and other unassigned include net securities gains, certain holding company expenses and other items not allocated in the management accounting process.
Return on Average Assets Revenue Earnings Assigned Capital ------------------ --------------- --------------- ------------------- Year ended December 31 - dollars in millions 1997 1996 1997 1996 1997 1996 1997 1996 - --------------------------------------------------------------------------------------------------------------------------- National Consumer Banking $10,311 $8,219 $650 $380 $25 $54 4% 10% Regional Community Banking 35,188 35,839 1,627 1,667 416 425 28 28 Private Banking 2,527 2,396 398 352 89 71 27 23 Secured Lending 5,937 5,864 247 210 134 95 30 21 Asset Management and Servicing 749 616 421 332 84 61 35 30 Corporate Banking 16,120 15,298 737 673 229 218 18 18 Mortgage Banking 10,388 9,289 421 340 54 29 15 9 ---------------------------------------------------- Total lines of business 81,220 77,521 4,501 3,954 1,031 953 21 21 Eliminations (14,237)(10,782) (222) (217) (112) (79) Provision for credit losses 105 66 Corporate administration and other unassigned 3,661 4,068 53 137 28 52 ---------------------------------------------------- Total consolidated $70,644 $70,807 $4,332 $3,874 $1,052 $992 19 17 - ---------------------------------------------------------------------------------------------------------------------------
PNC BANK CORP. 32 4 NATIONAL CONSUMER BANKING
Year ended December 31 - dollars in millions 1997 1996 - ---------------------------------------------------------- INCOME STATEMENT Net interest income $385 $261 Noninterest income 265 119 ----------------- Total revenue 650 380 Provision for credit losses 227 92 Noninterest expense 383 201 ----------------- Pretax earnings 40 87 Income taxes 15 33 ----------------- Earnings $25 $54 ----------------- AVERAGE BALANCE SHEET Loans $9,581 $7,877 Other assets 730 342 ----------------- Total assets $10,311 $8,219 ----------------- Net deposits $36 $24 Assigned funds and other liabilities 9,610 7,648 Assigned capital 665 547 ----------------- Total funds $10,311 $8,219 ----------------- PERFORMANCE RATIOS After-tax profit margin 4% 14% Efficiency 59 53 Return on assigned capital 4 10 - -----------------------------------------------------------
National Consumer Banking is strategically positioned to capitalize on consumer acceptance of mass marketed financial services and electronic delivery. Management's objective is to improve longer-term returns on assigned capital by emphasizing revenue growth in higher yielding products such as credit cards and education loans and mass marketing a full range of products and services through the most technologically advanced cost efficient channels. Credit card, automobile, student, home equity and residential mortgage loans, as well as deposit accounts and money market mutual funds will be marketed in conjunction with AAA and other national initiatives. The Corporation's exclusive marketing agreement with AAA, entered in 1996, marked the first major step in building a national consumer business. Continuing to build national scale during 1997, the Mall V.I.P.SM Visa(R) card was introduced in conjunction with top mall owners in the country. These alliances provide unique opportunities to access customers nationwide. The education lending business has grown through innovative affinity relationships with groups such as the Association of Independent California Colleges and Universities. National Consumer Banking has also focused on expansion of electronic delivery employing debit cards, offsite ATMs and online banking. Through affinity relationships and technology, PNC Bank delivers products in locations across the country providing convenient customer access. Significant start-up investments in long-term initiatives produced positive momentum during 1997. Total revenue grew 71% and noninterest income increased to 41% of total revenue compared with 31% in 1996. Noninterest income grew 123% or $146 million principally due to loan securitization income, increased credit card fees and higher electronic banking income. Net interest income increased 48% or $124 million over 1996 driven by higher loan outstandings and a change in loan portfolio mix. Average loans increased 22% as growth in wider spread credit card loans exceeded declines in lower yielding indirect auto loans and education loans. Credit card loans increased $2.4 billion due to AAA and other marketing initiatives. Indirect auto loans declined consistent with the strategic decision to reduce loans with unattractive returns. Education loans declined as a result of $1 billion of student loan securitizations. National Consumer Banking accounted for 3% of line of business earnings in 1997 compared with 6% in 1996. Earnings declined $29 million or 54% due to costs associated with national business expansion. Noninterest expense increased $182 million largely driven by higher marketing and credit card processing costs, acquired portfolio premium amortization and interchange fees. In addition to the impact on earnings from marketing and other expansion costs, net interest income is adversely affected until credit card rate incentives offered during introductory periods expire and yields earned are reset to market rates. The AAA initiative reduced earnings by $57 million in 1997. The provision for credit losses increased $135 million and was directly related to a larger proportion of credit card loans which have inherently higher charge-offs. PNC BANK CORP. 33 5 FINANCIAL REVIEW 1997 VERSUS 1996 REGIONAL COMMUNITY BANKING
Year ended December 31 - dollars in millions 1997 1996 - -------------------------------------------------------------------------------- INCOME STATEMENT Net interest income $1,348 $1,387 Noninterest income 279 280 ----------------- Total revenue 1,627 1,667 Provision for credit losses 26 21 Noninterest expense 930 960 ----------------- Pretax earnings 671 686 Income taxes 255 261 ----------------- Earnings $416 $425 ----------------- AVERAGE BALANCE SHEET Loans $9,078 $8,637 Assigned assets and other assets 26,110 27,202 ----------------- Total assets $35,188 $35,839 ----------------- Net deposits $33,570 $34,188 Other liabilities 134 151 Assigned capital 1,484 1,500 ----------------- Total funds $35,188 $35,839 ----------------- PERFORMANCE RATIOS After-tax profit margin 26% 26% Efficiency 57 58 Return on assigned capital 28 28 - --------------------------------------------------------------------------------
Regional Community Banking is focused on efficiently employing the traditional branch delivery system while expanding less capital intensive, technologically advanced alternative delivery systems. Many Community Banking customers still prefer more traditional delivery channels but increasingly demand convenience and choice among products and services. To address this transition, the Regional Community Bank was reorganized along specific customer segments. Consumers' demands for convenient high value products and services coupled with intense competitive pressures continue to shrink net interest spreads. Consumers are migrating from traditional deposit accounts toward higher return products such as money market accounts. In addition, niche competitors exert pricing pressure. As consumer preferences change, the challenge is to offer the proper products and maintain the appropriate balance of resources between the traditional branch structure and technologically advanced delivery channels. Regional Community Banking earned $416 million accounting for 40% of line of business earnings in 1997 compared with 45% a year ago. Earnings declined $9 million primarily due to a $39 million or 3% reduction in net interest income attributable to a modest decline in deposit levels and customer migration to higher cost money market deposit products. Noninterest income was essentially flat as a 9% increase in deposit service fees offset the impact of branch consolidation. Noninterest expense declined $30 million due to expense reduction associated with consolidating branch locations and the transfer of activity from traditional branches to alternative delivery channels. The increase in the provision for credit losses was due to higher outstandings. PRIVATE BANKING
Year ended December 31 - dollars in millions 1997 1996 - -------------------------------------------------------------------------------- INCOME STATEMENT Net interest income $113 $97 Noninterest income 285 255 ----------------- Total revenue 398 352 Provision for credit losses 4 1 Noninterest expense 251 237 ----------------- Pretax earnings 143 114 Income taxes 54 43 ----------------- Earnings $89 $71 ----------------- AVERAGE BALANCE SHEET Loans $2,468 $2,340 Other assets 59 56 ----------------- Total assets $2,527 $2,396 ----------------- Net deposits $1,661 $1,501 Assigned funds and other liabilities 542 592 Assigned capital 324 303 ----------------- Total funds $2,527 $2,396 ----------------- PERFORMANCE RATIOS After-tax profit margin 22% 20% Efficiency 63 67 Return on assigned capital 27 23 - --------------------------------------------------------------------------------
Private Banking offers investment management, full service brokerage, financial planning and traditional trust and banking services. Private Banking's objective is to be the financial "advisor of choice" in the growing affluent market, providing a full range of high quality customized predominantly fee-based investment products and services. Private Banking earned $89 million in 1997 accounting for 9% of total line of business earnings and representing a 25% increase over 1996. Total revenue grew $46 million reflecting double digit growth in noninterest and net interest income. Noninterest income increased $30 million in 1997 due to increased investment management, trust, and brokerage assets under administration driven by new business and market value appreciation. Assets under administration increased $9 billion to $59 billion at December 31, 1997. Net interest income increased due to loan and deposit growth. Noninterest expense increased due to the addition of sales and service personnel, higher incentive compensation commensurate with revenue growth and infrastructure development and technology investment costs. PNC BANK CORP. 34 6 SECURED LENDING
Year ended December 31 - dollars in millions 1997 1996 - -------------------------------------------------------------------------------- INCOME STATEMENT Net interest income $195 $181 Noninterest income 52 29 ----------------- Total revenue 247 210 Provision for credit losses (38) Noninterest expense 82 62 ----------------- Pretax earnings 203 148 Income taxes 69 53 ----------------- Earnings $134 $95 ----------------- AVERAGE BALANCE SHEET Loans $5,853 $5,667 Other assets 84 197 ----------------- Total assets $5,937 $5,864 ----------------- Net deposits $787 $637 Assigned funds and other liabilities 4,698 4,766 Assigned capital 452 461 ----------------- Total funds $5,937 $5,864 ----------------- PERFORMANCE RATIOS After-tax profit margin 54% 45% Efficiency 33 30 Return on assigned capital 30 21 - --------------------------------------------------------------------------------
Secured Lending includes PNC Bank's activities in commercial real estate, business credit and equipment leasing. Secured Lending's objective is to establish a significant national presence in each of these businesses providing product and advisory services focused on expanding fee-based revenues. Real estate banking is a relationship-driven, full service provider of financial products including capital markets financing and operational services. Real estate banking serves regional and national customers including commercial and residential developers, investors, mortgage bankers and property management companies. PNC Bank's real estate experience extends across all major property types throughout the U.S. Targeted strategic growth areas include commercial mortgage origination, securitization and servicing, loan syndications, private debt placements and treasury management. Consistent with this strategy, on January 28, 1998, PNC Bank announced a definitive agreement to acquire the assets of Midland, one of the largest commercial real estate loan servicers in the nation. Midland is a technology-based firm specializing in the origination, securitization and servicing of commercial real estate assets. This transaction provides important competitive advantages for PNC Bank as more real estate customers demand sophisticated, technology-driven services and increased access to capital markets. The Corporation anticipates this transaction will close in the second quarter of 1998. Business credit provides asset-based lending, syndication and treasury management services. In 1997 several commercial finance groups were combined to provide the platform to streamline operations and pursue national expansion opportunities. Leasing provides equipment lease financing to a wide range of businesses, industries and institutions and also provides product support for PNC Bank's capital markets activities. Secured Lending contributed 13% of total line of business earnings in 1997 compared with 10% in 1996. Earnings increased $39 million or 41% in the comparison as a result of higher revenue and continued improvement in credit quality. Consistent with Secured Lending's objectives, noninterest income increased 79% in 1997 and represented 21% of total revenue compared to 14% in 1996. Noninterest income grew $23 million in 1997 primarily due to capital markets distribution activities and treasury management fees. Noninterest expense increased $20 million in 1997 primarily due to increased personnel and delivery costs associated with expanding capital markets capabilities. PNC BANK CORP. 35 7 FINANCIAL REVIEW 1997 VERSUS 1996 ASSET MANAGEMENT AND SERVICING
Asset Mutual Fund Management Servicing Total ------------------- ------------------- -------------------- Year ended December 31 - dollars in millions 1997 1996 1997 1996 1997 1996 - --------------------------------------------------------------------------------------------------------------------------- INCOME STATEMENT Advisory, processing and other fee income $265 $203 $143 $121 $408 $324 Net interest income 6 (1) 7 9 13 8 ----------------------------------------------------------------------- Total revenue 271 202 150 130 421 332 Operating expenses 190 154 95 80 285 234 ----------------------------------------------------------------------- Pretax earnings 81 48 55 50 136 98 Income taxes 31 18 21 19 52 37 ----------------------------------------------------------------------- Earnings $50 $30 $34 $31 $84 $61 ----------------------------------------------------------------------- AVERAGE BALANCE SHEET Loans $52 $31 $61 $58 $113 $89 Assigned assets and other assets 536 421 100 106 636 527 ----------------------------------------------------------------------- Total assets $588 $452 $161 $164 $749 $616 ----------------------------------------------------------------------- Net deposits $388 $295 $63 $82 $451 $377 Other liabilities 37 26 17 14 54 40 Assigned capital 163 131 81 68 244 199 ----------------------------------------------------------------------- Total funds $588 $452 $161 $164 $749 $616 ----------------------------------------------------------------------- PERFORMANCE RATIOS After-tax profit margin 19% 15% 22% 23% 20% 18% Efficiency 70 76 64 62 68 71 Return on assigned capital 31 23 41 44 35 30 - ---------------------------------------------------------------------------------------------------------------------------
Asset Management and Mutual Fund Servicing comprise the Asset Management and Servicing line of business which contributed 8% of total line of business earnings in 1997 compared with 6% in 1996. Earnings increased $23 million or 38% in the comparison. Fee income increased 26% due to an increase in managed assets and assets under administration driven by new business and market appreciation. Operating expenses increased primarily due to incremental costs associated with servicing new business and higher compensation commensurate with revenue growth. Assets under administration by PFPC Inc., the Corporation's mutual fund servicing operation, increased $76 billion or 23% in the year-to-year comparison to $406 billion at December 31, 1997. Managed assets totaled $137 billion at December 31, 1997, a 26% increase compared with a year ago. COMPOSITION OF MANAGED ASSETS
December 31 1997 1996 - -------------------------------------------------------------------------------- Fixed income 43% 45% Equity 28 27 Liquidity management 29 28 - --------------------------------------------------------------------------------
Asset Management includes BlackRock, HAWTHORN and PNC Bank's institutional trust business and provides a full range of high quality investment advisory and asset management services to individuals and institutions. BlackRock manages in excess of $108 billion of assets for individual and institutional investors. Domestic and international equities, global fixed income, money markets and risk management advisory services are included in the product base. BlackRock is also pursuing growth of technology-related businesses, through which institutional clients are offered BlackRock's risk management capabilities. BlackRock is currently the second largest U.S. bank manager of mutual funds. BlackRock's proprietary mutual fund family, with approximately $35 billion in assets, provides institutional and individual investors with a full range of equity, bond and money market investment options. HAWTHORN, created in 1997 through the combination of PNC Bank's family wealth management unit and Stolper & Co., provides institutional investment-level advisory services to the ultra-affluent. HAWTHORN has $10.6 billion in assets under management and an additional $6.3 billion under administration and custody. PNC BANK CORP. 36 8 Asset Management earnings increased $20 million or 67% over the prior year led by strong revenue growth. Revenue increased $69 million or 34% due to new business and market appreciation while operating expenses increased $36 million or 23%. PFPC Inc., the Corporation's mutual fund servicing operation, specializes in providing mutual fund complexes with tailored services including accounting and administration, transfer agent and custody services. PFPC Inc. had double digit growth in assets and accounts serviced during 1997 leading to 15% revenue growth. Operating expenses increased $15 million due to higher compensation expense commensurate with revenue growth and increased investments in technology and facilities associated with business expansion. PFPC's assets and accounts serviced were as follows:
December 31 1997 1996 - -------------------------------------------------------------------------------- Assets (billions) Custody $223 $200 Accounting/administration 182 130 - -------------------------------------------------------------------------------- Accounts (millions) Shareholder 4.6 4.3 Checking and credit/debit card 2.1 1.6 - --------------------------------------------------------------------------------
Revenue from investment management and mutual fund servicing is included in Asset Management and Servicing. Revenue from marketing asset management products and services to consumers is included primarily in the Private Banking line of business. The following table sets forth revenue and earnings from asset management products and services included in each line of business.
Year ended December 31 - in millions Revenue Earnings - -------------------------------------------------------------------------------- 1997 Asset Management and Servicing $421 $84 Private Banking 224 55 ---------------- Total $645 $139 - -------------------------------------------------------------------------------- 1996 Asset Management and Servicing $332 $61 Private Banking 200 47 ---------------- Total $532 $108 - --------------------------------------------------------------------------------
Asset Management and Servicing revenue is primarily affected by the volume of new business, the value of assets managed and serviced, investment performance and financial market conditions. Revenue may be positively affected by strong investment performance or improving financial markets. Conversely, declining performance or deteriorating financial markets may have an adverse effect on revenue. Corporate Banking
Year ended December 31 - dollars in millions 1997 1996 - -------------------------------------------------------------------------------- INCOME STATEMENT Net interest income $450 $444 Noninterest income 287 229 --------------------- Total revenue 737 673 Provision for credit losses 5 (17) Noninterest expense 363 339 --------------------- Pretax earnings 369 351 Income taxes 140 133 --------------------- Earnings $229 $218 --------------------- AVERAGE BALANCE SHEET Loans $15,201 $14,487 Other assets 919 811 --------------------- Total assets $16,120 $15,298 --------------------- Net deposits $2,211 $2,230 Assigned funds and other liabilities 12,643 11,864 Assigned capital 1,266 1,204 --------------------- Total funds $16,120 $15,298 --------------------- PERFORMANCE RATIOS After-tax profit margin 31% 32% Efficiency 49 50 Return on assigned capital 18 18 - --------------------------------------------------------------------------------
Corporate Banking provides specialized credit, capital markets and treasury management products and services and includes PNC Bank's equity management business which makes venture capital investments. The ongoing pressure on leverage related products has led to significantly more emphasis on altering the revenue composition through growth of noncredit revenue such as treasury management and capital markets. The strategic focus for Corporate Banking is on developing and delivering a comprehensive range of higher margin fee-based products and services. Corporate Banking contributed $229 million or 22% of total 1997 line of business earnings representing an $11 million or 5% increase over 1996 earnings. Total revenue increased 10% or $64 million to $737 million reflecting noninterest income growth of 25%. Noninterest income represented 39% of 1997 revenue compared to 34% in 1996. Net interest income increased $6 million or 1% to $450 million in 1997 as the impact of higher loan volumes exceeded the impact of lower net interest spreads resulting from continued competitive pricing pressure. Average loans increased $714 million or 5% over the prior year with the most significant increase occurring in the middle market portfolios. Noninterest income was $287 million for 1997, a $58 million increase over the prior year primarily due to a $27 million increase in venture capital income and a $22 million increase PNC BANK CORP. 37 9 FINANCIAL REVIEW 1997 VERSUS 1996 in capital markets fees. Noninterest income for 1997 includes capital markets fees of $71 million, venture capital revenue of $98 million and treasury management fees and other income of $118 million. Treasury management revenue does not reflect the total compensation for these services due to the acceptance of compensating balances in lieu of cash payments. Noninterest expense in 1997 was $363 million, a $24 million or 7% increase over 1996. This increase reflects a 6% increase in full-time equivalent personnel and increased incentive compensation, primarily related to increased noncredit revenue. MORTGAGE BANKING
Year ended December 31 - dollars in millions 1997 1996 - -------------------------------------------------------------------------------- INCOME STATEMENT Net interest income $137 $119 Noninterest income 284 221 ----------------- Total revenue 421 340 Provision for credit losses 5 5 Noninterest expense 329 289 ----------------- Pretax earnings 87 46 Income taxes 33 17 ----------------- Earnings $54 $29 ----------------- AVERAGE BALANCE SHEET Loans $7,836 $7,289 Other assets 2,552 2,000 ----------------- Total assets $10,388 $9,289 ----------------- Net deposits $621 $618 Assigned funds and other liabilities 9,402 8,343 Assigned capital 365 328 ----------------- Total funds $10,388 $9,289 ----------------- PERFORMANCE RATIOS After-tax profit margin 13% 8% Efficiency 78 85 Return on assigned capital 15 9 - --------------------------------------------------------------------------------
Mortgage Banking activities include origination, securitization and servicing of residential mortgages, as well as retention of selected loans in the portfolio. Mortgage Banking contributed 5% of total line of business earnings in 1997 compared with 3% in 1996. Earnings increased $25 million to $54 million for 1997 primarily due to higher origination and securitization activity. Net interest income increased $18 million or 15% in 1997 as a result of higher loan portfolio volume offsetting lower spreads. Noninterest expense increased $40 million in 1997 reflecting a $15 million increase in volume-related expenses and a $25 million increase in mortgage servicing rights ("MSR") amortization expense. MSR value and amortization are affected by changes in interest rates. If interest rates decline and the rate of prepayment increases, the underlying servicing fees and related MSR value would also decline. In a period of rising interest rates, a converse relationship would exist. The Corporation seeks to manage this risk by using financial instruments whose values move in the opposite direction of MSR value changes. Mortgage Banking's results include servicing revenue and the impact from securities and interest rate floors used to hedge the value of MSR in noninterest income, while MSR amortization is reflected in noninterest expense. The following table reflects the components of net mortgage banking revenue. MORTGAGE BANKING REVENUE
Year ended December 31 - dollars in millions 1997 1996 - -------------------------------------------------------------------------------- Servicing $160 $155 MSR amortization (81) (56) Hedging activities 18 (6) -------------- Net servicing revenue 97 93 Origination and securitization 98 60 Other 8 12 -------------- Net mortgage banking revenue $203 $165 - --------------------------------------------------------------------------------
During 1997, Mortgage Banking funded $6.1 billion of residential mortgages with 70% representing retail originations. The comparable amounts were $5.6 billion and 64%, respectively, in 1996. At December 31, 1997, the mortgage servicing portfolio totaled $40.7 billion, including $31.7 billion of loans serviced for others, had a weighted-average coupon of 7.94% and an estimated fair value of $474 million. Capitalized MSR totaled $377 million at December 31, 1997 compared with $313 million a year ago. MORTGAGE SERVICING PORTFOLIO
In millions 1997 1996 - -------------------------------------------------------------------------------- January 1 $39,543 $37,299 Originations 6,136 5,614 Purchases 1,917 3,737 Repayments (6,734) (6,075) Sales (161) (1,032) ----------------- December 31 $40,701 $39,543 - --------------------------------------------------------------------------------
PNC BANK CORP. 38 10 FORWARD-LOOKING STATEMENTS PNC Bank has made, and may continue to make, various forward-looking statements with respect to earnings per share, AAA Financial Services, credit quality, interest rate and market risk, corporate objectives, revenue composition and growth, Year 2000, BlackRock, Midland and other financial and business matters. The Corporation cautions that these forward-looking statements are subject to numerous assumptions, risks and uncertainties, all of which change over time, and the Corporation assumes no duty to update forward-looking statements. Actual results could differ materially from forward-looking statements. In addition to factors previously disclosed by the Corporation and those identified elsewhere in this Financial Review and in the Corporation's Annual Report, the following factors, among others, could cause actual results to differ materially from forward-looking statements: continued pricing pressures on loan and deposit products; success and timing of AAA and other business initiatives and strategies; competition; changes in economic conditions; continued customer disintermediation; customers' acceptance of PNC Bank's products and services; and the extent and timing of technological advancement, capital management actions, actions of the Federal Reserve Board and legislative and regulatory actions and reforms. CONSOLIDATED INCOME STATEMENT REVIEW INCOME STATEMENT HIGHLIGHTS
Year ended December 31 - in millions 1997 1996 Change - -------------------------------------------------------------------------------- Net interest income (taxable-equivalent basis) $2,524 $2,479 $45 Provision for credit losses 70 70 Noninterest income before net securities gains 1,759 1,373 386 Net securities gains 49 22 27 Noninterest expense 2,615 2,312 303 Income taxes 566 535 31 Net income 1,052 992 60 - --------------------------------------------------------------------------------
Taxable-equivalent net interest income increased to $2.524 billion for 1997, a $45 million increase over 1996. The net interest margin widened 11 basis points to 3.94% compared with 3.83% in the prior year. These increases resulted from a higher-yielding earning asset mix which offset the impact of spread compression, change in deposit mix and lower average deposit levels. Average securities declined $4.8 billion to $8.8 billion for 1997 while average loans increased $3.8 billion to $52.9 billion. PNC BANK CORP. 39 11 FINANCIAL REVIEW 1997 VERSUS 1996
NET INTEREST INCOME ANALYSIS Average Balances Interest Income/Expense Average Yields/Rates ------------------------ ------------------------------------------------- Taxable-equivalent basis Year ended December 31 - dollars in millions 1997 1996 Change 1997 1996 Change 1997 1996 Change - --------------------------------------------------------------------------------------------------------------------------- Interest-earning assets Securities $8,774 $13,550 $(4,776) $546 $867 $(321) 6.22% 6.40% (18)bp Loans, net of unearned income Consumer 11,224 12,192 (968) 953 1,028 (75) 8.49 8.43 6 Credit card 3,558 1,165 2,393 459 163 296 12.92 13.94 (102) Residential mortgage 13,105 12,049 1,056 976 898 78 7.45 7.45 Commercial 19,089 17,727 1,362 1,500 1,388 112 7.86 7.83 3 Commercial real estate 4,060 4,186 (126) 358 373 (15) 8.82 8.92 (10) Other 1,871 1,797 74 130 119 11 6.94 6.63 31 --------------------------------------------------- Total loans, net of unearned income 52,907 49,116 3,791 4,376 3,969 407 8.27 8.08 19 Other interest-earning assets 2,336 2,059 277 158 137 21 6.75 6.64 11 --------------------------------------------------- Total interest-earning assets/ interest income 64,017 64,725 (708) 5,080 4,973 107 7.93 7.68 25 Noninterest-earning assets 6,627 6,082 545 ------------------------- Total assets $70,644 $70,807 $(163) ------------------------- Interest-bearing liabilities Deposits Demand and money market $13,477 $12,619 $858 391 332 59 2.90 2.63 27 Savings 2,852 3,445 (593) 57 69 (12) 1.97 2.02 (5) Other time 17,441 18,307 (866) 948 981 (33) 5.44 5.36 8 Deposits in foreign offices 1,094 846 248 61 46 15 5.58 5.44 14 --------------------------------------------------- Total interest-bearing deposits 34,864 35,217 (353) 1,457 1,428 29 4.18 4.06 12 Borrowed funds 18,594 18,314 280 1,099 1,066 33 5.91 5.82 9 --------------------------------------------------- Total interest-bearing liabilities/ interest expense 53,458 53,531 (73) 2,556 2,494 62 4.78 4.66 12 ----------------------------------------------------- Noninterest-bearing liabilities, capital securities and shareholders' equity 17,186 17,276 (90) ------------------------- Total liabilities and shareholders' equity $70,644 $70,807 $(163) ------------------------- Interest rate spread 3.15 3.02 13 Impact of noninterest-bearing sources .79 .81 (2) ----------------------- Net interest income/margin $2,524 $2,479 $45 3.94% 3.83% 11 bp - ---------------------------------------------------------------------------------------------------------------------------
Changes in net interest income and margin result from the interaction between the volume and composition of earning assets, related yields and associated funding costs. Accordingly, portfolio size, composition and related yields earned can have a significant impact on net interest income and margin. In 1997, average loans comprised 82.6% of average earning assets compared to 75.9% for 1996. A higher percentage of loans in the earning asset base coupled with growth in higher yielding asset categories, predominantly credit card, contributed positively to net interest income and margin. These positive impacts were partially offset by declining spreads primarily attributable to competitive pressures on certain loan and deposit products. Funding cost is affected by the composition of and rates paid on various funding sources. Average deposits comprised 63.0% and 63.7% of PNC Bank's total sources of funding for the years ended December 31, 1997 and 1996, respectively, with the remainder primarily comprised of wholesale funding obtained at prevailing market rates. Management anticipates modest balance sheet growth and continuation of the challenging competitive environment through 1998. PROVISION FOR CREDIT LOSSES The provision for credit losses was $70 million in 1997. No provision was recorded in the prior year. PNC Bank's loan portfolio is comprised of an increasingly larger proportion of consumer loans, primarily credit cards, which have inherently higher charge-offs. Accordingly, management anticipates the Corporation will continue to record higher provisions for credit losses in 1998. PNC BANK CORP. 40 12 NONINTEREST INCOME
Change Year ended December 31 - ----------------- dollars in millions 1997 1996 Amount Percent - -------------------------------------------------------------------------------- Asset management Asset management and trust $462 $378 $84 22.2% Mutual fund servicing 141 119 22 18.5 ----------------------- Total asset management 603 497 106 21.3 Service fees Deposit 317 289 28 9.7 Credit card and merchant services 93 30 63 NM Corporate finance and capital markets 83 65 18 27.7 Consumer services 75 64 11 17.2 Brokerage 54 54 Insurance 40 30 10 33.3 Other 50 34 16 47.1 ----------------------- Total service fees 712 566 146 25.8 Mortgage banking 156 154 2 1.3 Other 288 156 132 84.6 ----------------------- Total noninterest income before net securities gains 1,759 1,373 386 28.1 Net securities gains 49 22 27 NM ----------------------- Total $1,808 $1,395 $413 29.6% - -------------------------------------------------------------------------------- NM - not meaningful
Noninterest income before net securities gains totaled $1.759 billion in 1997, a $386 million or 28.1% increase compared with 1996. Net securities gains were $49 million in 1997 including $17 million associated with mortgage banking activities. Strong asset management and service fee growth reflects the strategic emphasis on expanding fee-based revenue. Asset management benefited from new business and market appreciation. Service fees exhibited strong growth in nearly all categories. Deposit fees increased $28 million due to a revised fee structure implemented during 1996 and higher treasury management revenue. Credit card and merchant services fees increased $63 million, reflecting credit card portfolio growth largely due to acquisitions to build scale in National Consumer Banking and the July 1996 termination of a third party alliance. Mortgage banking revenue grew primarily due to higher income from origination and securitization activities exceeding an $8 million decline in gains from the sale of servicing. Mortgage originations were $6.1 billion in 1997 compared with $5.6 billion in 1996. Other noninterest income increased in the comparison primarily due to a $27 million increase in venture capital income and asset securitization income of $55 million. NONINTEREST EXPENSE
Change Year ended December 31 - ------------------ dollars in millions 1997 1996 Amount Percent - -------------------------------------------------------------------------------- Staff expense Compensation $1,016 $930 $86 9.2% Employee benefits 192 180 12 6.7 ----------------------- Total staff expense 1,208 1,110 98 8.8 Net occupancy 189 197 (8) (4.1) Equipment 180 172 8 4.7 Goodwill amortization 53 54 (1) (1.9) Other amortization 121 63 58 92.1 Taxes other than income 57 53 4 7.5 Distributions on capital securities 43 1 42 NM Other 764 662 102 15.4 ----------------------- Total $2,615 $2,312 $303 13.1% - -------------------------------------------------------------------------------- NM - not meaningful
Noninterest expense increased $303 million to $2.615 billion in 1997 primarily due to $187 million of incremental costs associated with AAA and credit card-related national consumer initiatives. Higher incentive compensation commensurate with revenue growth and the cost of trust preferred capital securities also contributed to the increase. Excluding AAA and credit card-related national consumer initiatives and the cost of trust preferred capital securities, noninterest expense increased $74 million or 3%. Average full-time equivalent employees totaled 24,639 in 1997 compared with 25,020 in 1996. The efficiency ratio was 59.4% compared with 59.6% a year ago. YEAR 2000 The Corporation has been working to prepare its computer systems and applications for the year 2000. This process involves reviewing, modifying and replacing existing hardware and software as necessary and communicating with external service providers and customers to assure they are addressing their year 2000 issues. The Corporation is also assessing the potential for systems of third parties such as vendors, customers, governmental entities and others to impact the Corporation's business operations. Given the Corporation's common technology infrastructure, management estimates the review and modification of its computer systems and applications will be substantially completed by December 31, 1998. The expected total cost to become year 2000 compliant is approximately $30 million which is being expensed as incurred. Failure of the Corporation or third parties to correct year 2000 issues could cause disruption of operations resulting in increased operating costs. In addition, to the extent customers' financial positions are weakened as a result of year 2000 issues, credit quality could be affected. PNC BANK CORP. 41 13 FINANCIAL REVIEW 1997 VERSUS 1996 BALANCE SHEET REVIEW Total assets increased $1.9 billion since year-end 1996 primarily due to increases in loans, loans held for sale and short-term investments partially offset by a reduction in the securities portfolio. YEAR-END BALANCE SHEET HIGHLIGHTS
December 31 - in millions 1997 1996 Change - -------------------------------------------------------------------------------- Assets $75,120 $73,260 $1,860 Earning assets 66,688 65,439 1,249 Loans, net of unearned income 54,245 51,798 2,447 Securities 8,522 11,917 (3,395) Deposits 47,649 45,676 1,973 Borrowed funds 19,622 19,604 18 Shareholders' equity 5,384 5,869 (485) - --------------------------------------------------------------------------------
LOANS Loans outstanding increased $2.4 billion from year-end 1996 to $54.2 billion at December 31, 1997. Loan portfolio composition continues to be geographically diversified among numerous industries and types of businesses and reflects growth in the Corporation's core businesses, national consumer initiatives and the impact of acquisitions. As the Corporation's businesses evolve, the loan portfolio is expected to remain diversified. The credit card portfolio increased 38.0% due to AAA and other marketing initiatives. Growth in residential mortgages and commercial loans was partially offset by reductions in indirect automobile lending and $1.0 billion of student loan securitizations. Management anticipates modest loan portfolio growth in 1998. LOANS
December 31 - in millions 1997 1996 - -------------------------------------------------------------------------------- Consumer Home equity $4,848 $4,569 Automobile 3,221 3,731 Credit card 3,830 2,776 Student 1,223 1,725 Other 1,913 2,067 ----------------- Total consumer 15,035 14,868 Residential mortgage 12,785 12,703 Commercial Manufacturing 3,838 3,770 Retail/Wholesale 3,575 3,369 Service providers 2,497 2,464 Real estate related 2,047 1,527 Communications 1,154 1,239 Health care 1,504 1,277 Financial services 1,027 717 Other 4,347 4,225 ----------------- Total commercial 19,989 18,588 Commercial real estate Mortgage 1,848 1,941 Real estate project 2,126 2,157 ----------------- Total commercial real estate 3,974 4,098 Lease financing and other 2,874 1,926 Unearned income (412) (385) ----------------- Total, net of unearned income $54,245 $51,798 - --------------------------------------------------------------------------------
Unfunded commercial commitments, net of participations and syndications, totaled $29.7 billion and $27.1 billion at December 31, 1997 and 1996, respectively. Unfunded credit card commitments increased $2.9 billion to $16.4 billion. Commercial commitments generally have fixed expiration dates, may require payment of a fee, and contain termination clauses in the event the customer's credit quality deteriorates. Based on the Corporation's historical experience, most commitments expire unfunded and therefore cash requirements are substantially less than the total commitment. PNC BANK CORP. 42 14 SECURITIES The securities portfolio declined $3.4 billion from year-end 1996 to $8.5 billion at December 31, 1997. The expected weighted-average life of the securities portfolio was 2 years and 9 months at December 31, 1997 compared with 2 years and 11 months at year-end 1996. SECURITIES AVAILABLE FOR SALE
1997 1996 -------------------------------------------------------- December 31 - Amortized Fair Amortized Fair in millions Cost Value Cost Value - -------------------------------------------------------------------------------- Debt securities U.S. Treasury and government agencies $1,102 $1,105 $3,238 $3,237 Mortgage-backed 4,672 4,623 6,301 6,176 Asset-backed 2,079 2,083 1,609 1,615 State and municipal 170 177 218 227 Other debt 34 33 100 105 Corporate stocks and other 501 501 554 557 ----------------------------------- Total $8,558 $8,522 $12,020 $11,917 - --------------------------------------------------------------------------------
Securities available for sale may be sold as part of the overall asset/liability management process. Realized gains and losses are reflected in the results of operations and include gains or losses on associated financial derivatives. During 1997, $10.2 billion of securities were sold at a $49 million net gain. The securities portfolio includes collateralized mortgage obligations and other mortgage-backed securities. These securities are marketable and generally guaranteed, primarily by U.S. government agencies. Expected lives of such securities can vary as interest rates change. In a rising interest rate environment, prepayments on the underlying mortgage securities may slow and lengthen the expected lives. Conversely, expected lives would shorten in a declining interest rate environment. The Corporation monitors the impact of this risk through the use of an income simulation model as part of the asset/liability management process. The notional value of financial derivatives designated to securities available for sale was $5.5 billion at December 31, 1996. The net fair value of such financial derivatives, which is reflected in the preceding table, was less than $1 million. These contracts matured during 1997 and no financial derivatives were designated to securities available for sale at December 31, 1997. FUNDING SOURCES Deposits increased 4.3% to $47.6 billion at December 31, 1997 compared with $45.7 billion at year-end 1996 while borrowed funds remained relatively unchanged. Deposits increased primarily due to an increase in short-term foreign deposits. During 1997, the Corporation diversified its funding base by initiating a $2.5 billion Euro medium-term bank note program. The Corporation issued approximately $514 million of bank notes under this program. FUNDING SOURCES
December 31 - in millions 1997 1996 - -------------------------------------------------------------------------------- Deposits Demand, savings and money market $27,475 $27,027 Time 17,125 17,803 Foreign 3,049 846 ----------------- Total deposits 47,649 45,676 Borrowed funds Bank notes and senior debt 9,826 8,093 Federal funds purchased 3,632 3,933 Repurchase agreements 714 645 Other borrowed funds 3,753 5,576 Subordinated debt 1,697 1,357 ----------------- Total borrowed funds 19,622 19,604 ----------------- Total $67,271 $65,280 - --------------------------------------------------------------------------------
CAPITAL The access to and cost of funding new business initiatives including acquisitions, deposit insurance costs, ability to pay dividends and the level and nature of regulatory oversight depend, in large part, on a financial institution's capital strength. The minimum regulatory capital ratios are 4% for Tier I risk-based, 8% for total risk-based and 3% for leverage. However, regulators may require higher capital levels when particular circumstances warrant. To qualify as well capitalized, regulators require banks to maintain capital ratios of at least 6% for Tier I, 10% for total risk-based and 5% for leverage. At December 31, 1997, the Corporation and each bank subsidiary met the well capitalized capital ratio requirements. PNC BANK CORP. 43 15 FINANCIAL REVIEW 1997 VERSUS 1996 RISK-BASED CAPITAL
December 31 - dollars in millions 1997 1996 - -------------------------------------------------------------------------------- Capital components Shareholders' equity Common $5,069 $5,553 Preferred 315 316 Trust preferred capital securities 650 350 Goodwill and other (949) (1,003) Net unrealized securities losses 23 67 ----------------- Tier I risk-based capital 5,108 5,283 Subordinated debt 1,666 1,343 Eligible allowance for credit losses 861 801 ----------------- Total risk-based capital $7,635 $7,427 ----------------- Assets Risk-weighted assets and off-balance-sheet instruments $68,756 $63,761 Average tangible assets 69,948 68,597 ----------------- Capital ratios Tier I risk-based 7.43% 8.29% Total risk-based 11.11 11.65 Leverage 7.30 7.70 - --------------------------------------------------------------------------------
The capital position is managed through balance sheet size and composition, issuance of debt and equity instruments, treasury stock activities, dividend policies and retention of earnings. In May 1997, the Corporation issued $300 million of 8.315% mandatorily redeemable capital securities which qualify as Tier I capital. In July 1997, the Corporation issued $350 million of 6 7/8% subordinated notes that qualify as Tier II capital. In the fourth quarter of 1996, the Corporation issued $300 million of nonconvertible preferred stock and $350 million of 7.95% mandatorily redeemable capital securities. These issuances qualify as Tier I capital. During 1997, PNC Bank repurchased 29.3 million shares of common stock. In April 1997, the Corporation's board of directors authorized the repurchase of up to 15 million shares of common stock through March 31, 1998. At December 31, 1997 approximately 3.6 million shares remain under this authorization. RISK MANAGEMENT In the normal course of business, the Corporation assumes various types of risk, the most significant of which are credit, liquidity and interest rate risk. Market risk is also inherent in the Corporation's business operations. Market risk is the risk of loss associated with adverse changes in the fair value of financial instruments due to changes in interest rates, exchange rates and equity prices. To manage these risks, PNC Bank has risk management processes designed to provide for risk identification, measurement, monitoring and control. CREDIT RISK Credit risk represents the possibility that a customer or counterparty may not perform in accordance with contractual terms. Credit risk is inherent in the financial services business and results from extending credit to customers, purchasing securities and entering into off-balance-sheet financial derivative transactions. The Corporation seeks to manage credit risk through diversification, limiting exposure to any single industry or customer and requiring collateral or selling participations to third parties. The Corporation, through its credit management process, manages and monitors credit risk by establishing uniform credit policies and exercising centralized oversight, review and approval procedures. Credit Policy, at the direction of the board of directors, establishes underwriting standards that set forth the criteria used in extending credit. To support consistent application of underwriting standards, credit officers work with lending officers in evaluating the creditworthiness of borrowers and structuring transactions. Credit decisions are made at the line of business or market level. However, credit requests above certain limits or that involve exceptions to certain policies require additional corporate approvals. NONPERFORMING ASSETS
December 31 - dollars in millions 1997 1996 - -------------------------------------------------------------------------------- Nonaccrual loans Commercial $128 $156 Commercial real estate Mortgage 84 109 Real estate project 10 25 Consumer 10 6 Residential mortgage 44 51 --------------- Total nonaccrual loans 276 347 Restructured loans 2 --------------- Total nonperforming loans 276 349 Foreclosed assets Commercial real estate 27 71 Residential mortgage 21 22 Other 9 17 --------------- Total foreclosed assets 57 110 --------------- Total nonperforming assets $333 $459 --------------- Nonperforming loans to loans .51% .67% Nonperforming assets to loans and foreclosed assets .61 .88 Nonperforming assets to asset .44 .63 - --------------------------------------------------------------------------------
PNC BANK CORP. 44 16 At December 31, 1997, $34 million of nonperforming loans were current as to principal and interest compared with $80 million at December 31, 1996. CHANGE IN NONPERFORMING ASSETS
In millions 1997 1996 - --------------------------------------------------------------- January 1 $459 $536 Transferred from accrual 308 447 Returned to performing (26) (40) Principal reductions (230) (277) Sales (99) (134) Charge-offs and valuation adjustments (79) (73) ------------------------- December 31 $333 $459 - ---------------------------------------------------------------
ACCRUING LOANS PAST DUE 90 DAYS OR MORE
Amount Percent of Loans December 31 - ------------- ------------------ dollars in millions 1997 1996 1997 1996 - ------------------------------------------------------------- Consumer Guaranteed student $26 $51 2.32% 2.95% Credit card 69 43 1.80 1.56 Other 32 46 .33 .45 ---------------- Total consumer 127 140 .87 .96 Residential mortgage 60 58 .47 .46 Commercial 78 34 .39 .19 Commercial real estate 23 12 .59 .29 ---------------- Total $288 $244 .53 .47 - -------------------------------------------------------------
Loans not included in past due, nonaccrual or restructured categories, but where known information about possible credit problems causes management to be uncertain of the borrower's ability to comply with existing repayment terms over the next six months totaled $41 million at December 31, 1997. ALLOWANCE FOR CREDIT LOSSES In determining the adequacy of the allowance for credit losses, the Corporation makes allocations to specific problem loans based on discounted cash flow analyses or collateral valuations for impaired loans and to pools of watchlist and nonwatchlist loans for various credit risk factors. Allocations to loan pools are developed by risk rating and industry classifications and based on management's judgment concerning historical loss trends and other relevant factors. These factors may include, among others, local, regional and national economic conditions, portfolio concentrations, industry competition and consolidation and the impact of government regulation. Consumer and residential mortgage loan allocations are based on historical loss experience adjusted for portfolio activity and current economic conditions. ALLOWANCE FOR CREDIT LOSSES
In millions 1997 1996 - --------------------------------------------------------- January 1 $1,166 $1,259 Charge-offs (385) (247) Recoveries 113 83 -------------------- Net charge-offs (272) (164) Provision for credit losses 70 Acquisitions 8 71 -------------------- December 31 $972 $1,166 - ---------------------------------------------------------
The allowance as a percent of nonperforming loans and period-end loans was 352% and 1.79%, respectively, at December 31, 1997. The comparable 1996 amounts were 334% and 2.25%. CHARGE-OFFS AND RECOVERIES
Year ended Net Percent of December 31 - Charge- Charge- Average dollars in millions offs Recoveries offs Loans - ------------------------ ------------------------------------------ 1997 Consumer $107 $37 $70 .62% Credit card 208 25 183 5.14 Residential mortgage 9 1 8 .06 Commercial 49 38 11 .06 Commercial real estate 12 12 ----------------------------- Total $385 $113 $272 .51 - ------------------------------------------------------------------------ 1996 Consumer $101 $35 $66 .54% Credit card 66 7 59 5.06 Residential mortgage 9 2 7 .06 Commercial 53 29 24 .14 Commercial real estate 18 10 8 .19 ---------------------------- Total $247 $83 $164 .33 - ------------------------------------------------------------------------
Credit card net charge-offs increased $124 million in the comparison primarily due to higher outstandings associated with purchased portfolios. PNC BANK CORP. 45 17 FINANCIAL REVIEW 1997 VERSUS 1996 LIQUIDITY RISK Liquidity represents an institution's ability to generate cash or otherwise obtain funds at reasonable rates to satisfy commitments to borrowers and demands of depositors and debtholders and to invest in strategic initiatives. Liquidity risk represents the possibility the Corporation would be unable to generate cash or otherwise obtain funds at reasonable rates to satisfy such obligations or investments in strategic initiatives. Liquidity risk is managed through the coordination of the expected maturities of assets, liabilities and off-balance-sheet positions and is enhanced by the ability to raise funds in capital markets through direct borrowing or asset securitizations. The ability to raise funds in the capital markets depends, among other factors, on credit ratings, market conditions, capital considerations and investor demand. Liquid assets consist of cash and due from banks, short-term investments, loans held for sale and securities available for sale. At December 31, 1997, such assets totaled $16.7 billion, with $4.5 billion pledged as collateral for borrowing, trust and other commitments. Liquidity is also provided by residential mortgages which may be used as collateral for funds obtained through the Federal Home Loan Bank ("FHLB") system. At December 31, 1997, approximately $5.9 billion of residential mortgages were available as collateral for borrowings from the FHLB. During 1997, cash and due from banks increased $287 million to $4.3 billion compared with an increase of $337 million in 1996. Net cash used by operating activities totaled $41 million in 1997 compared with $210 million provided a year earlier. The funding of loan originations resulted in a $48 million use of cash by investing activities in 1997. Investing activities provided cash of $1.6 billion in 1996. Net cash provided by financing activities totaled $376 million compared with $1.4 billion used a year earlier. The principal source of parent company revenue and cash flow is dividends from subsidiary banks. PNC Bancorp, Inc. is a wholly-owned subsidiary of the parent company and is the holding company for all bank subsidiaries. There are legal limitations on the ability of bank subsidiaries to pay dividends and make other distributions to PNC Bancorp, Inc. and in turn the parent company. Without regulatory approval, the amount available for dividend payments to PNC Bancorp, Inc. by all bank subsidiaries was $237 million at December 31, 1997. Dividends may also be impacted by capital needs, regulatory requirements, corporate policies, contractual restrictions and other factors. Liquidity for the parent company and subsidiaries is also generated through the issuance of securities in public or private markets and lines of credit. In July 1997, PNC Bank issued $350 million of subordinated notes. The Corporation also has unused capacity under effective shelf registration statements of approximately $1.4 billion of debt and equity securities. In addition, the Corporation had a $500 million unused line of credit. Management believes the Corporation has sufficient liquidity to meet current obligations to borrowers, depositors, debtholders and others. The impact of replacing maturing liabilities is reflected in the income simulation model used in the overall asset/liability management process. INTEREST RATE RISK Interest rate risk arises primarily through the Corporation's core business activities of extending loans and taking deposits. Many factors, including economic and financial conditions, movements in market interest rates and consumer preferences, affect the spread between interest earned on assets and interest paid on liabilities. In managing interest rate risk, the Corporation seeks to minimize its reliance on a particular interest rate scenario as a source of earnings, while maximizing net interest income and net interest margin. To achieve these objectives, the Corporation uses securities purchases and sales, long-term and short-term funding vehicles, financial derivatives and other capital markets instruments. Interest rate risk is centrally managed by Asset and Liability ("A&L") Management. The Corporation actively measures and monitors all components of interest rate risk including term structure or repricing risk, yield curve or nonparallel rate shift risk, basis risk and options risk. Senior management's Corporate Asset & Liability Committee ("ALCO") provides strategic direction to A&L Management and, in doing so, reviews capital markets activities and interest rate risk exposures. The Finance Committee of the Board of Directors, which meets quarterly, is responsible for overseeing the Corporation's interest rate risk management process. The Corporation measures and manages both the short-term and long-term effects of changing interest rates. A net interest income simulation model is used to measure the sensitivity of net interest income to changing interest rates over the next twenty-four month period; and an economic value of equity model is used to measure the sensitivity of the value of existing on- and off-balance sheet positions to changing interest rates. The income simulation model is the primary tool used to measure the direction and magnitude of changes in net interest income resulting from changes in interest rates. Forecasting net interest income and its sensitivity to changes in interest rates requires that the Corporation make assumptions about the volume and characteristics of new business and the behavior of existing positions. These business assumptions are based on the Corporation's experience, line of business plans and published industry experience with input by key line of business managers. Any significant changes in major assumptions are reviewed by Corporate ALCO. This review includes an assessment of the motivation for the change and its effect on the simulated results. Key assumptions employed in the model include prepayment speeds on mortgage-related assets and consumer loans, loan PNC BANK CORP. 46 18 volumes and pricing, deposit volumes and pricing, the expected life and repricing characteristics of nonmaturity loans and deposits and management's financial and capital plans. Because these assumptions are inherently uncertain, the model cannot precisely estimate net interest income or precisely predict the effect of higher or lower interest rates on net interest income. Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes, the difference between actual experience and the assumed volume and characteristics of new business and the behavior of existing positions, and changes in market conditions and management strategies, among other factors. The Corporation's interest rate risk management policies provide that net interest income should not decrease by more than 3% if interest rates gradually increase or decrease from current rates by 100 basis points over a twelve-month period. Over the course of 1997, the Corporation's interest rate risk exposures were consistently within policy limits. At December 31, 1997, if interest rates were to increase by 100 basis points over the next twelve months, net interest income would decline by 0.8%. If interest rates were to decrease by 100 basis points over the next twelve months there would be no effect on net interest income. The Corporation models additional interest rate scenarios covering a wider range of rate movements to identify yield curve, term structure and basis risk exposures. These scenarios are developed based on historical rate relationships or management's expectations regarding the future direction and level of interest rates. Depending on market conditions and other factors, these scenarios may be modeled more or less frequently. Such analyses are used in conjunction with the income simulation model and economic value of equity model to identify inherent risk and develop appropriate strategies. The Corporation measures the sensitivity of the value of its balance sheet and off-balance sheet positions to movements in interest rates using an economic value of equity sensitivity model. The model computes the value of all current on- and off-balance sheet positions under a range of instantaneous interest rate changes. The resulting change in the value of equity is the measure of overall long-term interest rate risk inherent in the Corporation's existing on- and off-balance sheet positions. The Corporation uses the economic value of equity model to complement the income simulation modeling process. Economic value of equity sensitivities are periodically reported to Corporate ALCO and the Finance Committee of the Board of Directors. Based on the results of the economic value of equity model at December 31, 1997, if interest rates were to increase by 100 basis points, the economic value of existing on- and off-balance sheet positions would increase by 0.02% of assets. If interest rates were to decrease by 100 basis points, the economic value of existing on- and off-balance sheet positions would decline by 0.16% of assets. MARKET RISK PNC Bank's market risk is predominantly related to interest rate risk associated with normal loan and deposit taking. Market risk associated with trading, capital markets and foreign exchange activities is managed using a value-at-risk approach that combines interest rate risk, foreign exchange rate risk, spread risk and volatility risk. Exposure is measured as the maximum loss due to a two standard deviation one day move. The combined year-end value-at-risk of all trading operations was less than $300 thousand. Most of PNC Bank's trading activities are designed to provide capital markets services for Corporate Banking and Private Banking customers. While some market risk exposure is a necessary outgrowth of providing services to customers, the performance of PNC Bank's trading operations is predominantly based on providing value-added services to our customers and not on positioning the Corporation's portfolio for gains from market movements. PNC BANK CORP. 47 19 FINANCIAL REVIEW 1997 VERSUS 1996 FINANCIAL DERIVATIVES A variety of off-balance-sheet financial derivatives are used as part of the overall interest rate risk management process to manage interest rate risk inherent in the Corporation's line of business activities. Interest rate swaps and purchased interest rate caps and floors are the primary instruments used for these purposes. Interest rate swaps are agreements to exchange fixed and floating interest rate payments calculated on a notional principal amount. The floating rate is based on a money market index, primarily short-term LIBOR indices. Purchased interest rate caps and floors are agreements where, for a fee, the counterparty agrees to pay the Corporation the amount, if any, by which a specified market interest rate exceeds or is less than a defined rate applied to a notional amount, respectively. Forward contracts provide for the delivery of financial instruments at a specified future date and at a specified price or yield. Such contracts are primarily used to manage risk positions associated with certain mortgage banking activities. Financial derivatives involve, to varying degrees, interest rate and credit risk in excess of the amount recognized in the balance sheet, but less than the notional amount of the contract. For interest rate swaps, caps and floors, only periodic cash payments and, with respect to caps and floors, premiums, are exchanged. Therefore, cash requirements and exposure to credit risk are significantly less than the notional value. The following table sets forth changes in off-balance-sheet financial derivatives used for interest rate risk management and mortgage banking activities during 1997. FINANCIAL DERIVATIVES ACTIVITY
Weighted- Average 1997 - dollars in millions January 1 Additions Maturities Terminations December 31 Maturity - --------------------------------------------------------------------------------------------------------------------------------- Interest rate risk management Interest rate swaps Receive fixed $7,003 $2,304 $(1,357) $(3,630) $4,320 2 yr. 0 mo. Pay fixed 602 (154) 448 2 yr. 3 mo. Basis swaps 335 981 (305) 1,011 5 yr. 3 mo. Interest rate caps 5,813 372 (5,643) 542 3 yr. 8 mo. Interest rate floors 2,500 1,146 (1) 3,645 1 yr. 6 mo. ----------------------------------------------------------- Total interest rate risk management 16,253 4,803 (7,460) (3,630) 9,966 2 yr. 3 mo. Mortgage banking activities Forward contracts Commitments to purchase loans 395 10,171 (8,914) 1,652 2 mo. Commitments to sell loans 894 10,115 (9,674) 1,335 2 mo. Interest rate floors - MSR 1,050 670 (250) 1,470 4 yr. 2 mo. ----------------------------------------------------------- Total mortgage banking activities 2,339 20,956 (18,588) (250) 4,457 ----------------------------------------------------------- Total $18,592 $25,759 $(26,048) $(3,880) $14,423 - ---------------------------------------------------------------------------------------------------------------------------------
During 1997, financial derivatives used in interest rate risk management reduced net interest income by $14 million compared with an $11 million reduction in the prior year. PNC BANK CORP. 48 20 The following table sets forth by designated assets and liabilities the notional value and the estimated fair value of financial derivatives used for interest rate risk management and mortgage banking activities. Weighted-average interest rates presented are those expected to be in effect based on the implied forward yield curve. FINANCIAL DERIVATIVES
Forward Yield Curve Notional Estimated ------------------- December 31, 1997 - dollars in millions Value Fair Value Paid Received - --------------------------------------------------------------------------------------------------------------------------- Interest rate risk management Asset rate conversion Interest rate swaps(1) Receive fixed designated to loans $3,170 $64 5.79% 6.45% Pay fixed designated to loans 427 (10) 7.30 5.89 Basis swaps designated to other earning assets 336 2 5.77 5.99 Interest rate caps designated to loans(2) 542 4 NM NM Interest rate floors designated to loans(3) 3,645 4 NM NM ---------------------- Total asset rate conversion 8,120 64 Liability rate conversion Interest rate swaps(1) Receive fixed designated to interest-bearing liabilities 1,150 37 5.88 6.31 Pay fixed designated to borrowed funds 21 3 5.47 6.38 Basis swaps designated to borrowed funds 675 1 5.96 5.99 ---------------------- Total liability rate conversion 1,846 41 ---------------------- Total interest rate risk management 9,966 105 Mortgage banking activities Forward contracts Commitments to purchase loans 1,652 (1) NM NM Commitments to sell loans 1,335 (5) NM NM Interest rate floors - MSR(3) 1,470 26 NM NM ---------------------- Total mortgage banking activities 4,457 20 ---------------------- Total financial derivatives $14,423 $125 - ---------------------------------------------------------------------------------------------------------------------------
(1) The floating rate portion of interest rate contracts is based on money-market indices. As a percent of notional value, 67% were based on 1-month LIBOR, 28% on 3-month LIBOR and the remainder on other short-term indices. (2) Substantially all interest rate caps require the counterparty to pay the Corporation the excess, if any, of 3-month LIBOR over a weighted-average strike of 6.32%. (3) Interest rate floors with notional values of $3.5 billion and $1.5 billion require the counterparty to pay the Corporation the excess, if any, of the weighted-average strike of 5.16% over 3-month LIBOR and the weighted-average strike of 5.91% over 10-year CMT, respectively. At December 31, 1997, 3-month LIBOR was 5.81% and 10-year CMT was 5.75%. NM - not meaningful CUSTOMER-RELATED DERIVATIVES To accommodate customer needs, PNC Bank enters into financial derivatives transactions primarily consisting of interest rate swaps, caps, floors and foreign exchange contracts. Risk exposure from customer positions is managed through transactions with other dealers. These positions are recorded at estimated fair value and changes in value are included in the results of operations. The opposing schedule sets forth information relating to positions associated with customer derivatives.
Positive Negative Notional Fair Fair Net Asset December 31, 1997 - in millions Value Value Value (Liability) - --------------------------------------------------------------------------------------- Interest rate Swaps $3,518 $ 15 $ (14) $ 1 Caps/floors Sold 1,340 (4) (4) Purchased 1,215 4 4 Foreign exchange 1,700 23 (23) Other 734 1 (1) ------------------------------------------------------ Total $8,507 $ 43 $ (42) $ 1 - ----------------------------------------------------------------------------------------
PNC BANK CORP. 49 21 FINANCIAL REVIEW 1996 VERSUS 1995 OVERVIEW Net income for 1996 totaled $992 million or $2.88 per diluted share compared with $408 million or $1.19, respectively, in 1995. Returns on average common shareholders' equity and average assets for 1996 were 17.18% and 1.40%, respectively, compared with 7.05% and 0.54%, respectively, in 1995. The 1996 results include a $22 million after-tax charge to recapitalize the SAIF. Excluding the SAIF assessment, earnings for 1996 totaled $1.015 billion or $2.94 per diluted share. On this basis, returns on average common shareholders' equity and average assets were 17.58% and 1.43%, respectively. The 1995 results include $380 million of after-tax charges recorded in connection with the Midlantic Corporation ("Midlantic") merger and actions taken to reposition the Corporation's balance sheet. Excluding these charges, 1995 earnings were $788 million or $2.30 per diluted share. INCOME STATEMENT REVIEW INCOME STATEMENT HIGHLIGHTS
Year ended December 31 - in millions 1996 1995 Change - ---------------------------------------------------------------------------- Net interest income (taxable-equivalent basis) $2,479 $2,189 $290 Provision for credit losses 6 (6) Noninterest income before net securities gains (losses) 1,373 1,240 133 Net securities gains (losses) 22 (280) 302 Noninterest expense before special charges 2,312 2,209 103 Special charges 260 (260) Income taxes 535 219 316 Net income 992 408 584 - -----------------------------------------------------------------------------
NET INTEREST INCOME Taxable-equivalent net interest income totaled $2.479 billion in 1996 compared with $2.189 billion for 1995. The net interest margin widened to 3.83% in 1996 compared with 3.15% in 1995. These increases were primarily due to loan growth, the October 1995 Chemical Bank, New Jersey acquisition and changes in balance sheet composition. PROVISION FOR CREDIT LOSSES Favorable economic conditions during 1996 and 1995, combined with management's ongoing attention to asset quality, resulted in lower nonperforming assets and strong coverage ratios. The Corporation did not record a provision for credit losses in 1996 compared with a provision of $6 million in 1995. NONINTEREST INCOME Noninterest income before securities transactions increased $133 million to $1.373 billion in 1996. Asset management and trust revenue increased $77 million or 18.3% due to new business and an increase in the value of assets under administration. Service fees increased $71 million in 1996 to $566 million, primarily reflecting growth in deposit services, treasury management, brokerage and corporate finance. During 1996, mortgage banking revenue decreased $33 million to $154 million primarily due to lower servicing sales. Other noninterest income increased $18 million to $156 million in 1996 primarily due to higher venture capital income. Net securities gains totaled $22 million in 1996 compared with losses of $280 million in 1995. During 1995, securities were sold and related financial derivatives were terminated in connection with initiatives to downsize the securities portfolio and to reduce interest rate sensitivity. NONINTEREST EXPENSE Noninterest expense before special charges increased $103 million or 4.7% in 1996 primarily due to purchase acquisitions consummated during 1995, incentive compensation and the one-time assessment to recapitalize the SAIF. Compensation expense increased primarily due to acquisitions and incentive compensation in fee-based businesses including asset management and brokerage. In connection with the Midlantic merger, the Corporation recorded special charges of $260 million in 1995 for elimination of duplicate operations and facilities, employee severance, professional services, termination of an interest rate cap position and various other costs. PNC BANK CORP. 50 22 BALANCE SHEET REVIEW Total assets and earning assets were $73.3 billion and $65.4 billion, respectively, at December 31, 1996 compared with $73.4 billion and $66.8 billion at year-end 1995. The decline was primarily due to a reduced securities portfolio offset by loan growth. LOANS Loans outstanding increased $3.1 billion from year-end 1995 to $51.8 billion at December 31, 1996. Loan portfolio composition remained relatively consistent in the comparison except for an increase in the credit card portfolio attributable to AAA-related initiatives. SECURITIES The securities portfolio declined $3.9 billion from year-end 1995 to $11.9 billion at December 31, 1996, reflecting the impact of management's actions to reduce reliance on investment activities and related wholesale funding. The following table presents the amortized cost and fair value of securities available for sale at year-end 1996 and 1995. SECURITIES AVAILABLE FOR SALE
1996 1995 ------------------------------------------------------- December 31 - Amortized Fair Amortized Fair in millions Cost Value Cost Value - ------------------------------------------------------------------------------------ Debt securities U.S. Treasury and government agencies $ 3,238 $ 3,237 $ 4,241 $ 4,314 Mortgage-backed 6,301 6,176 8,631 8,566 Asset-backed 1,609 1,615 2,023 2,032 State and municipal 218 227 343 367 Other debt 100 105 99 97 Corporate stocks and other 554 557 455 457 Associated derivatives 6 ------------------------------------------------------- Total $12,020 $11,917 $15,792 $15,839 - ------------------------------------------------------------------------------------
FUNDING SOURCES Deposits decreased $1.2 billion to $45.7 billion compared with $46.9 billion at year-end 1995. Time deposits declined $858 million as consumers sought more attractive yields from alternative investments. Borrowed funds totaled $19.6 billion at December 31, 1996 compared with $19.1 billion at the end of 1995. ASSET QUALITY The allowance for credit losses totaled $1.2 billion at December 31, 1996 compared with $1.3 billion at December 31, 1995. ASSET QUALITY
December 31 - in millions 1996 1995 - ------------------------------------------------------------------ Nonperforming assets $459 $536 Accruing loans past due 90 days or more Consumer 97 87 Credit card 43 8 Residential mortgage 58 63 Commercial 34 22 Commercial real estate 12 45 -------------------- Total $244 $225 -------------------- Allowance as a percent of period-end Loans 2.25% 2.59% Nonperforming loans 334.40 351.68 - ------------------------------------------------------------------
CAPITAL Shareholders' equity totaled $5.9 billion and $5.8 billion at December 31, 1996 and 1995, respectively, and the leverage ratio was 7.70% and 6.37% in the comparison. Tier I and total risk-based capital ratios were 8.29% and 11.65%, respectively, at December 31, 1996. The comparable December 31, 1995 ratios were 8.00% and 11.56%, respectively. PNC BANK CORP. 51 23 FINANCIAL REVIEW 1996 VERSUS 1995 The following table sets forth by designated assets and liabilities the notional value and the estimated fair value of financial derivatives used for interest rate risk management and mortgage banking activities. Weighted-average interest rates presented are those expected to be in effect based on the implied forward yield curve at December 31, 1996. FINANCIAL DERIVATIVES
Forward Yield Curve Notional Estimated ---------------------- December 31, 1996 - dollars in millions Value Fair Value Paid Received - --------------------------------------------------------------------------------------------------------------------------- Interest rate risk management Asset rate conversion Interest rate swaps(1) Receive fixed designated to loans $6,020 $100 5.88% 5.94% Pay fixed designated to loans 552 (15) 7.36 6.17 Interest rate caps designated to(2) Securities 5,500 NM NM Loans 313 2 NM NM Interest rate floors designated to loans(3) 2,500 3 NM NM --------------------- Total asset rate conversion 14,885 90 Liability rate conversion Interest rate swaps(1) Receive fixed designated to interest-bearing liabilities 983 9 5.88 6.12 Pay fixed designated to borrowed funds 50 5.63 5.68 Basis swaps designated to borrowed funds 335 3 5.67 5.66 --------------------- Total liability rate conversion 1,368 12 --------------------- Total interest rate risk management 16,253 102 Mortgage banking activities Forward contracts Commitments to purchase loans 395 (1) NM NM Commitments to sell loans 894 NM NM Interest rate floors - MSR(3) 1,050 10 NM NM --------------------- Total mortgage banking activities 2,339 9 --------------------- Total financial derivatives $18,592 $111 - ---------------------------------------------------------------------------------------------------------------------------
(1) The floating rate portion of interest rate contracts is based on money-market indices. As a percent of notional value, 51% were based on 3-month LIBOR, 45% on 1-month LIBOR and the remainder on other short-term indices. (2) Interest rate caps with notional values of $5.783 billion and $30 million require the counterparty to pay the Corporation the excess, if any, of 3-month LIBOR over a weighted-average strike of 6.49% and 1-month LIBOR over 6.75%, respectively. (3) Interest rate floors with notional values of $2.5 billion and $1.05 billion require the counterparty to pay the Corporation the excess, if any, of the weighted-average strike of 4.92% over 3-month LIBOR and the weighted-average strike of 5.88% over 10-year CMT. At December 31, 1996, 1-month LIBOR was 5.50%, 3-month LIBOR was 5.56% and 10-year CMT was 6.43%. NM - not meaningful PNC BANK CORP. 52 24 REPORTS ON CONSOLIDATED FINANCIAL STATEMENTS MANAGEMENT'S REPORT PNC Bank Corp. is responsible for the preparation, integrity and fair presentation of its published financial statements. The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles and, as such, include judgments and estimates of management. PNC Bank Corp. also prepared the other information included in the annual report and is responsible for its accuracy and consistency with the consolidated financial statements. Management is responsible for establishing and maintaining effective internal control over financial reporting. The internal control system is augmented by written policies and procedures and by audits performed by an internal audit staff which reports to the Audit Committee of the Board of Directors. Internal auditors monitor the operation of the internal control system and report findings to management and the Audit Committee, and corrective actions are taken to address identified control deficiencies and other opportunities for improving the system. The Audit Committee, composed solely of outside directors, provides oversight to the financial reporting process. There are inherent limitations in the effectiveness of any system of internal control, including the possibility of human error and circumvention or overriding of controls. Accordingly, even an effective internal control system can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness of an internal control system may vary over time. Management assessed PNC Bank Corp.'s internal control over financial reporting as of December 31, 1997. This assessment was based on criteria for effective internal control over financial reporting described in "Internal Control-Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management believes that PNC Bank Corp. maintained an effective internal control system over financial reporting as of December 31, 1997. /s/ Thomas H. O'Brien /s/ Robert L. Haunschild - ----------------------------- --------------------------------------- Thomas H. O'Brien Robert L. Haunschild Chairman and Senior Vice President and Chief Executive Officer Chief Financial Officer REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS SHAREHOLDERS AND BOARD OF DIRECTORS PNC BANK CORP. We have audited the accompanying consolidated balance sheet of PNC Bank Corp. and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of PNC Bank Corp.'s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of PNC Bank Corp. and subsidiaries at December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Pittsburgh, Pennsylvania January 23, 1998 PNC BANK CORP. 53 25 CONSOLIDATED STATEMENT OF INCOME
Year ended December 31 - dollars in millions, except per share data 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------- INTEREST INCOME Loans and fees on loans $4,354 $3,943 $3,743 Securities 540 859 1,283 Other 157 136 123 ----------------------------------------------- Total interest income 5,051 4,938 5,149 ----------------------------------------------- INTEREST EXPENSE Deposits 1,457 1,428 1,552 Borrowed funds 1,099 1,066 1,455 ----------------------------------------------- Total interest expense 2,556 2,494 3,007 ---------------------------------------------- Net interest income 2,495 2,444 2,142 Provision for credit losses 70 6 ----------------------------------------------- Net interest income less provision for credit losses 2,425 2,444 2,136 ----------------------------------------------- NONINTEREST INCOME Asset management and trust 603 497 420 Service fees 712 566 495 Mortgage banking 156 154 187 Net securities gains (losses) 49 22 (280) Other 288 156 138 ----------------------------------------------- Total noninterest income 1,808 1,395 960 ----------------------------------------------- NONINTEREST EXPENSE Staff expense 1,208 1,110 1,065 Net occupancy and equipment 369 369 346 Amortization 174 117 115 Other 821 715 683 Distributions on capital securities 43 1 Special charges 260 ----------------------------------------------- Total noninterest expense 2,615 2,312 2,469 ----------------------------------------------- Income before income taxes 1,618 1,527 627 Income taxes 566 535 219 ----------------------------------------------- Net income $1,052 $992 $408 ----------------------------------------------- EARNINGS PER COMMON SHARE Basic $3.33 $2.91 $1.20 Diluted 3.28 2.88 1.19 CASH DIVIDENDS DECLARED PER COMMON SHARE 1.50 1.42 1.40 AVERAGE COMMON SHARES OUTSTANDING (in thousands) Basic 310,147 338,568 336,455 Diluted 316,221 344,576 343,868 - ---------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements. PNC BANK CORP. 54 26 CONSOLIDATED BALANCE SHEET
December 31 - dollars in millions, except par value 1997 1996 - --------------------------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $4,303 $4,016 Short-term investments 1,526 774 Loans held for sale 2,324 941 Securities available for sale 8,522 11,917 Loans, net of unearned income of $412 and $385 54,245 51,798 Allowance for credit losses (972) (1,166) ------------------------------ Net loans 53,273 50,632 Other 5,172 4,980 ------------------------------ Total assets $75,120 $73,260 ------------------------------ LIABILITIES Deposits Noninterest-bearing $10,158 $10,937 Interest-bearing 37,491 34,739 ------------------------------ Total deposits 47,649 45,676 Borrowed funds Bank notes and senior debt 9,826 8,093 Federal funds purchased 3,632 3,933 Repurchase agreements 714 645 Other borrowed funds 3,753 5,576 Subordinated debt 1,697 1,357 ------------------------------ Total borrowed funds 19,622 19,604 Other 1,815 1,761 ------------------------------ Total liabilities 69,086 67,041 Mandatorily redeemable capital securities of subsidiary trusts 650 350 SHAREHOLDERS' EQUITY Preferred stock 7 7 Common stock - $5 par value Authorized: 450,000,000 shares Issued: 348,447,600 and 345,154,238 shares 1,742 1,726 Capital surplus 1,042 939 Retained earnings 4,641 4,075 Deferred benefit expense (41) (60) Net unrealized securities losses (23) (67) Common stock held in treasury at cost: 48,017,641 and 21,036,195 shares (1,984) (751) ------------------------------ Total shareholders' equity 5,384 5,869 ------------------------------ Total liabilities, capital securities and shareholders' equity $75,120 $73,260 ===========================================================================================================================
See accompanying Notes to Consolidated Financial Statements. PNC BANK CORP. 55 27 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Preferred Common Capital Retained Dollars in millions, except per share data Stock Stock Surplus Earnings Other Total - --------------------------------------------------------------------------------------------------------------------------- Balance at January 1, 1995 $51 $1,719 $692 $3,535 $(270) $5,727 Net income 408 408 Cash dividends declared Common (PNC - $1.40, Midlantic - $.96 per share) (383) (383) Preferred (3) (3) Common stock issued (4,532,108 shares) 23 (8) 15 Preferred stock redeemed (50) (50) Treasury stock activity 5 (119) (114) Midlantic merger - treasury stock issued (38) (146) 184 Tax benefit of ESOP and stock option plans 2 14 16 Deferred benefit expense 4 4 Net unrealized securities gains 148 148 -------------------------------------------------------------------------- Balance at December 31, 1995 1 1,704 545 3,571 (53) 5,768 -------------------------------------------------------------------------- Net income 992 992 Cash dividends declared Common (482) (482) Preferred (6) (6) Common stock issued (4,290,890 shares) 22 74 96 Preferred stock issued (6,000,000 shares) 6 290 296 Treasury stock activity 1 (1) (751) (751) Tax benefit of ESOP and stock option plans 29 1 30 Deferred benefit expense 19 19 Net unrealized securities losses (93) (93) -------------------------------------------------------------------------- Balance at December 31, 1996 7 1,726 939 4,075 (878) 5,869 -------------------------------------------------------------------------- Net income 1,052 1,052 Cash dividends declared Common (469) (469) Preferred (19) (19) Common stock issued (3,293,362 shares) 16 57 73 Treasury stock activity 19 (1,233) (1,214) Tax benefit of ESOP and stock option plans 27 2 29 Deferred benefit expense 19 19 Net unrealized securities gains 44 44 -------------------------------------------------------------------------- Balance at December 31, 1997 $7 $1,742 $1,042 $4,641 $(2,048) $5,384 ===========================================================================================================================
See accompanying Notes to Consolidated Financial Statements. PNC BANK CORP. 56 28 CONSOLIDATED STATEMENT OF CASH FLOWS
Year ended December 31 - in millions 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $1,052 $992 $408 Adjustments to reconcile net income to net cash provided (used) by operating activities Provision for credit losses 70 6 Depreciation, amortization and accretion 346 290 296 Deferred income taxes 133 190 128 Net securities (gains) losses (49) (22) 280 Net gain on sales of assets (179) (89) (77) Valuation adjustments (3) (9) (15) Change in Loans held for sale (1,383) (282) (172) Other (28) (860) 266 ----------------------------------------------- Net cash provided (used) by operating activities (41) 210 1,120 ----------------------------------------------- INVESTING ACTIVITIES Net change in loans (5,182) (1,657) (2,021) Repayment Securities available for sale 2,014 6,045 1,791 Investment securities 1,944 Purchases Securities available for sale (8,725) (9,063) (3,409) Investment securities (161) Credit card portfolios (202) (1,822) Other loans (332) (683) (702) Sales Securities available for sale 10,223 6,789 7,983 Loans 2,863 671 160 Foreclosed assets 116 151 125 Net cash received for acquisitions/divestitures 460 49 Other (823) 664 1,276 ----------------------------------------------- Net cash provided (used) by investing activities (48) 1,555 7,035 ----------------------------------------------- FINANCING ACTIVITIES Net change in Noninterest-bearing deposits (779) 221 272 Interest-bearing deposits 2,766 (1,919) (2,134) Federal funds purchased (301) (541) (125) Sale/issuance Repurchase agreements 84,315 70,626 74,102 Bank notes and senior debt 9,125 8,197 7,946 Other borrowed funds 99,469 88,663 98,786 Subordinated debt 350 344 Capital securities 300 350 Preferred stock 296 Common stock 155 120 88 Repayment/maturity Repurchase agreements (84,246) (72,832) (75,553) Bank notes and senior debt (7,390) (6,561) (10,686) Other borrowed funds (101,368) (86,991) (100,250) Subordinated debt (5) Redemption of preferred stock (50) Acquisition of treasury stock (1,532) (569) (236) Cash dividends paid (488) (488) (387) ----------------------------------------------- Net cash provided (used) by financing activities 376 (1,428) (7,888) ----------------------------------------------- INCREASE IN CASH AND DUE FROM BANKS 287 337 267 Cash and due from banks at beginning of year 4,016 3,679 3,412 ----------------------------------------------- Cash and due from banks at end of year $4,303 $4,016 $3,679 ----------------------------------------------- CASH PAID FOR Interest $2,569 $2,636 $3,102 Income taxes 418 193 122 NONCASH ITEMS Increase in securities available for sale 18,078 Decrease in investment securities (18,078) Transfers from loans to other assets 71 76 99 ===========================================================================================================================
See accompanying Notes to Consolidated Financial Statements. PNC BANK CORP. 57 29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS BUSINESS PNC Bank Corp. ("Corporation" or "PNC Bank") is one of the largest diversified financial services organizations in the United States. The Corporation's major businesses include National Consumer Banking, Regional Community Banking, Private Banking, Secured Lending, Asset Management and Servicing, Corporate Banking and Mortgage Banking. Financial products and services are customized for specific customer segments and offered nationally and in PNC Bank's primary geographic markets in Pennsylvania, New Jersey, Delaware, Ohio, Kentucky, Indiana, Massachusetts and Florida. PNC Bank is subject to intense competition from other financial services companies with respect to these businesses and is subject to the regulations of certain federal and state agencies and undergoes periodic examinations by certain regulatory authorities. NOTE 1 ACCOUNTING POLICIES BASIS OF FINANCIAL STATEMENT PRESENTATION The consolidated financial statements include the accounts of PNC Bank and its subsidiaries, substantially all of which are wholly owned. Such statements have been prepared in accordance with generally accepted accounting principles. All significant intercompany accounts and transactions have been eliminated. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the amounts reported. Actual results will differ from such estimates and such differences may be material to the financial statements. LOANS HELD FOR SALE Loans held for sale primarily consist of residential mortgages and are carried at the lower of cost or aggregate market value. Gains and losses on sales of loans held for sale are included in noninterest income. SECURITIES Securities are classified as investments and carried at amortized cost if management has the positive intent and ability to hold the securities to maturity. Securities purchased with the intention of recognizing short-term profits are placed in the trading account, carried at market value and classified as short-term investments. Gains and losses on trading securities are included in other income. Securities not classified as investments or trading are designated as securities available for sale and carried at fair value with unrealized gains and losses, net of income taxes, reflected in shareholders' equity. Gains and losses on sales of securities available for sale are computed on a specific security basis and included in noninterest income. LOANS Loans are stated at the principal amounts outstanding, net of unearned income. Interest income with respect to loans is accrued on the principal amount outstanding, except for lease financing income and interest on certain consumer loans which are recognized over their respective terms using methods which approximate the level yield method. Significant loan fees are deferred and accreted to interest income over the respective lives of the loans. NONPERFORMING ASSETS Nonperforming assets are comprised of nonaccrual and restructured loans and foreclosed assets. Generally, loans other than consumer are classified as nonaccrual and the accrual of interest is discontinued when it is determined the collection of interest or principal is doubtful or when a default of interest or principal has existed for 90 days or more, unless the loan is well secured and in the process of collection. When interest accrual is discontinued, accrued but uncollected interest credited to income in the current year is reversed and unpaid interest accrued in the prior year, if any, is charged against the allowance for credit losses. Consumer loans are generally charged off when payments are past due 180 days. A loan is categorized as restructured if the original interest rate or repayment terms are restructured due to a deterioration in the financial condition of the borrower. Nonperforming loans are generally not returned to performing status until the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time and collection of the contractual principal and interest is no longer doubtful. Foreclosed assets are comprised of property acquired through a foreclosure proceeding or acceptance of a deed-in-lieu of foreclosure. These assets are recorded on the date acquired at the lower of the related loan balance or market value of the collateral less estimated disposition costs. Market values are estimated primarily based upon appraisals. Subsequently, foreclosed assets are valued at the lower of the amount recorded at acquisition date or the then current market value less estimated disposition costs. Gains or losses realized upon disposition of such property are reflected in other expense. Impaired loans consist of nonaccrual and restructured commercial and commercial real estate loans. Interest collected on these loans is recognized on the cash basis or cost recovery method. ALLOWANCE FOR CREDIT LOSSES The allowance for credit losses is a reserve for estimated credit losses established through provisions charged against income. Loans deemed to be uncollectible are charged against the allowance and recoveries of previously charged-off loans are credited to the allowance. The allowance is maintained at a level believed by management to be sufficient to absorb estimated potential credit losses. Management's determination of the adequacy of the allowance is based on periodic evaluations of the credit portfolio and other relevant factors. This evaluation is inherently PNC BANK CORP. 58 30 subjective as it requires material estimates, including, among others, the amounts and timing of expected future cash flows on impaired loans, estimated losses on consumer loans and residential mortgages, and general amounts for historical loss experience, economic conditions, uncertainties in estimating losses and inherent risks in the various credit portfolios, all of which may be susceptible to significant change. Impaired loans are generally evaluated based on the present value of expected future cash flows or the fair value of the underlying collateral if principal repayment is expected to come from the sale or operation of such collateral. SERVICING OF FINANCIAL ASSETS Originated servicing rights for loans sold are recognized by allocating total costs incurred between the loan and the servicing rights based on their relative fair values. Purchased servicing rights are recorded at cost. Servicing rights are amortized in proportion to estimated net servicing income. To determine the fair value of servicing rights, the Corporation estimates the present value of future cash flows incorporating numerous assumptions including servicing income, cost of servicing, discount rates, prepayment speeds and default rates. A valuation allowance is maintained for the excess, if any, of the carrying amount of capitalized servicing rights over estimated fair value. For purposes of measuring impairment, servicing rights are disaggregated and stratified based on predominant risk characteristics, primarily loan type, interest rate and investor type. GOODWILL AND OTHER Goodwill is amortized on a straight-line basis over periods ranging from 15 to 25 years. Other amortizable assets are reduced using accelerated and straight-line methods over their respective estimated useful lives. On a periodic basis, management reviews goodwill and other amortizable assets and evaluates events or changes in circumstances that may indicate impairment in the carrying amount of such assets. In such instances, impairment, if any, is measured on a discounted future cash flow basis. DEPRECIATION AND AMORTIZATION For financial reporting purposes, premises and equipment are depreciated principally using the straight-line method over the estimated useful lives of the assets. Accelerated methods are used for federal income tax purposes. Leasehold improvements are amortized over their estimated useful lives or their respective lease terms, whichever is shorter. TREASURY STOCK The Corporation records common stock purchased for treasury at cost. At the date of subsequent reissue, the treasury stock account is reduced by the cost of such stock on the first-in, first-out basis. FINANCIAL DERIVATIVES The Corporation uses off-balance-sheet financial derivatives as part of the overall asset/liability management process, in mortgage banking activities and in providing risk management services to customers. Substantially all such instruments are used to manage risk related to changes in interest rates. Financial derivatives primarily consist of interest rate swaps, purchased interest rate caps and floors, forward contracts and foreign exchange contracts. Interest rate swaps are agreements with a counterparty to exchange periodic interest payments calculated on a notional principal amount. Purchased interest rate caps and floors are agreements where, for a fee, the counterparty agrees to pay the Corporation the amount, if any, by which a specified market interest rate is higher or lower than a defined rate applied to a notional amount. Interest rate swaps, caps and floors that modify the interest rate characteristics (such as from fixed to variable, variable to fixed, or one variable index to another) of designated interest-bearing assets or liabilities are accounted for under the accrual method. The net amount payable or receivable from the derivative contract is accrued as an adjustment to interest income or interest expense of the designated instrument. Premiums on contracts are deferred and amortized over the life of the agreement as an adjustment to interest income or interest expense of the designated instruments. Unamortized premiums are included in other assets. Changes in fair value of financial derivatives accounted for under the accrual method are not reflected in the financial results. Realized gains and losses, except losses on terminated interest rate caps and floors, are deferred as an adjustment to the carrying amount of the designated instruments and amortized over the shorter of the remaining original life of the agreements or the designated instruments. Losses on terminated interest rate caps and floors are recognized immediately in the results of operations. If the designated instruments are disposed of, the fair value of the associated derivative contract and any unamortized deferred gains or losses are included in the determination of gain or loss on the disposition of such instruments. Contracts not qualifying for accrual accounting are marked to market. Forward contracts provide for the delivery of financial instruments at a specified future date and at a specified price or yield. The Corporation uses forward contracts primarily to manage risk associated with its mortgage banking activities. Realized gains and losses on mandatory and optional delivery forward commitments are recorded in mortgage banking income in the period settlement occurs. Unrealized gains or losses are considered in the lower of cost or market valuation of loans held for sale. To accommodate customer needs, PNC Bank also enters into financial derivative transactions primarily consisting of interest rate swaps, caps, floors and foreign exchange contracts. Interest rate risk exposure from customer positions is PNC BANK CORP. 59 31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS managed through transactions with other dealers. These positions are recorded at estimated fair value and changes in value are included in other income. FOREIGN CURRENCY TRANSLATION The Corporation has foreign currency exposures for loans and deposits denominated in foreign currencies. These exposures are managed by entering into currency swaps and currency forward contracts. Assets and liabilities denominated in foreign currencies are translated into U.S. dollars at the balance sheet date exchange rate. Resulting gains or losses are included in the results of operations. Derivatives designated as hedges are accounted for using the deferral method of accounting. Derivatives not qualifying for deferral accounting are marked to market. INCOME TAXES Income taxes are accounted for under the liability method. Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. STOCK OPTIONS For stock options granted at exercise prices not less than the fair market value of common stock on the date of grant, no compensation expense is recognized. EARNINGS PER COMMON SHARE Effective December 31, 1997, the Corporation adopted Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share." The provisions of SFAS No. 128 required replacement of the previously reported primary and fully diluted earnings per share amounts with basic and diluted earnings per share for all periods presented. Basic earnings per common share is calculated by dividing net income adjusted for preferred stock dividends declared by the weighted-average number of shares of common stock outstanding. Diluted earnings per common share is based on net income adjusted for interest expense, net of tax, on outstanding convertible debentures and dividends declared on nonconvertible preferred stock. The weighted-average number of shares of common stock outstanding is increased by the assumed conversion of outstanding convertible preferred stock and convertible debentures from the beginning of the year or date of issuance, if later, and the number of shares of common stock which would be issued assuming the exercise of stock options. Such adjustments to net income and the weighted-average number of shares of common stock outstanding are made only when such adjustments dilute earnings per common share. RECENT ACCOUNTING PRONOUNCEMENTS In December 1996, SFAS No. 127 "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125" was issued. This statement defers certain provision of SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities," related to repurchase agreements, securities lending and other similar transactions until January 1, 1998. SFAS No. 130, "Reporting Comprehensive Income," is effective for fiscal years beginning after December 15, 1997. This Statement establishes standards for reporting and display of comprehensive income and its components. Comprehensive income includes net income and all other changes in shareholders' equity except those resulting from investments and distributions to owners. SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information," is effective for financial statements for periods beginning after December 15, 1997. This Statement requires financial and descriptive information about an entity's operating segments to be included in the annual financial statements. These standards, when implemented, are not expected to materially impact the reported financial position or results of operations of the Corporation. NOTE 2 MERGERS AND ACQUISITIONS On December 31, 1995, Midlantic Corporation ("Midlantic") merged with the Corporation. Each share of Midlantic common stock outstanding was converted into 2.05 shares of the Corporation's common stock. The Corporation issued approximately 112 million shares of common stock and cash in lieu of fractional shares in connection with the merger. In connection with the merger, PNC Bank recorded $260 million of special charges for integration and consolidation and to realign the interest rate risk profile of the combined companies. The transaction was accounted for as a pooling of interests. NOTE 3 CASH FLOWS For the statement of cash flows, cash and cash equivalents are defined as cash and due from banks. The following table sets forth information pertaining to acquisitions and divestitures which affect cash flows.
Year ended December 31 - in millions 1996 1995 - ---------------------------------------------------------- Assets acquired $538 $3,932 Liabilities assumed 501 3,230 Cash paid 37 661 Cash and due from banks received 497 710 ==========================================================
The Corporation did not have acquisition or divestiture activity which affected 1997 cash flows. PNC BANK CORP. 60 32 NOTE 4 SECURITIES AVAILABLE FOR SALE
1997 1996 - --------------------------------------------------------------------------------------------------------------------------- Amortized Unrealized Fair Amortized Unrealized Fair -------------- -------------- December 31 - in millions Cost Gains Losses Value Cost Gains Losses Value - --------------------------------------------------------------------------------------------------------------------------- Debt securities U.S. Treasury and government agencies $1,102 $4 $1 $1,105 $3,238 $20 $21 $3,237 Mortgage-backed 4,672 4 53 4,623 6,301 13 138 6,176 Asset-backed 2,079 5 1 2,083 1,609 7 1 1,615 State and municipal 170 7 177 218 9 227 Other debt 34 1 33 100 7 2 105 -------------------------------------------------------------------------- Total debt securities 8,057 20 56 8,021 11,466 56 162 11,360 Corporate stocks and other 501 3 3 501 554 3 557 ------------------------------------------------------------------------- Total securities available for sale $8,558 $23 $59 $8,522 $12,020 $59 $162 $11,917 ===========================================================================================================================
At December 31, 1996, $5.5 billion notional value of interest rate caps were designated to securities available for sale. These contracts matured during 1997 and no financial derivatives were designated to securities available for sale at December 31, 1997. The following table presents the amortized cost, fair value and weighted-average yield of debt securities at December 31, 1997 by remaining contractual maturity. CONTRACTUAL MATURITY OF DEBT SECURITIES
December 31, 1997 - Within 1 to 5 to After 10 dollars in millions 1 Year 5 Years 10 Years Years Total - ------------------------------------------------------------------------------------- U.S. Treasury and government agencies $96 $536 $467 $3 $1,102 Mortgage-backed 1 155 4,516 4,672 Asset-backed 125 80 1,874 2,079 State and municipal 30 25 59 56 170 Other debt 2 7 10 15 34 ------------------------------------------------------------- Total $128 $694 $771 $6,464 $8,057 ------------------------------------------------------------- Fair value $128 $695 $774 $6,424 $8,021 Weighted-average yield 6.52% 6.19% 6.37% 6.19% 6.22% =====================================================================================
Based on current interest rates and expected prepayment speeds, the weighted-average expected maturity of mortgage-backed and asset-backed securities was approximately 2 years and 6 months at December 31, 1997. Weighted-average yields are based on historical cost with effective yields weighted for the contractual maturity of each security. The carrying value of securities pledged to secure public and trust deposits, repurchase agreements and for other purposes at December 31, 1997 was $4.5 billion. Information relating to security sales, including the effects of related financial derivatives, is set forth in the following table:
Year ended December 31 - Gross Gross in millions Proceeds Gains Losses - -------------------------------------------------------- 1997 $10,223 $59 $10 1996 6,789 39 17 1995 8,125 12 292 ========================================================
PNC BANK CORP. 61 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5 LOANS AND COMMITMENTS TO EXTEND CREDIT Loans outstanding were as follows:
December 31 - in millions 1997 1996 1995 1994 1993 - -------------------------------------------------------------------------------------------- Consumer $11,205 $12,092 $12,535 $11,013 $10,214 Credit card 3,830 2,776 1,004 838 726 Residential mortgage 12,785 12,703 11,689 9,746 8,611 Commercial 19,989 18,588 17,446 16,347 16,163 Commercial real estate 3,974 4,098 4,280 4,261 4,527 Other 2,874 1,926 2,102 2,223 2,231 - -------------------------------------------------------------------------------------------- Total loans 54,657 52,183 49,056 44,428 42,472 Unearned income (412) (385) (403) (385) (359) - -------------------------------------------------------------------------------------------- Total loans, net of unearned income $54,245 $51,798 $48,653 $44,043 $42,113 ============================================================================================
In connection with the Corporation's alliance with AAA, credit card portfolios totaling $1.6 billion and $178 million were purchased during 1996 and 1997, respectively. Loan outstandings and unfunded commitments are concentrated in PNC Bank's primary geographic markets. At December 31, 1997, no specific industry concentration exceeded 4% of total outstandings and unfunded commitments. NET UNFUNDED COMMITMENTS
December 31 - in millions 1997 1996 - -------------------------------------------------------- Consumer $3,363 $3,741 Credit card 16,385 13,505 Residential mortgage 2,144 511 Commercial 29,707 27,087 Commercial real estate 1,167 764 Other 1,019 849 ----------------- Total $53,785 $46,457 ========================================================
Commitments to extend credit represent arrangements to lend funds provided there is no violation of specified contractual conditions. Commercial commitments are reported net of participations, assignments and syndications, primarily to financial institutions, totaling $5.9 billion and $4.4 billion at December 31, 1997 and 1996, respectively. Commitments generally have fixed expiration dates, may require payment of a fee, and contain termination clauses in the event the customer's credit quality deteriorates. Based on the Corporation's historical experience, most commitments expire unfunded and therefore cash requirements are substantially less than the total commitment. Net outstanding letters of credit totaled $4.7 billion and $4.5 billion at December 31, 1997 and 1996, respectively, and consist primarily of standby letters of credit which commit the Corporation to make payments on behalf of customers when certain specified future events occur. Such instruments are typically issued to support industrial revenue bonds, commercial paper, and bid or performance related contracts. At year-end 1997, the largest industry concentration within standby letters of credit was health care, which accounted for approximately 16% of the total. Maturities for standby letters of credit ranged from 1998 to 2020. At December 31, 1997, $1.8 billion of loans were pledged to secure borrowings and for other purposes. Certain directors and executive officers of the Corporation and its subsidiaries, as well as certain affiliated companies of these directors and officers, were customers of and had loans with subsidiary banks in the ordinary course of business. All such loans were on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other customers and did not involve more than a normal risk of collectibility. The aggregate dollar amounts of these loans were $95 million and $265 million at December 31, 1997 and 1996, respectively. PNC BANK CORP. 62 34 NOTE 6 NONPERFORMING ASSETS The following table sets forth nonperforming assets and related information:
December 31 - in millions 1997 1996 1995 1994 1993 - --------------------------------------------------------------------------------------------------------------------------- Nonaccrual loans $276 $347 $335 $496 $656 Restructured loans 2 23 69 200 --------------------------------------------- Total nonperforming loans 276 349 358 565 856 --------------------------------------------- Foreclosed assets 57 110 178 192 268 Assets held for accelerated disposition 10 158 --------------------------------------------- Total nonperforming assets $333 $459 $536 $767 $1,282 --------------------------------------------- Nonperforming loans to period-end loans .51% .67% .74% 1.28% 2.03% Nonperforming assets to period-end loans, foreclosed assets and assets held for accelerated disposition .61 .88 1.10 1.73 3.01 Nonperforming assets to total assets .44 .63 .73 .99 1.69 --------------------------------------------- Interest on nonperforming loans Computed on original terms $31 $35 $36 $54 $74 Recognized 6 10 10 14 19 --------------------------------------------- Past due loans Accruing loans past due 90 days and more $288 $244 $225 $175 $171 As a percentage of total loans, net of unearned income .53% .47% .46% .40% .41% ===========================================================================================================================
The Corporation had no material commitments as of December 31, 1997 to extend credit to customers whose outstanding loans are nonperforming. At December 31, 1997 and 1996, foreclosed assets are reported net of valuation allowances of $13 million and $19 million, respectively. Gains on sales of foreclosed assets resulted in net foreclosed asset income of $160 thousand, $9 million and $11 million in 1997, 1996 and 1995, respectively. Net foreclosed asset income or expense is included in other noninterest expense. NOTE 7 ALLOWANCE FOR CREDIT LOSSES Changes in the allowance for credit losses were as follows:
In millions 1997 1996 1995 - --------------------------------------------------------- January 1 $1,166 $1,259 $1,352 Charge-offs (385) (247) (240) Recoveries 113 83 107 ---------------------------- Net charge-offs (272) (164) (133) Provision for credit losses 70 6 Acquisitions 8 71 34 ---------------------------- December 31 $972 $1,166 $1,259 - ---------------------------------------------------------
Impaired loans totaled $228 million and $292 million at December 31, 1997 and 1996, respectively. Impaired loans totaling $151 million and $190 million at the end of 1997 and 1996, respectively, had a corresponding specific allowance for credit losses of $38 million and $53 million. The average balance of impaired loans was $271 million in 1997, $313 million in 1996 and $365 million in 1995. Interest income recognized on impaired loans totaled $2 million, $5 million and $6 million in 1997, 1996 and 1995, respectively. NOTE 8 PREMISES, EQUIPMENT AND LEASEHOLD IMPROVEMENTS Premises, equipment and leasehold improvements, stated at cost less accumulated depreciation and amortization, were as follows:
December 31 - in millions 1997 1996 - -------------------------------------------------------- Land $95 $95 Buildings 504 518 Equipment 1,133 996 Leasehold improvements 172 172 ---------------- 1,904 1,781 Accumulated depreciation and amortization (1,010) (916) ---------------- Net book value $894 $865 ========================================================
Depreciation and amortization expense on premises, equipment and leasehold improvements totaled $148 million in 1997, $143 million in 1996 and $135 million in 1995. PNC BANK CORP. 63 35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Certain facilities and equipment are leased under agreements expiring at various dates until the year 2025. Substantially all such leases are accounted for as operating leases. Rental expense on such leases amounted to $88 million in 1997, $90 million in 1996 and $95 million in 1995. At December 31, 1997 and 1996, required minimum annual rentals due on noncancelable leases having terms in excess of one year aggregated $629 million and $436 million, respectively. Minimum annual rentals for each of the years 1998 through 2002 are $70 million, $74 million, $67 million, $60 million and $55 million, respectively. NOTE 9 GOODWILL AND OTHER Goodwill and other amortizable assets, net of amortization, consisted of the following:
December 31 - in millions 1997 1996 - -------------------------------------------------------- Goodwill $898 $953 Mortgage servicing rights 377 313 Purchased credit cards 320 322 Other 37 34 ---------------- Total $1,632 $1,622 - --------------------------------------------------------
At December 31, 1997, the fair value of capitalized mortgage servicing rights ("MSR") was $389 million. Amortization of goodwill and other amortizable assets was as follows:
Year ended December 31 - in millions 1997 1996 1995 - ---------------------------------------------------------- Goodwill $53 $54 $39 Mortgage servicing rights 81 56 71 Purchased credit cards 34 3 Other 6 4 5 ----------------------- Total $174 $117 $115 - ----------------------------------------------------------
NOTE 10 DEPOSITS The aggregate amount of time deposits with a denomination greater than $100,000 was $7.0 billion and $4.9 billion at December 31, 1997 and 1996, respectively. Remaining contractual maturities of time deposits are $14.3 billion, $3.3 billion, $835 million, $351 million and $1.4 billion for the years 1998 through 2002 and thereafter, respectively. NOTE 11 BORROWED FUNDS Most bank notes mature in 1998 and have interest rates that range from 5.22% to 6.50%. Obligations to the Federal Home Loan Bank have maturities ranging from 1998 to 2017 and interest rates that range from 1.25% to 7.91%. Subordinated notes totaling $55 million are convertible into common stock at a conversion price of $23.41 per share. Senior and subordinated notes consisted of the following:
December 31, 1997 - dollars in millions Stated Rate Maturity Outstanding - ------------------------------------------------------------------------------ Senior 4.93% to 9.25% 1998 to 2000 $170 Subordinated Nonconvertible 6.125% to 10.55% 1998 to 2007 1,642 Convertible 8.25% 2008 to 2010 55 ------- Total $1,867 - -----------------------------------------------------------------------------
Borrowed funds have scheduled repayments for the years 1998 through 2002 and thereafter of $14.5 billion, $683 million, $60 million, $206 million and $4.2 billion, respectively. NOTE 12 CAPITAL SECURITIES OF SUBSIDIARY TRUSTS Mandatorily Redeemable Capital Securities of Subsidiary Trusts ("Capital Securities") include preferred beneficial interests in the assets of PNC Institutional Capital Trust A ("Trust A") and PNC Institutional Capital Trust B ("Trust B"). Trust A, formed in December 1996, holds $350 million aggregate principal amount of certain 7.95% junior subordinated debentures, issued by PNC Bank, N.A., a subsidiary of the Corporation, due December 15, 2026. Trust B, formed in May 1997, holds $300 million aggregate principal amount of certain 8.315% junior subordinated debentures due May 15, 2027, issued by the Corporation. Cash distributions on the Capital Securities are made to the extent interest on the debentures is received by the Trusts. In the event of certain changes or amendments to regulatory requirements or federal tax rules, the Capital Securities are redeemable in whole. Otherwise, Trust A Capital Securities are generally redeemable in whole or in part after December 15, 2006 at a declining redemption price ranging from 103.975% to 100% of par on or after December 15, 2016. Trust B Capital Securities are generally redeemable in whole or in part after May 15, 2017 at a declining redemption price ranging from 104.175% to 100% of par on or after May 15, 2017. PNC BANK CORP. 64 36 NOTE 13 SHAREHOLDERS' EQUITY Information related to preferred stock is as follows:
Shares Outstanding Liquidation ------------------ December 31 Value per Share 1997 1996 - --------------------------------------------------------- Authorized $1 par value 17,393,707 17,452,764 Issued and outstanding Series A $40 15,364 16,479 Series B 40 4,384 4,667 Series C 20 304,939 327,013 Series D 20 406,220 441,805 Series F 50 6,000,000 6,000,000 ----------------------- Total 6,730,907 6,789,964 - --------------------------------------------------------
Series A through D are cumulative and, except for Series B, are redeemable at the option of the Corporation. Annual dividends on Series A, B and D preferred stock total $1.80 per share and Series C preferred stock total $1.60 per share. Holders of Series A through D preferred stock are entitled to a number of votes equal to the number of full shares of common stock into which such preferred stock is convertible. Series A through D preferred stock have the following conversion privileges: (i) one share of Series A or Series B is convertible into eight shares of common stock; and (ii) 2.4 shares of Series C or Series D are convertible into four shares of common stock. The Series F preferred stock is nonconvertible and nonvoting. Noncumulative dividends are payable quarterly through September 30, 2001 at a rate of 6.05%. Thereafter, the dividend rate will be indexed to certain market indices; however, the rate paid will not be less than 6.55% or greater than 12.55%. The Series F preferred stock is redeemable in whole until September 29, 2001 in the event of certain amendments to the Internal Revenue Code relating to the dividend received deduction at a declining redemption price from $52.50 to $50.50 per share. After September 29, 2001, the Series F preferred stock may be redeemed, in whole or in part, at $50 per share. PNC Bank has a dividend reinvestment and stock purchase plan. Holders of preferred stock and common stock may participate in the plan which provides that additional shares of common stock may be purchased at market value with reinvested dividends and voluntary cash payments. Common shares purchased pursuant to this plan were: 765,760 shares in 1997; 1,097,597 shares in 1996; and 1,177,481 shares in 1995. The Corporation had reserved approximately 26.6 million common shares to be issued in connection with certain stock plans and the conversion of certain debt and equity securities. The following table sets forth purchases and issuances of common stock held in treasury. TREASURY STOCK ACTIVITY
Shares in thousands, dollars in millions Shares Amount - ---------------------------------------------------------- January 1, 1995 2,815 $65 Shares purchased 10,252 236 Shares issued (5,578) (117) Midlantic merger (7,489) (184) ---------------- December 31, 1995 -- -- Shares purchased 22,731 802 Shares issued (1,695) (51) ---------------- December 31, 1996 21,036 751 Shares purchased 29,323 1,303 Shares issued (2,341) (70) ---------------- December 31, 1997 48,018 $1,984 - ----------------------------------------------------------
NOTE 14 REGULATORY MATTERS The Corporation is subject to the regulations of certain federal and state agencies and undergoes periodic examinations by such regulatory authorities. Neither the Corporation nor any of its subsidiaries is subject to written regulatory agreements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on PNC Bank's financial position. The Corporation's capital amounts and classification are also subject to qualitative judgments by regulatory agencies about components, risk weightings, and other factors. PNC BANK CORP. 65 37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table sets forth regulatory capital ratios for PNC Bank and the Corporation's only significant bank subsidiary, PNC Bank, N.A. REGULATORY CAPITAL
Amount Ratios December 31 - ---------------------------------- dollars in millions 1997 1996 1997 1996 - --------------------------------------------------------- Risk-based capital Tier I PNC Bank Corp. $5,108 $5,283 7.43% 8.29% PNC Bank, N.A. 4,865 3,848 7.53 7.52 Total PNC Bank Corp. 7,635 7,427 11.11 11.65 PNC Bank, N.A. 6,786 5,343 10.50 10.44 Leverage PNC Bank Corp. 5,108 5,283 7.30 7.70 PNC Bank, N.A. 4,865 3,848 7.45 7.09 - -------------------------------------------------------------
Regulatory quantitative measures to ensure capital adequacy require the Corporation to maintain minimum ratios of Tier I and total capital to risk-weighted assets of 4% and 8%, respectively, and Tier I capital to average assets (leverage) of 3%. To qualify as well capitalized, regulators require capital ratios of 6% for Tier I, 10% for total risk-based and 5% for leverage. As of the most recent notification from federal regulators, the Corporation and each of its bank subsidiaries met the well capitalized ratio requirements under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes would change the Corporation's category. Dividends that may be paid by subsidiary banks to the parent company are subject to certain legal limitations and also may be impacted by capital needs, regulatory requirements, corporate policies, contractual restrictions and other factors. Without regulatory approval, the amount available for payment of dividends by all subsidiary banks was $237 million at December 31, 1997. Under federal law, generally no bank subsidiary may extend credit to the parent company or its nonbank subsidiaries on terms and under circumstances which are not substantially the same as comparable extensions of credit to nonaffiliates. No extension of credit may be made to the parent company or a nonbank subsidiary which is in excess of 10% of the capital stock and surplus of such bank subsidiary or in excess of 20% of the capital and surplus of such bank subsidiary as to aggregate extensions of credit to the parent company and its subsidiaries. In certain circumstances, federal regulatory authorities may impose more restrictive limitations. Such extensions of credit, with limited exceptions, must be fully collateralized. The maximum amount available under statutory limitations for transfer from subsidiary banks to the parent company in the form of loans and dividends approximated 17% of consolidated net assets at December 31, 1997. Federal Reserve Board regulations require depository institutions to maintain cash reserves with the Federal Reserve Bank. During 1997, subsidiary banks maintained reserves which averaged $208 million. NOTE 15 FINANCIAL DERIVATIVES FAIR VALUE OF FINANCIAL DERIVATIVES
Positive Negative Total Notional Fair Notional Fair Notional December 31 - in millions Value Value Value Value Value - ----------------------------------------------------------------------------------- 1997 Interest rate swaps $4,849 $106 $930 $(10) $5,779 Interest rate caps 542 4 542 Interest rate floors 3,500 6 145 (1) 3,645 Mortgage banking activities 1,470 26 2,987 (6) 4,457 ---------------------------------------------- Total $10,361 $142 $4,062 $(17) $14,423 - ----------------------------------------------------------------------------------- 1996 Interest rate swaps $7,290 $112 $650 $(15) $ 7,940 Interest rate caps 5,813 2 5,813 Interest rate floors 2,500 3 2,500 Mortgage banking activities 1,853 10 486 (1) 2,339 ---------------------------------------------- Total $17,456 $127 $1,136 $(16) $18,592 - -----------------------------------------------------------------------------------
PNC BANK CORP. 66 38 The Corporation uses a variety of off-balance-sheet financial derivatives as part of its overall interest rate risk management process and to manage risk associated with mortgage banking activities. Financial derivatives involve, to varying degrees, interest rate and credit risk in excess of the amount recognized in the balance sheet but less than the notional amount of the contract. For interest rate swaps and purchased interest rate caps and floors, only periodic cash payments and, with respect to such caps and floors, premiums, are exchanged. Therefore, cash requirements and exposure to credit risk are significantly less than the notional value. The Corporation manages these risks as part of its asset/liability management process and through credit policies and procedures. The Corporation seeks to minimize the credit risk by entering into transactions with only a select number of high-quality institutions, establishing credit limits, requiring bilateral-netting agreements, and, in certain instances, segregated collateral. The Corporation uses interest rate swaps and purchased caps and floors to modify the interest rate characteristics of designated interest-bearing assets or liabilities from fixed to variable, variable to fixed, or one variable index to another. At December 31, 1997, $7.8 billion of interest rate swaps, caps and floors were designated to loans. No financial derivatives were designated to securities available for sale at December 31, 1997. During 1997, derivative contracts modified the average effective yield on interest-earning assets from 7.96% to 7.93%. At December 31, 1997, $1.8 billion of interest rate swaps were designated to interest-bearing liabilities. During 1997, derivative contracts modified the average rate on interest-bearing liabilities from 4.79% to 4.78%. PNC Bank uses a combination of on-balance-sheet instruments and financial derivatives to manage risk associated with its mortgage banking activities. The inherent risk affecting the value of MSR is the potential for the related mortgages to prepay, thereby eliminating the underlying servicing fee income stream. Generally, derivatives used to hedge the value of MSR have been marked to market and included in trading gains or losses. Forward contracts are used to manage risk positions associated with mortgage origination activities. Substantially all forward contracts mature within 90 days of origination. Forward contracts are traded in over-the-counter markets and do not have standardized terms. Counterparties to the Corporation's forward contracts are primarily U.S. government agencies and brokers and dealers in mortgage-backed securities. In the event the counterparty is unable to meet its contractual obligations, the Corporation may be exposed to selling or purchasing mortgage loans at prevailing market prices. At December 31, 1997 and 1996, the Corporation's exposure to credit losses with respect to financial derivatives was not material. CUSTOMER-RELATED DERIVATIVES The following schedule sets forth information relating to positions associated with customer-related derivatives.
Positive Negative Notional Fair Fair Net Asset December 31, 1997 - in millions Value Value Value (Liability) - -------------------------------------------------------------------------------- Interest rate Swaps $3,518 $15 $(14) $1 Caps/floors Sold 1,340 (4) (4) Purchased 1,215 4 4 Foreign exchange 1,700 23 (23) Other 734 1 (1) ------------------------------------------------ Total $8,507 $43 $(42) $1 - --------------------------------------------------------------------------------
NOTE 16 EMPLOYEE BENEFIT PLANS INCENTIVE SAVINGS PLANS The Corporation sponsors incentive savings plans covering substantially all employees. Under the plans, employee contributions up to 6% of bi-weekly compensation, as defined in the plans, subject to Internal Revenue Code limitations, are matched with cash or shares of PNC Bank common stock. Contributions to the plans are matched primarily by shares of PNC Bank common stock held by the Corporation's ESOP. The Corporation makes annual contributions to the ESOP equal to the debt service requirements on the ESOP borrowing less dividends received by the ESOP. All dividends received by the ESOP are used to pay debt service. Dividends used for debt service totaled $10 million in each of the years 1997, 1996 and 1995. To satisfy additional debt service requirements, PNC Bank contributed $13 million in 1997, $11 million in 1996 and $9 million in 1995. PNC BANK CORP. 67 39 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As the ESOP borrowing is repaid, shares are allocated to employees who made contributions during the year based on the proportion of annual debt service to total debt service. The Corporation includes all ESOP shares as common shares outstanding in the earnings per share computation. Components of ESOP shares are:
As of or for the year ended December 31 - in thousands 1997 1996 - -------------------------------------------------------- Shares Unallocated 2,237 3,184 Allocated 3,413 3,057 Released for allocation 947 851 Retired (458) (495) ----------------- Total 6,139 6,597 - --------------------------------------------------------
Compensation expense related to the portion of contributions matched with ESOP shares is determined based on the number of ESOP shares allocated. Compensation expense related to these plans was $11 million for 1997, $9 million for 1996 and $18 million for 1995. PENSION PLANS The Corporation has a noncontributory, defined benefit pension plan covering substantially all employees. Retirement benefits are based on salary levels and length of service. Pension contributions are based on an actuarially determined amount necessary to fund total benefits payable to plan participants. The following table sets forth the estimated status of the defined benefit plan:
December 31 - in millions 1997 1996 - ---------------------------------------------------------------------------------- Benefit obligation Vested $618 $545 Nonvested 18 19 ------------------ Accumulated benefit obligation 636 564 Effect of future compensation levels 118 113 ------------------ Projected benefit obligation for services rendered to date 754 677 Plan assets at fair value, primarily listed common stocks, U.S. government and agency securities, and collective funds 773 713 ------------------ Plan assets in excess of projected benefit obligation (19) (36) Unrecognized net gain due to experience different from assumptions and the effects of changes in assumptions 25 26 Unrecognized net asset 16 23 Unrecognized prior service cost (6) (8) ------------------ Accrued pension cost $16 $5 - ----------------------------------------------------------------------------------
The components of net periodic pension cost were as follows:
Year ended December 31 - in millions 1997 1996 1995 - ------------------------------------------------------------------------------- Service cost for benefits earned during the period $29 $30 $23 Interest cost on projected benefit obligations 53 46 45 Actual return on plan assets (117) (93) (112) Net amortization and deferral 46 27 58 ----------------------------- Net periodic pension costs $11 $10 $14 - -------------------------------------------------------------------------------
Assumptions used to measure the projected benefit obligation and the expected return on assets included in net periodic pension costs are set forth in the following table.
Year ended December 31 1997 1996 1995 - ----------------------------------------------------------------- Discount rate 7.20% 7.70% 7.15% Increase in compensation levels 4.50 4.75 4.75 Expected long-term return on assets 9.50 9.50 9.50 - -----------------------------------------------------------------
The Corporation also maintains nonqualified supplemental retirement plans for certain employees. All retirement benefits provided under these plans are unfunded and any payments to plan participants are made by the Corporation. At December 31, 1997 and 1996 approximately $32 million and $27 million, respectively, were included in other liabilities. Benefit expense related to these plans was $8 million for 1997, $8 million for 1996 and $6 million for 1995. POSTRETIREMENT BENEFIT PLANS The Corporation also provides certain health care and life insurance benefits for retired employees ("postretirement benefits") through various plans. A reconciliation of the accrued postretirement benefit obligation is as follows:
December 31 - in millions 1997 1996 - -------------------------------------------------------------------------------- Accumulated postretirement benefit Retirees $162 $160 Active employees 6 6 Other active plan participants 45 45 ------------------ Total accumulated postretirement obligation 213 211 Unrecognized prior service cost credit 49 56 Unrecognized net loss (12) (16) ------------------ Accrued postretirement benefit obligation $250 $251 - --------------------------------------------------------------------------------
PNC BANK CORP. 68 40 The components of postretirement benefit expense are as follows:
Year ended December 31 - in millions 1997 1996 1995 - -------------------------------------------------------------------------------- Service cost for benefits earned during the period $2 $3 $3 Interest cost on projected benefit obligations 16 14 15 Amortization of prior service cost (4) (4) (4) ----------------------------- Net postretirement benefit expense $14 $13 $14 - --------------------------------------------------------------------------------
Assumptions used in accounting for the postretirement benefit plans were:
December 31 1997 1996 1995 - ------------------------------------------------------------------------------- Discount rate 7.20% 7.70% 7.15% Expected health care cost trend rate Medical 6.50 7.00 7.50 Dental 6.20 6.60 7.00 - -------------------------------------------------------------------------------
The health care cost trend rate declines until it stabilizes at 4.7% beginning in 2001. A one percent increase in the health care cost trend rate from that assumed would not have a material impact on projected service and interest costs or the accumulated postretirement obligation. NOTE 17 STOCK-BASED COMPENSATION PLANS The Corporation has a senior executive long-term incentive award plan ("Incentive Plan") that provides for the granting of incentive stock options, nonqualified options, stock appreciation rights ("SAR"), performance units and incentive shares. In any given year, the number of shares of common stock available for grant under the Incentive Plan may range from 1.5% to 3% of total issued shares of common stock determined at the end of the preceding calendar year. STOCK OPTIONS Options are granted at exercise prices not less than the market value of common stock on the date of grant and are exercisable twelve months after the grant date. Payment of the option price may be in cash or shares of common stock at market value on the exercise date. The following table presents stock option data related to the Incentive Plan, a similar predecessor plan and other plans assumed in certain mergers.
Per Option --------------------------------- Weighted- Average Shares in thousands Exercise Price Exercise Price Shares - --------------------------------------------------------------------------------- January 1, 1995 $1.59 - $30.13 $ 18.14 16,586 Granted 16.46 - 29.06 25.25 127 Exercised 1.59 - 29.25 13.20 (2,996) Terminated 6.10 - 30.13 20.97 (420) Options exchanged for stock - Midlantic merger 8.33 (3,457) -------- December 31, 1995 11.38 - 29.88 23.00 9,840 Granted 31.13 - 37.31 31.23 2,697 Exercised 11.38 - 29.25 21.05 (3,258) SAR exercised 19.13 (7) Terminated 21.75 - 31.13 27.75 (242) --------- December 31, 1996 11.38 - 37.31 26.03 9,030 Granted 43.31 - 43.75 43.75 2,912 Exercised 11.38 - 31.13 24.10 (2,969) SAR exercised 17.13 (4) Terminated 21.75 - 43.75 41.32 (178) --------- December 31, 1997 11.38 - 43.75 32.25 8,791 - ---------------------------------------------------------------------------------
At December 31, 1997, the weighted-average remaining contractual life of outstanding options was 7 years, 3 months and options for 6,023,474 shares of common stock were exercisable at a weighted-average price of $26.97 per share. The grant-date fair value of options granted in 1997 was $9.24 per option. Shares of common stock available for the granting of options under the Incentive Plan and the predecessor plans were: 9,012,899 at December 31, 1997, 9,723,541 at December 31, 1996, and 10,314,610 at December 31, 1995. INCENTIVE SHARE AWARDS In 1997 and 1995, 313,000 and 323,000 incentive shares of common stock, respectively, were granted to certain senior executives pursuant to the Incentive Plan. Issuance of such incentive shares is subject to the market price of PNC Bank's common stock equaling or exceeding specified levels for defined periods. At December 31, 1997 the shares granted in 1997 had not met the specified levels required for issuance. The requirements for the shares granted in 1995 were met on September 16, 1996 and November 4, 1996, and 302,700 shares of restricted common stock were issued. The restricted period ends two years after the issue date. During the restricted period the recipient receives dividends and can vote the shares. If the recipient leaves the Corporation within the restricted period, the shares will be forfeited. Forfeitures totaled 20,300 shares through December 31, 1997. Compensation expense recognized for incentive share awards was $6 million, $3 million and $1 million in 1997, 1996 and 1995, respectively. PNC BANK CORP. 69 41 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS EMPLOYEE STOCK PURCHASE PLAN The Corporation's employee stock purchase plan ("ESPP") has approximately 4.2 million shares available for issuance. Persons who have been continuously employed for at least one year are eligible to participate. Participants purchase the Corporation's common stock at 85% of the lesser of fair market value on the first or last day of each offering period. No charge to earnings is recorded with respect to the ESPP. Shares issued pursuant to the ESPP were as follows:
Year ended December 31 Shares Price Per Share - ----------------------------------------------------------------------- 1997 367,494 $33.15 and $35.49 1996 389,738 25.29 and 25.82 1995 463,907 17.32 and 22.95 - ------------------------------------------------------------------------
The following table sets forth pro forma net income and earnings per share as if compensation expense was recognized for stock options and the ESPP. PRO FORMA NET INCOME AND EPS
Pro Year ended December 31 Reported forma - ----------------------------------------------------------- Net income (in millions) 1997 $1,052 $1,035 1996 992 980 1995 408 407 Diluted earnings per share 1997 $3.28 $3.23 1996 2.88 2.84 1995 1.19 1.19 - ------------------------------------------------------------
For purposes of computing pro forma results PNC Bank estimated the fair value of stock options and ESPP shares using the Black-Scholes option pricing model. Black-Scholes is predominantly used to value traded options which differ from PNC Bank's options. The model requires the use of numerous assumptions, many of which are highly subjective in nature. Therefore, the pro forma results are estimates of results of operations as if compensation expense had been recognized for all stock-based compensation plans and are not indicative of the impact on future periods. The following assumptions were used in the option pricing model for purposes of estimating pro forma results. The dividend yield represents average yields over the previous three-year period.
Year ended December 31 1997 1996 1995 - ------------------------------------------------------------- Risk-free interest rate 6.2% 5.3% 6.4% Dividend yield 4.9 4.7 4.3 Volatility 27.6 32.1 32.3 Expected life 6 yrs. 6 yrs. 6 yrs. - ---------------------------------------------------------------
NOTE 18 INCOME TAXES The components of income taxes were as follows:
Year ended December 31 - in millions 1997 1996 1995 - -------------------------------------------------------------------------------- Current Federal $380 $297 $ 77 State 53 48 14 ---------------------------------- Total current 433 345 91 Deferred Federal 126 172 84 State 7 18 44 ---------------------------------- Total deferred 133 190 128 ---------------------------------- Total $566 $535 $219 - --------------------------------------------------------------------------------
Significant components of deferred tax assets and liabilities are as follows:
December 31 - in millions 1997 1996 - ---------------------------------------------------------- Deferred tax assets Allowance for credit losses $336 $382 Compensation and benefits 134 120 Net unrealized securities losses 12 38 Other 28 88 ------------------ Total deferred tax assets 510 628 Deferred tax liabilities Leasing 284 247 Depreciation 37 45 Other 112 100 ------------------ Total deferred tax liabilities 433 392 ------------------ Net deferred tax asset $77 $236 - ----------------------------------------------------------
A reconciliation between the statutory and effective tax rates follows:
Year ended December 31 1997 1996 1995 - ---------------------------------------------------------------- Statutory tax rate 35.0% 35.0% 35.0% Increases (decreases) resulting from State taxes 2.4 2.8 6.0 Tax-exempt interest (1.1) (1.7) (4.5) Goodwill .8 .9 1.7 Other (2.1) (2.0) (3.3) ---------------------------- Effective tax rate 35.0% 35.0% 34.9% - -----------------------------------------------------------------
PNC BANK CORP. 70 42 NOTE 19 EARNINGS PER SHARE The following table sets forth basic and diluted earnings per share calculations.
Year ended December 31 - in thousands, except per share data 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------- CALCULATION OF BASIC EARNINGS PER COMMON SHARE Net income $1,052,468 $992,226 $408,060 Less: Preferred dividends declared 19,457 5,480 3,327 ------------------------------------- Net income applicable to basic earnings per common share $1,033,011 $986,746 $404,733 ------------------------------------- Basic weighted-average common shares outstanding 310,147 338,568 336,455 ------------------------------------- Basic Earnings Per Common Share $3.33 $2.91 $1.20 ------------------------------------- CALCULATION OF DILUTED EARNINGS PER COMMON SHARE Net income $1,052,468 $992,226 $408,060 Add: Interest expense on convertible debentures (net of tax) 3,006 3,416 3,842 Less: Dividends declared on nonconvertible preferred stock 18,150 4,084 1,813 ------------------------------------- Net income applicable to diluted earnings per common share $1,037,324 $991,558 $410,089 ------------------------------------- Basic weighted-average common shares outstanding 310,147 338,568 336,455 Weighted-average common shares to be issued using average market price and assuming: Conversion of preferred stock Series A and B 163 173 198 Conversion of preferred stock Series C and D 1,237 1,321 1,431 Conversion of debentures 2,449 2,790 3,105 Exercise of stock options 1,914 1,610 2,679 Incentive share awards 311 114 ------------------------------------- Diluted weighted-average common shares outstanding 316,221 344,576 343,868 ------------------------------------- Diluted Earnings Per Common Share $3.28 $2.88 $1.19 =============================================================================================================
NOTE 20 LITIGATION A consolidated class action complaint is pending against the Corporation and certain officers, alleging violations of federal securities laws and common law relating to disclosures and seeking, among other things, unquantified damages on behalf of purchasers of the Corporation's securities during specified portions of 1994. The parties have reached an agreement in principle to settle this action, which is subject to documentation and court approval. The proposed settlement will not have a material impact on the Corporation's financial position or results of operations. The Corporation, in the normal course of business, is subject to various other pending and threatened lawsuits in which claims for monetary damages are asserted. Management, after consultation with legal counsel, does not anticipate the ultimate aggregate liability, if any, arising out of such other lawsuits will have a material adverse effect on the Corporation's financial position. At the present time, management is not in a position to determine whether any such pending or threatened litigation will have a material adverse effect on the Corporation's results of operations in any future reporting period. NOTE 21 OTHER FINANCIAL INFORMATION Summarized financial information of the parent company is as follows: PARENT COMPANY ONLY BALANCE SHEET
December 31 - in millions 1997 1996 - ---------------------------------------------------------------------------------- ASSETS Cash and due from banks $1 $4 Securities available for sale 68 602 Investments in Bank subsidiaries 6,192 6,078 Nonbank subsidiaries 386 276 Advances to subsidiary banks 8 9 Other assets 133 118 ------------------ Total assets $6,788 $7,087 ------------------ LIABILITIES Borrowed funds $355 $363 Nonbank affiliate borrowings 738 332 Accrued expenses and other liabilities 311 523 ------------------ Total liabilities 1,404 1,218 ------------------ SHAREHOLDERS' EQUITY 5,384 5,869 ------------------ Total liabilities and shareholders' equity $6,788 $7,087 =================================================================================
PNC BANK CORP. 71 43 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Borrowed funds have scheduled repayments of $200 million in 1999, $100 million in 2001 and $55 million thereafter. Commercial paper and all other debt issued by PNC Funding Corp., a wholly-owned subsidiary, is guaranteed by the parent company. In addition, in connection with certain affiliates' mortgage servicing operations, the parent company has committed to maintain such affiliates' net worth above minimum requirements. PARENT COMPANY ONLY STATEMENT OF INCOME
Year ended December 31 - in millions 1997 1996 1995 - -------------------------------------------------------- OPERATING REVENUE Dividends from Bank subsidiaries $852 $924 $447 Nonbank subsidiaries 9 32 25 Interest income 14 7 4 Other income 2 1 ------------------------ Total operating revenue 877 964 476 ------------------------ OPERATING EXPENSE Interest expense 76 56 73 Other expense 11 38 33 ------------------------ Total operating expense 87 94 106 ------------------------ Income before income taxes and equity in undistributed net income of subsidiaries 790 870 370 Income tax benefits (32) (30) (35) ------------------------- Income before equity in undistributed net income of subsidiaries 822 900 405 Net equity in undistributed net income (excess dividends) Bank subsidiaries 144 63 (19) Nonbank subsidiaries 86 29 22 ------------------------- Net income $1,052 $992 $408 - --------------------------------------------------------
PARENT COMPANY ONLY STATEMENT OF CASH FLOWS
Year ended December 31 - in millions 1997 1996 1995 - --------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $1,052 $992 $408 Adjustments to reconcile net income to net cash provided by operating activities Equity in undistributed net earnings of subsidiaries (230) (92) (3) Other 19 (6) 10 ----------------------------------- Net cash provided by operating activities 841 894 415 ----------------------------------- INVESTING ACTIVITIES Net change in interest-earning deposits with subsidiary bank 1 (1) 4 Net capital returned from subsidiaries 57 657 594 Securities available for sale Sales 3,321 1,296 646 Purchases (2,787) (1,850) (586) Cash paid in acquisitions (527) Other (8) (2) ----------------------------------- Net cash provided by investing activities 584 102 129 ---------------------------------- FINANCING ACTIVITIES Borrowings from nonbank subsidiary 656 275 Repayments on borrowings from nonbank subsidiary (222) (353) (239) Redemption of preferred stock (50) Acquisition of treasury stock (1,532) (569) (236) Cash dividends paid to shareholders (488) (488) (387) Issuance of stock 155 416 88 Other 3 ------------------------------------ Net cash used by financing activities (1,428) (994) (549) ---------------------------------- Increase (decrease) in cash and due from banks (3) 2 (5) Cash and due from banks at beginning of year 4 2 7 ---------------------------------- Cash and due from banks at end of year $1 $4 $2 - ---------------------------------------------------------------------------------
During 1997, 1996 and 1995, the parent company received income tax refunds of $35 million, $39 million and $20 million, respectively. Such refunds represent the parent company's portion of consolidated income taxes. During 1997, 1996 and 1995, the parent company paid interest expense of $65 million, $60 million and $68 million, respectively. PNC BANK CORP. 72 44 In connection with the Midlantic merger, borrowed funds of Midlantic in the aggregate principal amount of $355 million at December 31, 1997 were jointly and severally assumed by the parent company and its wholly-owned subsidiary, PNC Bancorp, Inc. Summarized financial information for PNC Bancorp, Inc. and subsidiaries is as follows: PNC BANCORP, INC., AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET
December 31 - in millions 1997 1996 - -------------------------------------------------------- ASSETS Cash and due from banks $4,302 $4,022 Securities 8,276 11,210 Loans, net of unearned income 54,126 51,736 Allowance for credit losses (971) (1,166) ----------------- Net loans 53,155 50,570 Other assets 8,144 5,988 ----------------- Total assets $73,877 $71,790 LIABILITIES Deposits $47,766 $46,290 Borrowed funds 18,437 18,077 Other liabilities 1,145 1,014 ----------------- Total liabilities 67,348 65,381 Mandatorily redeemable capital securities of subsidiary trust 350 350 SHAREHOLDERS' EQUITY 6,179 6,059 ----------------- Total liabilities, capital securities and shareholders' equity $73,877 $71,790 - --------------------------------------------------------
PNC BANCORP, INC., AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME
Year ended December 31 - in millions 1997 1996 1995 - ---------------------------------------------------------- Interest income $5,005 $4,903 $5,117 Interest expense 2,466 2,404 2,941 ---------------------------- Provision for credit losses 70 20 ---------------------------- Net interest income less provision for credit losses 2,469 2,499 2,156 Noninterest income 1,596 1,249 871 Noninterest expense 2,520 2,230 2,409 ---------------------------- Income before income taxes 1,545 1,518 618 Income taxes 556 539 217 ---------------------------- Net income $989 $979 $401 - ----------------------------------------------------------
NOTE 22 UNUSED LINE OF CREDIT At December 31, 1997, the Corporation maintained a line of credit in the amount of $500 million, none of which was drawn. This line is available for general corporate purposes and expires in 2000. NOTE 23 FAIR VALUE OF FINANCIAL INSTRUMENTS
1997 1996 -------------------------------------------------------- Carrying Fair Carrying Fair December 31 - in millions Amount Value Amount Value - ---------------------------------------------------------------------------------------------------- ASSETS Cash and short-term assets $6,346 $6,346 $ 5,412 $ 5,412 Securities available for sale 8,522 8,522 11,917 11,917 Loans held for sale 2,324 2,324 941 941 Net loans (excludes leases) 51,409 52,983 49,281 50,212 LIABILITIES Demand deposits 27,478 27,478 27,030 27,030 Time deposits 20,171 20,236 18,646 18,654 Borrowed funds 19,913 20,061 19,912 19,970 OFF-BALANCE-SHEET Commitments to extend credit (14) (14) (14) (14) Letters of credit (9) (9) (4) (4) Financial derivatives used for Interest rate risk management 59 105 81 102 Mortgage banking activities 26 20 11 9 Customer-related derivatives 1 1 - ----------------------------------------------------------------------------------------------------
Real and personal property, lease financings, loan customer relationships, deposit customer intangibles, retail branch networks, fee-based businesses, such as asset management, mortgage banking and brokerage, trademarks and brand names are excluded from the amounts set forth above. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Corporation. Fair value is defined as the estimated amount at which a financial instrument could be exchanged in a current transaction between willing parties, or other than in a forced or liquidation sale. However, it is not management's intention to immediately dispose of a significant portion of such financial instruments, and unrealized gains or losses should not be interpreted as a forecast of future earnings and cash flows. The derived fair values are subjective in nature, involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly impact the derived fair value estimates. PNC BANK CORP. 73 45 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following methods and assumptions were used in estimating fair value amounts for financial instruments. GENERAL For short-term financial instruments realizable in three months or less, the carrying amount reported in the consolidated balance sheet approximates fair value. Unless otherwise stated, the rates used in discounted cash flow analyses are based on market yield curves. CASH AND SHORT-TERM ASSETS The carrying amounts reported in the consolidated balance sheet for cash and short-term investments approximate those assets' fair values primarily due to their short-term nature. For purposes of this disclosure only, short-term assets include due from banks, interest-earning deposits with banks, federal funds sold and resale agreements, trading securities, customer's acceptance liability and accrued interest receivable. SECURITIES The fair value of securities available for sale are based on quoted market prices, where available. If quoted market prices are not available, fair value is estimated using the quoted market prices of comparable instruments. NET LOANS AND LOANS HELD FOR SALE Fair values are estimated based on the discounted value of expected net cash flows incorporating assumptions about prepayment rates, credit losses and servicing fees and costs. For credit cards and revolving home equity loans, this fair value does not include any amount for new loans or the related fees that will be generated from the existing customer relationships. In the case of nonaccrual loans, scheduled cash flows exclude interest payments. For purposes of this disclosure only, the carrying value of loans held for sale approximates fair value. DEPOSITS The carrying amounts of noninterest-bearing demand and interest-bearing, money market and savings deposits approximate fair values. For time deposits, fair values are estimated based on the discounted value of expected net cash flows taking into account current interest rates. BORROWED FUNDS The carrying amounts of federal funds purchased, commercial paper, acceptances outstanding and accrued interest payable are considered fair value because of their short-term nature. For all other borrowed funds, fair values are estimated based on the discounted value of expected net cash flows taking into account current interest rates. UNFUNDED LOAN COMMITMENTS AND LETTERS OF CREDIT Fair values for commitments to extend credit and letters of credit are estimated based upon the amount of deferred fees and the creditworthiness of the counterparties. FINANCIAL DERIVATIVES The fair value of interest rate swaps are estimated based on the discounted value of the expected net cash flows. The fair value of other derivative instruments is based on dealer quotes. These fair values represent the estimated amounts the Corporation would receive or pay to terminate the contracts, taking into account current interest rates. PNC BANK CORP. 74 46 STATISTICAL INFORMATION SELECTED CONSOLIDATED FINANCIAL DATA
Year ended December 31 - dollars in millions, except per share data 1997 1996 1995 1994 1993 - --------------------------------------------------------------------------------------------------------------------------- SUMMARY OF OPERATIONS Interest income $5,051 $4,938 $5,149 $4,724 $4,023 Interest expense 2,556 2,494 3,007 2,232 1,683 --------------------------------------------------------------- Net interest income 2,495 2,444 2,142 2,492 2,340 Provision for credit losses 70 6 84 350 Noninterest income before net securities gains (losses) 1,759 1,373 1,240 1,181 941 Net securities gains (losses) 49 22 (280) (142) 195 Noninterest expense 2,615 2,312 2,469 2,238 1,985 --------------------------------------------------------------- Income before income taxes and cumulative effect of changes in accounting principles 1,618 1,527 627 1,209 1,141 Income taxes 566 535 219 318 262 --------------------------------------------------------------- Income before cumulative effect of changes in accounting principles 1,052 992 408 891 879 Cumulative effect of changes in accounting principles, net of tax benefits of $5 in 1994 and $5 in 1993 (7) 20 --------------------------------------------------------------- Net income $1,052 $992 $408 $884 $899 --------------------------------------------------------------- PER COMMON SHARE DATA Book value $16.87 $17.13 $16.87 $16.59 $15.61 Cash dividends declared 1.50 1.42 1.40 1.31 1.175 Earnings Basic before cumulative effect of changes in accounting principles $3.33 $2.91 $1.20 $2.58 $2.59 Cumulative effect of changes in accounting principles (.02) .06 --------------------------------------------------------------- Basic $3.33 $2.91 $1.20 $2.56 $2.65 --------------------------------------------------------------- Diluted before cumulative effect of changes in accounting principles $3.28 $2.88 $1.19 $2.54 $2.54 Cumulative effect of changes in accounting principles (.02) .06 --------------------------------------------------------------- Diluted $3.28 $2.88 $1.19 $2.52 $2.60 --------------------------------------------------------------- BALANCE SHEET HIGHLIGHTS (At December 31) Total assets $75,120 $73,260 $73,404 $77,461 $76,012 Securities 8,522 11,917 15,839 23,670 25,496 Loans, net of unearned income 54,245 51,798 48,653 44,043 42,113 Deposits 47,649 45,676 46,899 45,818 44,703 Borrowed funds 19,622 19,604 19,063 24,320 22,308 Shareholders' equity 5,384 5,869 5,768 5,727 5,404 SELECTED RATIOS Return on Average common shareholders' equity 20.01% 17.18% 7.05% 16.09% 18.55% Average assets 1.49 1.40 .54 1.19 1.40 Average common shareholders' equity to average assets 7.31 8.11 7.64 7.34 7.52 Dividend payout 45.39 48.89 94.76 37.42 30.79 Efficiency (excludes distributions on capital securities) 59.36 59.64 78.42 62.69 56.28 - ------------------------------------------------------------------------------------------------------------------------
PNC BANK CORP. 75 47 STATISTICAL INFORMATION SELECTED QUARTERLY FINANCIAL DATA
Quarter - dollars in millions, 1997 1996 ---------------------------------------------------------------------------------------- except per share data Fourth Third Second First Fourth Third Second First - --------------------------------------------------------------------------------------------------------------------------- SUMMARY OF OPERATIONS Interest income $1,281 $1,271 $1,257 $1,242 $1,223 $1,217 $1,243 $1,255 Interest expense 649 651 644 612 605 608 633 648 -------------------------------------------------------------------------------------- Net interest income 632 620 613 630 618 609 610 607 Provision for credit losses 25 20 15 10 Noninterest income before net securities gains (losses) 482 448 420 409 381 341 333 318 Net securities gains (losses) 22 (2) 13 16 7 8 4 3 Noninterest expense 701 639 639 636 586 596 564 566 -------------------------------------------------------------------------------------- Income before income taxes 410 407 392 409 420 362 383 362 Income taxes 145 145 133 143 148 128 135 124 -------------------------------------------------------------------------------------- Net income $265 $262 $259 $266 $272 $234 $248 $238 -------------------------------------------------------------------------------------- PER COMMON SHARE DATA Book value $16.87 $16.92 $16.51 $16.45 $17.13 $17.23 $17.07 $16.88 Earnings Basic .86 .84 .82 .81 .80 .69 .73 .70 Diluted .85 .83 .81 .80 .79 .68 .72 .69 AVERAGE BALANCE SHEET Total assets $70,869 $70,581 $70,821 $70,301 $69,536 $69,546 $72,440 $71,733 Securities 7,769 8,216 9,055 10,089 11,569 13,097 14,740 14,818 Loans, net of unearned income 53,663 53,202 52,813 51,922 49,973 48,713 49,191 48,625 Deposits 44,580 44,606 44,814 44,133 44,832 44,716 45,379 45,553 Borrowed funds 18,624 18,484 18,675 18,594 17,110 17,558 19,720 18,891 Shareholders' equity 5,414 5,381 5,360 5,758 6,017 5,766 5,767 5,764 - --------------------------------------------------------------------------------------------------------------------------
PNC BANK CORP. 76 48 ANALYSIS OF YEAR-TO-YEAR CHANGES IN NET INTEREST INCOME
1997/1996 1996/1995 --------------------------------------------------------------------- Increase/(Decrease) in Income/ Increase/(Decrease) in Income/ Expense Due to Changes in: Expense Due to Changes in: --------------------------------------------------------------------- Taxable-equivalent basis - in millions Volume Rate Total Volume Rate Total - --------------------------------------------------------------------------------------------------------------------------- INTEREST-EARNING ASSETS Loans held for sale $23 $3 $26 $27 $(3) $24 Securities U.S. Treasury, government agencies and corporations (247) (24) (271) (453) 106 (347) Other debt (41) (4) (45) (70) (5) (75) Other (2) (3) (5) (6) (4) (10) ----------------------------------------------------------------- Total securities (297) (24) (321) (541) 109 (432) Loans, net of unearned income Consumer (82) 7 (75) 89 (19) 70 Credit card 309 (13) 296 41 2 43 Residential mortgage 78 78 92 (2) 90 Commercial 107 5 112 92 (51) 41 Commercial real estate (11) (4) (15) (11) (26) (37) Other 5 6 11 (9) (2) (11) ----------------------------------------------------------------- Total loans, net of unearned income 312 95 407 284 (88) 196 Other interest-earning assets (3) (2) (5) (6) (5) (11) ----------------------------------------------------------------- Total interest-earning assets $(54) $161 $107 $(366) $143 $(223) ----------------------------------------------------------------- INTEREST-BEARING LIABILITIES Interest-bearing deposits Demand and money market $23 $36 $59 $10 $(35) $(25) Savings (11) (1) (12) (7) (14) (21) Other time (47) 14 (33) 30 (33) (3) Deposits in foreign offices 14 1 15 (63) (12) (75) ----------------------------------------------------------------- Total interest-bearing deposits (14) 43 29 (22) (102) (124) Borrowed funds Bank notes and senior debt 56 13 69 103 (33) 70 Federal funds purchased (18) 5 (13) (113) (31) (144) Repurchase agreements (66) (1) (67) (247) (41) (288) Other borrowed funds 40 (7) 33 (33) (26) (59) Subordinated debt 12 (1) 11 29 3 32 ----------------------------------------------------------------- Total borrowed funds 16 17 33 (289) (100) (389) ----------------------------------------------------------------- Total interest-bearing liabilities (3) 65 62 (263) (250) (513) ----------------------------------------------------------------- Change in net interest income $(27) $72 $45 $(159) $449 $290 - ---------------------------------------------------------------------------------------------------------------------------
Changes attributable to rate/volume are prorated into rate and volume components. PNC BANK CORP. 77 49 STATISTICAL INFORMATION AVERAGE CONSOLIDATED BALANCE SHEET AND NET INTEREST ANALYSIS
Year ended December 31 - 1997 1996 ------------------------------------------------------------------------- Taxable-equivalent basis Average Average Average Average Dollars in millions Balances Interest Yields/Rates Balances Interest Yields/Rates - --------------------------------------------------------------------------------------------------------------------------- ASSETS Interest-earning assets Loans held for sale $1,417 $104 7.31% $1,095 $78 7.09% Securities U.S. Treasury, government agencies and corporations 6,101 364 5.97 10,225 635 6.21 Other debt 2,094 139 6.62 2,719 184 6.78 Other 579 43 7.45 606 48 7.91 -------------------- -------------------- Total securities 8,774 546 6.22 13,550 867 6.40 Loans, net of unearned income Consumer 11,224 953 8.49 12,192 1,028 8.43 Credit card 3,558 459 12.92 1,165 163 13.94 Residential mortgage 13,105 976 7.45 12,049 898 7.45 Commercial 19,089 1,500 7.86 17,727 1,388 7.83 Commercial real estate 4,060 358 8.82 4,186 373 8.92 Other 1,871 130 6.94 1,797 119 6.63 -------------------- -------------------- Total loans, net of unearned income 52,907 4,376 8.27 49,116 3,969 8.08 Other interest-earning assets 919 54 5.88 964 59 6.12 -------------------- -------------------- Total interest-earning assets/interest income 64,017 5,080 7.93 64,725 4,973 7.68 Noninterest-earning assets Allowance for credit losses (1,077) (1,197) Cash and due from banks 2,920 3,163 Other assets 4,784 4,116 -------- -------- Total assets $70,644 $70,807 -------- -------- LIABILITIES, CAPITAL SECURITIES AND SHAREHOLDERS' EQUITY Interest-bearing liabilities Interest-bearing deposits Demand and money market $13,477 391 2.90 $12,619 332 2.63 Savings 2,852 57 1.97 3,445 69 2.02 Other time 17,441 948 5.44 18,307 981 5.36 Deposits in foreign offices 1,094 61 5.58 846 46 5.44 -------------------- -------------------- Total interest-bearing deposits 34,864 1,457 4.18 35,217 1,428 4.06 Borrowed funds Bank notes and senior debt 9,130 523 5.72 8,139 454 5.57 Federal funds purchased 2,834 158 5.57 3,157 171 5.41 Repurchase agreements 812 43 5.36 2,030 110 5.41 Other borrowed funds 4,304 256 5.96 3,630 223 6.14 Subordinated debt 1,514 119 7.87 1,358 108 7.98 -------------------- -------------------- Total borrowed funds 18,594 1,099 5.91 18,314 1,066 5.82 -------------------- -------------------- Total interest-bearing liabilities/interest expense 53,458 2,556 4.78 53,531 2,494 4.66 Noninterest-bearing liabilities and shareholders' equity Demand and other noninterest-bearing deposits 9,670 9,900 Accrued expenses and other liabilities 1,501 1,529 Mandatorily redeemable capital securities of subsidiary trusts 537 19 Shareholders' equity 5,478 5,828 -------- -------- Total liabilities, capital securities and shareholders' equity $70,644 $70,807 ------------------------------------------------------------------------- Interest rate spread 3.15 3.02 Impact of noninterest-bearing liabilities .79 .81 ----------------------- ----------------------- Net interest income/margin on earning assets $2,524 3.94% $2,479 3.83% - ---------------------------------------------------------------------------------------------------------------------------
Nonaccrual loans are included in loans, net of unearned income. The impact of financial derivatives used in interest rate risk management is included in the interest income/expense and average yields/rates of the related assets and liabilities. Average balances of securities are based on amortized historical cost (excluding SFAS No. 115 adjustments to fair value). PNC BANK CORP. 78 50
Year ended December 31 - 1995 1994 ---------------------------------------------------------------------------- Taxable-equivalent basis Average Average Average Average Dollars in millions Balances Interest Yields/Rates Balances Interest Yields/Rates - ------------------------------------------------------------------------------------------------------------------------------------ ASSETS Interest-earning assets Loans held for sale $725 $54 7.50% $749 $52 6.84% Securities U.S. Treasury, government agencies and corporations 17,706 982 5.55 20,915 1,200 5.74 Other debt 3,757 259 6.90 2,742 163 5.94 Other 677 58 8.46 698 58 8.30 -------------------- -------------------- Total securities 22,140 1,299 5.87 24,355 1,421 5.83 Loans, net of unearned income Consumer 11,142 958 8.60 10,472 833 7.95 Credit card 871 120 13.76 720 97 13.50 Residential mortgage 10,812 808 7.47 8,806 603 6.85 Commercial 16,562 1,347 8.13 15,926 1,183 7.43 Commercial real estate 4,304 410 9.54 4,430 373 8.41 Other 1,933 130 6.70 2,245 124 5.52 -------------------- -------------------- Total loans, net of unearned income 45,624 3,773 8.27 42,599 3,213 7.54 Other interest-earning assets 1,046 70 6.64 1,724 76 4.42 -------------------- -------------------- Total interest-earning assets/interest income 69,535 5,196 7.47 69,427 4,762 6.86 Noninterest-earning assets Allowance for credit losses (1,319) (1,391) Cash and due from banks 3,044 2,951 Other assets 3,871 3,375 -------- -------- Total assets $75,131 $74,362 -------- -------- LIABILITIES, CAPITAL SECURITIES AND SHAREHOLDERS' EQUITY Interest-bearing liabilities Interest-bearing deposits Demand and money market $12,254 357 2.91 $13,481 281 2.08 Savings 3,732 90 2.40 4,081 71 1.75 Other time 17,758 984 5.54 16,353 757 4.63 Deposits in foreign offices 1,974 121 6.13 1,083 51 4.69 -------------------- -------------------- Total interest-bearing deposits 35,718 1,552 4.34 34,998 1,160 3.31 Borrowed funds Bank notes and senior debt 6,326 384 6.07 8,513 376 4.42 Federal funds purchased 5,200 315 6.06 3,573 162 4.53 Repurchase agreements 6,514 398 6.11 5,576 228 4.09 Other borrowed funds 4,138 282 6.81 5,021 231 4.59 Subordinated debt 998 76 7.64 939 75 8.02 -------------------- -------------------- Total borrowed funds 23,176 1,455 6.28 23,622 1,072 4.54 -------------------- -------------------- Total interest-bearing liabilities/interest expense 58,894 3,007 5.10 58,620 2,232 3.81 Noninterest-bearing liabilities and shareholders' equity Demand and other noninterest-bearing deposits 9,112 8,939 Accrued expenses and other liabilities 1,341 1,272 Mandatorily redeemable capital securities of subsidiary trusts Shareholders' equity 5,784 5,531 -------- -------- Total liabilities, capital securities and shareholders' equity $75,131 $74,362 -------------------------------------------------------------------------- Interest rate spread 2.37 3.05 Impact of noninterest-bearing liabilities .78 .59 ---------------------- ---------------------- Net interest income/margin on earning assets $2,189 3.15% $2,530 3.64% - ------------------------------------------------------------------------------------------------------------------------------- Year ended December 31 - 1993 ----------------------------------------- Taxable-equivalent basis Average Average Dollars in millions Balances Interest Yields/Rates - ----------------------------------------------------------------------------------------------- ASSETS INTEREST-EARNING ASSETS Loans held for sale $402 $25 6.10% Securities U.S. Treasury, government agencies and corporations 19,885 1,165 5.86 Other debt 1,818 90 4.93 Other 631 58 9.14 ------------------- Total securities 22,334 1,313 5.88 Loans, net of unearned income Consumer 9,242 765 8.28 Credit card 682 94 13.74 Residential mortgage 3,834 309 8.07 Commercial 14,781 1,041 7.05 Commercial real estate 5,314 382 7.18 Other 1,688 84 4.97 ------------------- Total loans, net of unearned income 35,541 2,675 7.53 Other interest-earning assets 1,710 61 3.59 ------------------- Total interest-earning assets/interest income 59,987 4,074 6.79 Noninterest-earning assets Allowance for credit losses (1,510) Cash and due from banks 2,757 Other assets 2,819 -------- Total assets $64,053 -------- LIABILITIES, CAPITAL SECURITIES AND SHAREHOLDERS' EQUITY Interest-bearing liabilities Interest-bearing deposits Demand and money market $12,685 213 1.68 Savings 3,760 56 1.49 Other time 15,571 730 4.69 Deposits in foreign offices 222 7 3.03 ------------------- Total interest-bearing deposits 32,238 1,006 3.12 Borrowed funds Bank notes and senior debt 5,177 209 4.03 Federal funds purchased 1,844 57 3.09 Repurchase agreements 7,263 252 3.47 Other borrowed funds 2,696 102 3.79 Subordinated debt 670 57 8.50 ------------------- Total borrowed funds 17,650 677 3.84 ------------------- Total interest-bearing liabilities/interest expense 49,888 1,683 3.37 Noninterest-bearing liabilities and shareholders' equity Demand and other noninterest-bearing deposits 7,986 Accrued expenses and other liabilities 1,293 Mandatorily redeemable capital securities of subsidiary trusts Shareholders' equity 4,886 -------- Total liabilities, capital securities and shareholders' equity $64,053 -------------------------------------- Interest rate spread 3.42 Impact of noninterest-bearing liabilities .57 ---------------------- Net interest income/margin on earning assets $2,391 3.99% - --------------------------------------------------------------------------------------------
PNC BANK CORP. 79 51 STATISTICAL INFORMATION LOAN MATURITIES AND INTEREST SENSITIVITY
December 31, 1997 - 1 Year 1 Through After 5 Gross in millions or Less 5 Years Years Loans - -------------------------------------------------------------------------------- Commercial $7,264 $8,524 $4,201 $19,989 Real estate project 947 894 285 2,126 ------------------------------------------- Total $8,211 $9,418 $4,486 $22,115 ------------------------------------------- Loans with predetermined rate $1,155 $1,705 $789 $3,649 Loans with floating rate 7,056 7,713 3,697 18,466 ------------------------------------------- Total $8,211 $9,418 $4,486 $22,115 - --------------------------------------------------------------------------------
At December 31, 1997, $7.8 billion of interest rate swaps, caps and floors designated to commercial and commercial real estate loans altered the interest rate characteristics of such loans. The impact of the interest rate swaps is not reflected in the previous table. ALLOWANCE FOR CREDIT LOSSES The allowance for credit losses is based on periodic evaluations of the credit portfolio by management. These evaluations consider, among other factors, historic losses within specific industries, current economic conditions, loan portfolio trends, specific credit reviews and estimates based on subjective factors. During 1997, 1996 and 1995, stronger economic conditions combined with management's ongoing efforts to improve asset quality resulted in lower nonperforming assets and a higher reserve coverage of nonperforming loans.
SUMMARY OF LOAN LOSS EXPERIENCE Year ended December 31 - dollars in millions 1997 1996 1995 1994 1993 - --------------------------------------------------------------------------------------------------------------------------- Allowance at beginning of year $1,166 $1,259 $1,352 $1,372 $1,568 Charge-offs Consumer 104 100 76 72 80 Credit card 208 66 31 20 22 Residential mortgage 9 9 10 16 8 Commercial 48 52 84 116 168 Commercial real estate Commercial mortgage 8 10 23 15 49 Real estate project 4 8 14 37 186 Other 4 2 2 1 1 ----------------------------------------------------------------- Total charge-offs 385 247 240 277 514 Recoveries Consumer 36 34 33 34 30 Credit card 25 7 6 6 6 Residential mortgage 1 2 2 1 1 Commercial 38 28 49 59 56 Commercial real estate Commercial mortgage 10 6 9 5 4 Real estate project 2 4 6 10 8 Other 1 2 2 1 3 ----------------------------------------------------------------- Total recoveries 113 83 107 116 108 ----------------------------------------------------------------- Net charge-offs 272 164 133 161 406 Net charge-offs on bulk loan sales and assets held for accelerated disposition (8) (182) Provision for credit losses 70 6 84 350 Acquisitions/divestitures 8 71 34 65 42 ----------------------------------------------------------------- Allowance at end of year $972 $1,166 $1,259 $1,352 $1,372 ----------------------------------------------------------------- Allowance as a percent of period-end Loans 1.79% 2.25% 2.59% 3.07% 3.26% Nonperforming loans 351.79 334.40 351.68 239.29 160.28 As a percent of average loans Net charge-offs including bulk loan sales and assets held for accelerated disposition .51 .33 .29 .40 1.65 Net charge-offs excluding bulk loan sales and assets held for accelerated disposition .51 .33 .29 .38 1.14 Provision for credit losses .13 .01 .20 .99 Allowance for credit losses 1.84 2.37 2.76 3.17 3.86 Allowance as a multiple of net charge-offs including bulk loan sales and assets held for accelerated disposition 3.57x 7.11x 9.47x 8.00x 2.33x Allowance as a multiple of net charge-offs excluding bulk loan sales and assets held for accelerated disposition 3.57 7.11 9.47 8.40 3.38 - ---------------------------------------------------------------------------------------------------------------------------
PNC BANK CORP. 80 52 ALLOCATION OF ALLOWANCE FOR CREDIT LOSSES The following table presents the allocation of allowance for credit losses and the categories of loans as a percentage of total loans. ALLOCATION OF ALLOWANCE FOR CREDIT LOSSES*
1997 1996 1995 --------------------------------------------------------------------------------------- December 31 - LOANS TO Loans to Loans to dollars in millions ALLOWANCE TOTAL LOANS Allowance Total Loans Allowance Total Loans - ------------------------------------------------------------------------------------------------------------------- Commercial $406 36.9% $606 35.9% $585 34.5% Commercial real estate 141 7.3 173 7.9 332 10.1 Consumer 107 20.7 139 23.3 158 25.8 Credit card 258 7.0 141 5.4 45 2.1 Residential mortgage 42 23.6 80 24.5 112 24.0 Other 18 4.5 27 3.0 27 3.5 --------------------------------------------------------------------------------------- Total $972 100.0% $1,166 100.0% $1,259 100.0% ===================================================================================================================
1994 1993 ---------------------------------------------------------- December 31 - Loans to Loans to dollars in millions Allowance Total Loans Allowance Total Loans - -------------------------------------------------------------------------------------- Commercial $603 35.3% $572 36.9% Commercial real estate 419 11.5 498 12.3 Consumer 157 25.0 175 24.2 Credit card 27 1.9 27 1.7 Residential mortgage 116 22.1 86 20.5 Other 30 4.2 14 4.4 ---------------------------------------------------------- Total $1,352 100.0% $1,372 100.0% ======================================================================================
* For purposes of this presentation, unallocated reserves have been assigned to loan categories based on the relative specific allocation amounts. TIME DEPOSITS OF $100,000 OR MORE Time deposits in foreign offices totaled $3.0 billion, substantially all of which are in denominations of $100,000 or more. The following table sets forth remaining maturities of domestic time deposits of $100,000 or more. DOMESTIC TIME DEPOSITS OF $100,000 OR MORE Other Certificates Time December 31, 1997 - in millions of Deposit Deposits Total - ------------------------------------------------------------------------------ Three months or less $1,488 $5 $1,493 Over three through six months 433 2 435 Over six through twelve months 616 616 Over twelve months 1,351 33 1,384 -------------------------------------- Total $3,888 $40 $3,928 ============================================================================== SHORT-TERM BORROWINGS Most bank notes mature in 1998. Federal funds purchased include overnight borrowings and term federal funds, which are payable on demand. Repurchase agreements generally have maturities of 18 months or less. Other short-term borrowings consist primarily of U.S. Treasury, tax and loan borrowings which are payable on demand and commercial paper which is issued in maturities not to exceed nine months. At December 31, 1997 and 1996, $997 million and $487 million, respectively, notional value of interest rate swaps were designated to borrowed funds. The effect of these swaps is not included in the rates set forth in the table. SHORT-TERM BORROWINGS
1997 1996 1995 ------------------------------------------------------------------------------------- Dollars in millions Amount Rate Amount Rate Amount Rate - ---------------------------------------------------------------------------------------------------------------------------------- Bank notes Year-end balance $9,656 5.75% $7,905 5.46% $6,256 5.86% Average during year 8,959 5.68 7,947 5.52 6,091 6.01 Maximum month-end balance during year 10,391 9,041 7,075 Federal funds purchased Year-end balance 3,632 6.30 3,933 6.00 4,474 5.39 Average during year 2,834 5.57 3,157 5.41 5,200 6.06 Maximum month-end balance during year 4,459 4,837 7,413 Repurchase agreements Year-end balance 714 6.03 645 5.54 2,851 5.89 Average during year 812 5.36 2,030 5.41 6,514 6.11 Maximum month-end balance during year 946 3,363 7,981 Other Year-end balance 946 5.81 3,282 5.19 1,340 5.53 Average during year 1,671 6.57 1,466 6.79 1,671 7.20 Maximum month-end balance during year 2,574 3,395 3,057 - ----------------------------------------------------------------------------------------------------------------------------------
PNC BANK CORP. 81 53 CORPORATE INFORMATION CORPORATE HEADQUARTERS PNC Bank Corp. One PNC Plaza 249 Fifth Avenue Pittsburgh, Pennsylvania 15222-2707 INTERNET INFORMATION Information on PNC Bank Corp.'s financial results and its products and services is available on the Internet at www.pncbank.com. STOCK LISTING PNC Bank Corp. common stock is traded on the New York Stock Exchange ("NYSE") under the symbol PNC. At the close of business on February 1, 1998, there were 64,247 common shareholders of record. FINANCIAL INFORMATION The Annual Report on Form 10-K is filed with the Securities and Exchange Commission ("SEC"). Copies of this document and other filings, including Exhibits thereto, may be obtained: Electronically at the SEC's home page at www.sec.gov. By writing to Michelle Sentner, Assistant Vice President, Financial Reporting, at corporate headquarters. By calling 412-762-1553 or via e-mail to financial.reporting@pncbank.com. INQUIRIES For Financial Services call 1-800-4-BANKER. Individual shareholders should contact: Shareholder Relations at 800-843-2206 or the PNC Bank Hotline at 800-982-7652. Analysts and institutional investors should contact: William H. Callihan, Vice President, Investor Relations, at 412-762-8257. News media representatives and others seeking general information should contact: Jonathan Williams, Vice President, Media Relations, at 412-762-4550. TRUST PROXY VOTING Reports of 1997 nonroutine proxy voting by the trust divisions of PNC Bank Corp. are available by writing to Thomas R. Moore, Vice President and Assistant Corporate Secretary, at corporate headquarters. ANNUAL SHAREHOLDERS MEETING All shareholders are invited to attend the PNC Bank Corp. annual meeting on Tuesday, April 28, 1998, at 11 a.m., Eastern Standard Time, on the 15th floor of One PNC Plaza, 249 Fifth Avenue, Pittsburgh, Pennsylvania. COMMON STOCK PRICES/DIVIDENDS DECLARED The table below sets forth by quarter the range of high, low and quarter-end closing sale prices for PNC Bank Corp. common stock and the cash dividends declared per common share.
Cash Dividends 1997 QUARTER High Low Close Declared - ------------------------------------------------------------------- First $45.000 $36.500 $40.000 $.37 Second 44.750 37.375 41.750 .37 Third 49.750 41.125 48.813 .37 Fourth 58.750 42.875 56.938 .39 -------- Total $1.50 - ------------------------------------------------------------------- 1996 Quarter - ------------------------------------------------------------------- First $32.625 $28.375 $30.750 $.35 Second 31.500 28.375 29.750 .35 Third 33.875 27.500 33.375 .35 Fourth 39.750 33.125 37.625 .37 -------- Total $1.42 - -------------------------------------------------------------------
REGISTRAR AND TRANSFER AGENT The Chase Manhattan Bank P.O. Box 590 Ridgefield Park, New Jersey 07660 800-982-7652 DIVIDEND POLICY Holders of PNC Bank Corp. common stock are entitled to receive dividends when declared by the board of directors out of funds legally available. The board presently intends to continue the policy of paying quarterly cash dividends. However, future dividends will depend upon earnings, the financial condition of PNC Bank Corp. and other factors including applicable government regulations and policies and contractual restrictions. DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN The PNC Bank Corp. dividend reinvestment and stock purchase plan enables holders of common and preferred stock to purchase additional shares of common stock conveniently and without paying brokerage commissions or service charges. A prospectus and enrollment card may be obtained by writing to Shareholder Relations at corporate headquarters. PNC BANK CORP. 82 EX-21 9 PNC BANK CORP. 1 EXHIBIT 21 PNC BANK CORP. SCHEDULE OF CERTAIN SUBSIDIARIES (AS OF FEBRUARY 28, 1998)
STATE OR OTHER JURISDICTION OF NAME (1) INCORPORATION OR ORGANIZATION - ----------------------------------------------------------------------------------------------------------------------- PNC Bancorp, Inc. Delaware PNC Bank, Delaware (2) Delaware PNC Bank, FSB (2) United States PNC Bank, National Association (2) United States PNC Bank, New England (2) Massachusetts PNC Holding Corp. Delaware Alpine Indemnity Limited Grand Cayman, B.W.I. CastleInternational Asset Management Limited United Kingdom CastleInternational Asset Management, Inc. Delaware Parkway Management Inc. New Jersey PFPC International (Cayman) Ltd Grand Cayman, B.W.I. PFPC International Ltd Dublin, Ireland PFPC Trustee and Custodial Services Limited Dublin, Ireland PNC Alliance Inc. Delaware PNC Capital Corp. Delaware PNC Capital Markets, Inc. Pennsylvania PNC Capital Recovery Corp. Pennsylvania PNC Commercial Corp Florida PNC Equities Corp. Delaware PNC Equity Management Corp (2) Pennsylvania PNC ESOP Funding Corporation Delaware PNC Funding Corp Pennsylvania PNC GPI, Inc. Delaware PNC Insurance Corp. Arizona PNC Investment Corp. (2) Delaware PNC Management Services Corp Delaware PNC Network Holdings Corp. (2) Delaware PNC Realty Company, Ohio Ohio PNC Realty Holding Corp (2) Pennsylvania PNC Venture Corp Delaware
(1) All active first tier subsidiaries of the Corporation's two primary subsidiary holding companies, PNC Bancorp, Inc. and PNC Holding Corp., have been listed. Not all of such subsidiaries are "significant subsidiaries" within the meaning of Rule 1-02(v) of Regulation S-X. (2) The names of the subsidiaries of the indicated entities are omitted because such subsidiaries, considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary. EX-23 10 PNC BANK CORP. 1 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference, in the Registration Statements listed below, of our report dated January 23, 1998, with respect to the consolidated financial statements of PNC Bank Corp. and subsidiaries incorporated by reference in this Annual Report on Form 10-K of PNC Bank Corp. for the year ended December 31, 1997. Form S-3 relating to the Dividend Reinvestment and Stock Purchase Plan (No. 333-19003) Form S-8 relating to the PNC Bank Corp. Supplemental Incentive Savings Plan and PNC Bank Corp. and Affiliates Deferred Compensation Plan (No. 333-18069) Form S-8 relating to the PNC Retirement Savings Plan (No. 333-03901) Form S-8 relating the PNC Bank Corp. Employee Stock Purchase Plan (No. 33-62311) Form S-3 relating to the Dividend Reinvestment and Stock Purchase Plan of PNC Bank Corp. (No. 33-61083) Post-Effective Amendment No. 1 to Form S-8 relating to the PNC Bank Corp. 1997 Long-Term Incentive Award Plan (No. 33-54960) Post-Effective Amendment No. 1 on Form S-3 relating to the shelf registration of $500 million of debt securities of PNC Funding Corp., unconditionally guaranteed by PNC Bank Corp. (No. 33-42803) Form S-8 relating to the 1987 Senior Executive Long-Term Award Plan of PNC Bank Corp. (now known as the PNC Bank Corp. 1992 Long-Term Incentive Award Plan) (No. 33-28828) Post-Effective Amendment No. 1 (on Form S-8) to Form S-4 relating to the exercise of stock options assumed by PNC Bank Corp. in connection with the merger of a wholly-owned subsidiary of PNC Bank Corp. with and into Bank of Delaware Corporation (No. 33-25642) Post-Effective Amendment No. 1 to Form S-8 relating to the PNC Bank Corp. Incentive Savings Plan (No. 33-25140) Post-Effective Amendment No. 1 on Form S-8 relating to the Stock Option Plan of PNC Bank Corp. (No. 2-92181) Post-Effective Amendment No. 2 on Form S-8 relating to the PNC Bank Corp. Employee Stock Purchase Plan (No. 2-83510) Form S-8 relating to PNC Bank Corp. Employee Stock Purchase Plan (No. 333-25867) Form S-3 relating to the shelf registration of $1.3 billion of debt securities of PNC Funding Corp., unconditionally guaranteed by PNC Bank Corp., and/or common stock and/or preferred stock of PNC Bank Corp. (No. 333-34709 and No. 333-34709-01) /s/ ERNST & YOUNG LLP Pittsburgh, Pennsylvania March 20, 1998 EX-24 11 PNC BANK CORP. 1 EXHIBIT 24 POWER OF ATTORNEY PNC BANK CORP. ANNUAL REPORT ON FORM 10-K FOR YEAR ENDED DECEMBER 31, 1997 KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned Directors and/or Officers of PNC Bank Corp. (the "Corporation"), a Pennsylvania corporation, hereby names, constitutes and appoints Walter E. Gregg, Jr., John F. Fulgoney and Melanie S. Cibik, or each of them, with full power of substitution, such person's true and lawful attorney-in-fact and agent to execute in such person's name, place and stead, in any and all capacities, the Corporation's Annual Report on Form 10-K for the year ended December 31, 1997. And such persons hereby ratify and confirm all that any said attorney or attorney-in-fact, or any substitute, shall lawfully do or cause to be done by virtue hereof. Witness the due execution hereof by the following persons in the capacities indicated as of this February 19, 1998.
Name/Signature Capacity ------------------------------------- ------------------------------------------- Chairman, Chief Executive Officer /s/ THOMAS H. O'BRIEN and Director ------------------------------------- Thomas H. O'Brien /s/ PAUL W. CHELLGREN Director ------------------------------------- Paul W. Chellgren /s/ ROBERT N. CLAY Director ------------------------------------- Robert N. Clay /s/ GEORGE A. DAVIDSON, JR. Director ------------------------------------- George A. Davidson, Jr. /s/ DAVID F. GIRARD-DICARLO Director ------------------------------------- David F. Girard-diCarlo /s/ C. G. GREFENSTETTE Director ------------------------------------- C. G. Grefenstette /s/ WILLIAM R. JOHNSON Director ------------------------------------- William R. Johnson /s/ BRUCE LINDSAY Director ------------------------------------- Bruce Lindsay /s/ THOMAS MARSHALL Director ------------------------------------- Thomas Marshall /s/ CRAIG MCCLELLAND Director ------------------------------------- W. Craig McClelland /s/ JANE G. PEPPER Director ------------------------------------- Jane G. Pepper /s/ JACKSON H. RANDOLPH Director ------------------------------------- Jackson H. Randolph
2 /s/ JAMES E. ROHR President and Director ------------------------------------- James E. Rohr /s/ RODERIC H. ROSS Director ------------------------------------- Roderic H. Ross /s/ VINCENT A. SARNI Director ------------------------------------- Vincent A. Sarni /s/ GARRY J. SCHEURING Director ------------------------------------- Garry J. Scheuring /s/ RICHARD P. SIMMONS Director ------------------------------------- Richard P. Simmons /s/ THOMAS J. USHER Director ------------------------------------- Thomas J. Usher /s/ MILTON A. WASHINGTON Director ------------------------------------- Milton A. Washington /s/ HELGE H. WEHMEIER Director ------------------------------------- Helge H. Wehmeier
EX-27.1 12 PNC BANK CORP.
9 This schedule contains summary financial information extracted from the consolidated financial information incorporated by reference to the 1997 Annual Report on Form 10-K and is qualified in its entirety by reference to such financial information. 1,000,000 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 4,303 0 0 0 8,522 0 0 54,245 (972) 75,120 47,649 14,948 1,815 4,674 0 7 1,742 3,635 75,120 4,354 540 157 5,051 1,457 2,556 2,495 70 49 2,615 1,618 1,052 0 0 1,052 3.33 3.28 3.94 276 288 0 41 1,166 (385) 113 972 972 0 0
EX-27.2 13 PNC BANK CORP.
9 This schedule restates previously filed data relating to the adoption of SFAS No. 128 "Earnings Per Share." The provisions of SFAS No. 128 required replacement of primary and fully diluted earnings per share amounts with basic and diluted earnings per share. This schedule also restates previously filed data for short-term and long-term borrowings. 1,000,000 12-MOS 9-MOS 6-MOS 3-MOS 12-MOS DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1995 JAN-01-1996 JAN-01-1996 JAN-01-1996 JAN-01-1996 JAN-01-1995 DEC-31-1996 SEP-30-1996 JUN-30-1996 MAR-31-1996 DEC-31-1995 4,016 3,611 3,232 3,251 3,679 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 11,917 11,243 14,107 14,692 15,839 0 0 0 0 0 0 0 0 0 0 51,798 49,443 49,223 48,800 48,653 (1,166) (1,152) (1,189) (1,225) (1,259) 73,260 69,662 71,961 72,668 73,404 45,676 45,430 44,852 45,621 46,899 15,765 13,052 15,779 15,898 14,921 1,761 1,784 1,952 1,809 1,674 3,839 3,598 3,546 3,554 4,142 0 0 0 0 0 7 1 1 1 1 1,726 1,717 1,711 1,709 1,704 4,136 4,080 4,120 4,076 4,063 73,260 69,662 71,961 72,668 73,404 3,943 2,932 1,953 981 3,743 859 677 470 237 1,283 136 106 76 37 124 4,938 3,715 2,498 1,255 5,150 1,428 1,074 723 371 1,552 2,494 1,888 1,281 648 3,008 2,444 1,827 1,218 607 2,142 0 0 0 0 6 22 15 7 3 (280) 2,312 1,725 1,130 566 2,469 1,527 1,108 746 363 627 992 720 486 238 408 0 0 0 0 0 0 0 0 0 0 992 720 486 238 408 2.91 2.11 1.42 .70 1.20 2.88 2.09 1.41 .69 1.19 3.83 3.77 3.72 3.73 3.15 347 374 378 355 335 244 231 191 209 225 2 3 3 17 23 151 0 0 0 176 1,259 1,259 1,259 1,259 1,352 (247) (168) (113) 55 240 83 61 43 21 107 1,166 1,152 1,189 1,225 1,259 1,166 1,152 1,189 1,225 1,259 0 0 0 0 0 0 0 0 0 0
EX-27.3 14 PNC BANK CORP.
9 This schedule restates previously filed data relating to the adoption of SFAS No. 128 "Earnings Per Share." The provisions of SFAS No. 128 required replacement of primary and fully diluted earnings per share amounts with basic and diluted earnings per share. This schedule also restates previously filed data for short-term and long-term borrowings. 1,000,000 9-MOS 6-MOS 3-MOS DEC-31-1997 DEC-31-1997 DEC-31-1997 JAN-01-1997 JAN-01-1997 JAN-01-1997 SEP-30-1997 JUN-30-1997 MAR-31-1997 3,460 3,676 3,096 0 0 0 0 0 0 0 0 0 8,000 8,396 9,593 0 0 0 0 0 0 53,651 53,497 52,575 (1,027) (1,075) (1,119) 71,828 71,973 71,166 44,788 45,216 44,902 14,666 14,803 14,415 1,862 1,657 1,889 4,386 4,263 4,132 0 0 0 7 7 7 1,740 1,737 1,735 3,729 3,640 3,736 71,828 71,973 71,166 3,236 2,135 1,056 421 295 156 113 69 30 3,770 2,499 1,242 1,087 714 346 1,907 1,256 612 1,863 1,243 630 45 25 10 27 30 16 1,914 1,275 636 1,209 802 409 787 525 266 0 0 0 0 0 0 787 525 266 2.47 1.63 .81 2.44 1.61 .80 3.91 3.92 3.98 315 345 322 289 230 251 2 1 1 0 0 0 1,166 1,166 1,166 (280) (185) (89) 88 66 29 1,027 1,075 1,119 1,027 1,075 1,119 0 0 0 0 0 0
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