-----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, UhcjQZSGTq8+iOX0Amt0sTKRQdfJB8VwpeH6jSFWbl7LqE4ch4dTmiot05+1t2Ct FBaFOvCe/9t3guY36p/G8Q== 0000950128-99-001138.txt : 19991117 0000950128-99-001138.hdr.sgml : 19991117 ACCESSION NUMBER: 0000950128-99-001138 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 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-Q SEC ACT: SEC FILE NUMBER: 001-09718 FILM NUMBER: 99756515 BUSINESS ADDRESS: STREET 1: ONE PNC PLAZA STREET 2: 249 FIFTH AVE CITY: PITTSBURGH STATE: PA ZIP: 15265 BUSINESS PHONE: 4127621553 MAIL ADDRESS: STREET 1: ONE PNC PLAZA STREET 2: FIFTH AVENUE & WOOD STREET CITY: PITTSBURGH STATE: PA ZIP: 15265 FORMER COMPANY: FORMER CONFORMED NAME: PNC BANK CORP /PA/ DATE OF NAME CHANGE: 19930428 FORMER COMPANY: FORMER CONFORMED NAME: PNC FINANCIAL CORP DATE OF NAME CHANGE: 19920703 10-Q 1 PNC BANK, CORP. FORM 10-Q 1 PNC BANK Quarterly Report on Form 10-Q For the quarterly period ended September 30, 1999 Page 1 represents a portion of the third quarter 1999 Financial Review which is not required by the Form 10-Q report and is not "filed" as part of the Form 10-Q. The Quarterly Report on Form 10-Q and cross reference index is on page 35. 2 Consolidated Financial Highlights
Three months ended September 30 Nine months ended September 30 ----------------------------------------------------------------- Dollars in millions, except per share data 1999 1998 1999 1998 - ------------------------------------------------------------------------------------------------------------------------ FINANCIAL PERFORMANCE Revenue Net interest income (taxable-equivalent basis) $ 599 $ 653 $ 1,875 $ 1,934 Noninterest income 651 529 2,046 1,604 Total revenue 1,250 1,182 3,921 3,538 Net income 320 281 960 830 Per common share Basic earnings 1.07 .92 3.17 2.71 Diluted earnings 1.06 .91 3.14 2.68 Cash dividends declared .41 .39 1.23 1.17 - ------------------------------------------------------------------------------------------------------------------------ SELECTED RATIOS Return on Average common shareholders' equity 23.07% 20.52% 22.81% 21.00% Average assets 1.72 1.48 1.71 1.51 Net interest margin 3.59 3.81 3.70 3.86 Noninterest income to total revenue 52.08 44.75 52.18 45.34 Efficiency * 53.34 53.28 53.78 55.50 * Excluding amortization, distributions on capital securities and residential mortgage banking hedging activities ========================================================================================================================
September 30 December 31 September 30 Dollars in millions, except per share data 1999 1998 1998 - ------------------------------------------------------------------------------------------------------------------------ PERIOD-END BALANCE SHEET DATA Assets $73,003 $77,207 $76,238 Earning assets 64,782 69,027 68,638 Loans, net of unearned income 51,398 57,650 56,752 Securities available for sale 8,096 7,074 7,152 Deposits 45,146 47,496 46,875 Borrowed funds 18,898 20,946 19,972 Shareholders' equity 5,871 6,043 5,793 Common shareholders' equity 5,558 5,729 5,479 Book value per common share 18.90 18.86 18.21 CAPITAL RATIOS Leverage 7.74% 7.28% 7.18% Common shareholders' equity to total assets 7.61 7.42 7.19 ASSET QUALITY RATIOS Nonperforming assets to total loans, loans held for sale and foreclosed assets .65% .55% .54% Allowance for credit losses to total loans 1.31 1.31 1.44 Allowance for credit losses to nonaccrual loans 214.65 255.25 289.36 Quarterly net charge-offs to average loans .22 1.24 .62 ========================================================================================================================
PNC BANK CORP. ---- 1 3 FINANCIAL REVIEW This Financial Review should be read in conjunction with the PNC Bank Corp. and subsidiaries' ("Corporation" or "PNC Bank") unaudited Consolidated Financial Statements included herein and the Financial Review and audited Consolidated Financial Statements included in the Corporation's 1998 Annual Report. OVERVIEW PNC BANK CORP. The Corporation is one of the largest diversified financial services companies in the United States operating retail banking, asset management and wholesale banking businesses that provide products and services nationally and in PNC Bank's primary geographic markets in Pennsylvania, New Jersey, Delaware, Ohio and Kentucky. Financial services providers today are challenged by intense competition, changing customer demands, increased pricing pressures and the ongoing impact of deregulation. Traditional loan and deposit activities face particularly challenging competitive pressures as both banks and nonbanks compete for customers with access to a broad array of banking, investment and capital markets products. Recently enacted financial services reform legislation will allow banks and insurance companies to further expand the range of products and services offered to customers. PNC Bank has responded to these challenges by transitioning to an organization managed as separate businesses with highly focused customer segments. This management structure enables PNC's businesses to operate with an entrepreneurial focus on the valuation dynamics and competitive opportunities unique to their industry segments. This business model also allows the Corporation to enhance consolidated value by leveraging technology, information, branding, marketing, and financial resources across all businesses. The Corporation has altered its business mix by investing in specialized financial services businesses, including asset management, mutual fund servicing, investment advisory, mortgage banking and corporate services. These businesses are largely fee-based, less capital intensive and provide growth opportunities on a national scale. More meaningful contributions from these businesses, coupled with disciplined management of traditional banking activities, have allowed PNC Bank to significantly improve the composition of its revenue stream. Pursuant to this strategy, in July 1999, the Corporation announced an agreement to acquire First Data Investor Services Group, Inc. ("ISG"), the mutual fund servicing subsidiary of First Data Corporation, for $1.1 billion in cash. The transaction is expected to close in the fourth quarter of 1999, subject to customary closing conditions. Also, during the first quarter of 1999, the Corporation completed the sale of its credit card business and made the decision to exit certain out-of-footprint large corporate, national healthcare and other non-strategic institutional lending businesses. Additionally, in October, 1999, BlackRock, Inc., PNC Bank's investment management subsidiary, issued 9 million shares of class A common stock at $14.00 per share in an initial public offering. PNC Bank will continue to own approximately 70% of BlackRock's stock and expects to record an after-tax gain of approximately $60 million during the fourth quarter of 1999 as a result of this offering. SUMMARY FINANCIAL RESULTS Consolidated net income for the first nine months of 1999 was $960 million or $3.14 per diluted share. Results for the first nine months of 1999 included $358 million of pretax gains on the sales of PNC Bank's credit card business, an equity interest in Electronic Payment Services, Inc. ("EPS"), Concord EFS, Inc. ("Concord") stock and twelve branches in western Pennsylvania. The first nine months of 1999 also included $142 million of valuation adjustments associated with exiting certain institutional lending businesses, $98 million of costs related to efficiency initiatives and a $30 million contribution to the PNC Bank Foundation. Excluding these items, earnings for the first nine months of 1999 were $895 million or $2.92 per diluted share, return on average common shareholders' equity was 21.24% and return on average assets was 1.59%. Earnings for the first nine months of 1998 were $830 million or $2.68 per diluted share. Taxable-equivalent net interest income was $1.875 billion for the first nine months of 1999, a $59 million decrease compared with the first nine months of 1998. The net interest margin was 3.70% for the first nine months of 1999 compared with 3.86% in the prior-year period. These declines were primarily due to the sale of the credit card business in the first quarter of 1999. Excluding the credit card business, net interest income was $1.809 billion for the first nine months of 1999, an increase of $113 million or 7% compared with the first nine months of 1998, and the net interest margin was 3.62% and 3.60% in 1999 and 1998, respectively. Noninterest income was $2.046 billion for the first nine months of 1999, a $442 million increase compared with the first nine months of 1998. Excluding the gains and valuation adjustments from 1999 and $86 million of branch gains and $30 million of valuation adjustments from 1998, noninterest income increased $282 million or 18% in the period-to-period comparison primarily due to growth in fee-based revenue. PNC BANK CORP. ------ 2 4 FINANCIAL REVIEW The provision for credit losses was $133 million for the first nine months of 1999 compared with $110 million a year ago. Net charge-offs were $131 million or .33% of average loans for the first nine months of 1999 compared with $267 million or .65%, respectively, for the first nine months of 1998. The decreases were due to the sale of the credit card business in the first quarter of 1999. Noninterest expense was $2.314 billion for the first nine months of 1999, an 8% increase compared with the first nine months of 1998. Noninterest expense increased 5% compared with the prior-year period excluding $98 million of costs related to efficiency initiatives and a $30 million contribution to the PNC Bank Foundation in 1999 and $55 million of costs primarily for consumer delivery initiatives in 1998. The increase supported revenue growth in fee-based businesses. The efficiency ratio improved to 53.78% for the first nine months of 1999 compared with 55.50% in the prior year due to a continued focus on improving returns in traditional businesses. Total assets were $73.0 billion at September 30, 1999, compared with $77.2 billion at December 31, 1998. The decline was primarily due to the sale of the credit card business in the first quarter of 1999. Shareholders' equity totaled $5.9 billion at September 30, 1999, compared with $6.0 billion at December 31, 1998. The leverage ratio was 7.74% and Tier I and total risk-based capital ratios were 8.47% and 11.95%, respectively, at September 30, 1999. Overall asset quality characteristics remained relatively stable during the first nine months of 1999. The ratio of nonperforming assets to total loans, loans held for sale and foreclosed assets was .65% at September 30, 1999 and .55% at December 31, 1998. Nonperforming assets were $361 million at September 30, 1999, compared with $332 million at December 31, 1998. The allowance for credit losses was $674 million and represented 215% of nonaccrual loans and 1.31% of period-end loans at September 30, 1999. The comparable ratios were 255% and 1.31%, respectively, at December 31, 1998. FORWARD-LOOKING STATEMENTS This report includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act with respect to financial performance and other financial and business matters. Forward-looking statements are typically identified by words or phrases such as "believe," "expect," "anticipate," "intend," "estimate," "may increase," "may fluctuate," and variations of such words and similar expressions, or future or conditional verbs such as "will," "would," and "could" or similar expressions. The Corporation cautions that these forward-looking statements are subject to numerous assumptions, risks and uncertainties, all of which change over time, and the Corporation assumes no duty to update forward-looking statements. Actual results could differ materially from those anticipated in these forward-looking statements. In addition to factors previously disclosed by the Corporation and those identified elsewhere herein, the following factors, among others, could cause actual results to differ materially from forward-looking statements: the inability of the Corporation or others to remediate year 2000 concerns in a timely and adequate fashion; continued pricing pressures on loan and deposit products; increased credit risk; the introduction, withdrawal, success and timing of business initiatives and strategies; intensified competition; the ability to realize cost savings or revenues and implement integration plans associated with acquisitions and divestitures; changes in global and domestic economic conditions generally and in primary geographic markets in which the Corporation conducts business; changes in interest rates and financial and capital markets; inflation; customer borrowing, repayment, investment and deposit practices; customers' acceptance of PNC Bank's products and services; and the impact, extent and timing of technological changes, capital management activities, actions of the Federal Reserve Board and legislative and regulatory actions and reforms. REVIEW OF BUSINESSES PNC Bank operates seven major businesses engaged in retail banking, asset management and wholesale banking activities: PNC Regional Bank, PNC Advisors, BlackRock, PFPC Worldwide, PNC Institutional Bank, PNC Secured Finance and PNC Mortgage. Business results are based on PNC Bank's management accounting practices. There is no comprehensive, authoritative body of guidance for management accounting equivalent to generally accepted accounting principles; therefore, PNC Bank's results are not necessarily comparable with similar information for any other financial services institution. Financial results are presented as if each business operated on a stand-alone basis. PNC BANK CORP. ------ 3 5 The following changes were made in the first quarter of 1999 to the presentation of business results: PNC Regional Bank reflects the combination of PNC Regional Community Bank and PNC National Consumer Bank. Branch-based brokerage activities (previously included in PNC Advisors), the middle market customer segment (previously included in PNC Corporate Bank) and regional real estate lending and leasing activities in PNC Bank's geographic footprint (previously included in PNC Secured Finance) were also combined with PNC Regional Bank. Additionally, residential mortgages (previously included in PNC Mortgage) were realigned with PNC Regional Bank. Certain out-of-footprint large corporate, national healthcare and other non-strategic institutional lending businesses as well as venture capital activities (previously included in PNC Corporate Bank) are included in Other. PNC Institutional Bank is comprised of the remaining activities that were previously in PNC Corporate Bank. BlackRock reflects legal entity results for BlackRock, Inc. Financial results for 1999 and 1998 are presented consistent with this structure. The management accounting process uses various balance sheet and income statement assignments and transfers to measure performance of the businesses. Methodologies change from time-to-time as management accounting practices are enhanced and businesses change. Securities or borrowings and related net interest income are assigned based on the net asset or liability position of each business. Capital is assigned based on management's assessment of inherent risks and equity levels at independent companies providing similar products and services. Support areas not directly aligned with the businesses are allocated primarily based on the utilization of these services. Total business financial results differ from consolidated financial results primarily due to differences between management accounting practices and generally accepted accounting principles, divested and exited businesses, venture capital activities, sales of equity interests, minority interests in subsidiaries, eliminations and unassigned items, the impact of which is reflected in Other. The Corporation is managed as a portfolio of distinct businesses that are positioned to compete as stand-alone companies while enhancing PNC Bank's consolidated value by leveraging technology, information, branding, marketing and financial resources across all businesses. Total business earnings were $885 million for the first nine months of 1999, a 22% increase compared with the prior-year period. The contribution from asset management businesses increased to 21% of total business results while the regional bank and wholesale businesses accounted for 55% and 24% of total business results, respectively. RESULTS OF BUSINESSES
Return on Earnings Revenue Assigned Capital Average Assets * Nine months ended September 30 - ----------------------------------------------------------------------------------------- dollars in millions 1999 1998 1999 1998 1999 1998 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------------ PNC Regional Bank $ 490 $ 451 $1,734 $1,746 22% 21% $39,485 $38,741 Asset Management PNC Advisors 111 87 551 348 27 31 3,299 2,646 BlackRock 42 23 280 210 44 38 443 302 PFPC Worldwide 34 29 170 141 42 43 257 229 - ------------------------------------------------------------------------------------ -------------------- Total asset management 187 139 1,001 699 32 34 3,999 3,177 Wholesale PNC Institutional Bank 84 58 313 280 17 13 9,660 8,459 PNC Secured Finance 79 52 224 147 19 15 8,038 6,766 PNC Mortgage 45 23 327 243 13 10 7,092 4,634 - ------------------------------------------------------------------------------------ -------------------- Total wholesale 208 133 864 670 16 13 24,790 19,859 - ------------------------------------------------------------------------------------ -------------------- Total businesses 885 723 3,599 3,115 22 20 68,274 61,777 Other 10 107 106 423 6,974 11,922 - ------------------------------------------------------------------------------------ -------------------- 895 830 3,705 3,538 21 21 75,248 73,699 Gain on sale of credit card business 125 193 Gain on sale of equity interest in EPS 63 97 Gain on sale of Concord stock net of PNC Bank Foundation contribution 16 41 Valuation adjustments (92) (142) Costs related to efficiency initiatives (64) Gain on sale of branches 17 27 - ------------------------------------------------------------------------------------ -------------------- Total consolidated $ 960 $ 830 $3,921 $3,538 23 21 $75,248 $73,699 ====================================================================================================================================
* BlackRock's assets are presented as of period end. PNC BANK CORP. ------ 4 6 FINANCIAL REVIEW
PNC REGIONAL BANK Nine months ended September 30 - dollars in millions 1999 1998 - -------------------------------------------------------------------------------- INCOME STATEMENT Net interest income $ 1,305 $ 1,271 Noninterest income 429 475 - -------------------------------------------------------------------------------- Total revenue 1,734 1,746 Provision for credit losses 33 41 Noninterest expense 908 961 - -------------------------------------------------------------------------------- Pretax earnings 793 744 Income taxes 303 293 - -------------------------------------------------------------------------------- Earnings $ 490 $ 451 - -------------------------------------------------------------------------------- AVERAGE BALANCE SHEET Loans Consumer $ 9,072 $ 9,786 Commercial 9,523 8,904 Residential mortgage 9,873 9,684 Other 3,047 2,840 - -------------------------------------------------------------------------------- Total loans 31,515 31,214 Assigned assets and other assets 7,970 7,527 - -------------------------------------------------------------------------------- Total assets $39,485 $38,741 - -------------------------------------------------------------------------------- Deposits Noninterest-bearing demand $ 6,310 $ 6,510 Interest-bearing demand 4,872 4,168 Money market 8,980 7,235 Savings 2,577 2,613 Certificates 13,412 14,957 - -------------------------------------------------------------------------------- Total net deposits 36,151 35,483 Other liabilities 374 353 Assigned capital 2,960 2,905 - -------------------------------------------------------------------------------- Total funds $39,485 $38,741 - -------------------------------------------------------------------------------- PERFORMANCE RATIOS Return on assigned capital 22% 21% Noninterest income to total revenue 25 27 Efficiency 51 53 ================================================================================
PNC Regional Bank provides credit, deposit, branch-based brokerage and electronic banking products and services to retail customers as well as credit, leasing, treasury management and capital markets products and services to mid-sized and small businesses primarily within PNC Bank's geographic footprint. PNC Regional Bank utilizes experienced relationship managers and sophisticated information technology to identify consumer preferences for products, services and delivery channels of choice. Consumers are increasingly demanding the convenience of multiple delivery channels and choice among products and services. As consumer preferences have changed, PNC Regional Bank has focused on offering desired products and balancing resources between traditional branches and technology-driven alternative delivery channels. PNC Regional Bank contributed 55% of total business earnings for the first nine months of 1999 compared with 63% in the first nine months of 1998. Earnings increased $39 million or 9% to $490 million for the first nine months of 1999 and the return on assigned capital and efficiency ratios improved due to strategies designed to respond to changing customer preferences while improving the effectiveness and efficiency of the delivery system. These strategies resulted in revenue growth and a reduction in operating costs in the period-to-period comparison. Excluding the impact of $86 million of branch gains and $40 million of costs related to consumer delivery initiatives in 1998, earnings increased 16%. Excluding the impact of the branch gains in 1998, revenue increased 4% to $1.734 billion for the first nine months of 1999 compared with the prior-year period. The increase was primarily due to growth in deposits and fee-based services. The decrease in the provision for credit losses as well as consumer loans was primarily due to the downsizing of the indirect auto loan portfolio. Excluding the impact of costs related to consumer delivery initiatives in 1998, noninterest expense decreased 1% for the first nine months of 1999 compared with the prior-year period. PNC Regional Bank engages in credit and deposit activities that are affected by economic and financial market conditions. Accordingly, changes in the economy or financial markets could impact asset quality and results of operations. PNC BANK CORP. ------ 5 7
PNC ADVISORS Nine months ended September 30 - dollars in millions 1999 1998 - ----------------------------------------------------------------------------------- INCOME STATEMENT Net interest income $ 98 $ 88 Noninterest income Investment management and trust 292 237 Brokerage 108 16 Other 53 7 - ----------------------------------------------------------------------------------- Total noninterest income 453 260 - ----------------------------------------------------------------------------------- Total revenue 551 348 Provision for credit losses 5 (1) Noninterest expense 366 209 - ----------------------------------------------------------------------------------- Pretax earnings 180 140 Income taxes 69 53 - ----------------------------------------------------------------------------------- Earnings $ 111 $ 87 - ----------------------------------------------------------------------------------- AVERAGE BALANCE SHEET Loans Residential mortgage $ 958 $ 968 Consumer 937 932 Commercial 615 595 Other 357 28 - ----------------------------------------------------------------------------------- Total loans 2,867 2,523 Other assets 432 123 - ----------------------------------------------------------------------------------- Total assets $3,299 $ 2,646 - ----------------------------------------------------------------------------------- Deposits $2,223 $ 2,261 Assigned funds and other liabilities 528 5 Assigned capital 548 380 - ----------------------------------------------------------------------------------- Total funds $3,299 $ 2,646 - ----------------------------------------------------------------------------------- PERFORMANCE RATIOS Return on assigned capital 27% 31% Noninterest income to total revenue 82 75 Efficiency 66 60 ===================================================================================
PNC Advisors, the nation's fourth largest manager of trust and high net worth assets, offers personalized investment management, high-end brokerage, personal trust, estate planning and traditional banking services to affluent and wealthy individuals, and investment management, trust and administrative services to pensions, 401(k) plans and charitable organizations. PNC Advisors strives to be the "financial advisor of choice" in the growing affluent market, providing a full range of high quality, customized and predominantly fee-based investment products and services. Consistent with this objective, in the fourth quarter of 1998, the Corporation acquired Hilliard-Lyons, Inc. ("Hilliard Lyons"), a firm primarily focused on delivering brokerage services and investment advice to affluent clients. PNC Advisors is expanding the Hilliard Lyons brand and organization throughout PNC Bank's geographic footprint, which includes several of the nation's wealthiest metropolitan areas. PNC Advisors contributed 13% of total business earnings for the first nine months of 1999 compared with 12% in the prior-year period. Earnings of $111 million for the first nine months of 1999 increased $24 million or 28% compared with the first nine months of 1998 driven by strong revenue growth. Revenue increased $203 million or 58% for the first nine months of 1999 compared with the prior-year period. The increase was due to higher brokerage revenue primarily from the Hilliard Lyons acquisition and higher investment management and trust revenue primarily resulting from new business. The period-to-period increase in noninterest expense and the efficiency ratio as well as the lower return on assigned capital was attributable to the Hilliard Lyons acquisition.
ASSETS UNDER MANAGEMENT* September 30 - in billions 1999 1998 - ---------------------------------------------------------------- Personal investment management and trust $57 $47 Institutional trust 9 6 - ---------------------------------------------------------------- Total $66 $53 ================================================================
* Assets under management do not include brokerage assets administered. At September 30, 1999, PNC Advisors managed $66 billion of assets, a 25% increase compared with the prior-year period due to new business and the Hilliard Lyons acquisition. Brokerage assets administered by PNC Advisors increased $24 billion in the period-to-period comparison to $29 billion at September 30, 1999, primarily due to the Hilliard Lyons acquisition. PNC Advisors' revenue is affected by the volume of new business, the value of assets managed, investment performance and financial market conditions. Revenue may be positively affected by strong investment performance or improving financial markets. Conversely, declining performance or deteriorating financial markets may have an adverse effect on results of operations. PNC BANK CORP. ------ 6 8 FINANCIAL REVIEW
BLACKROCK Nine months ended September 30 - dollars in millions 1999 1998 - ------------------------------------------------------------------------------ INCOME STATEMENT Advisory and administrative fees $265 $201 Other income 15 9 - ------------------------------------------------------------------------------ Total revenue 280 210 Operating expense 192 150 Goodwill amortization 7 7 - ------------------------------------------------------------------------------ Operating income 81 53 Interest expense 8 9 - ------------------------------------------------------------------------------ Pretax earnings 73 44 Income taxes 31 21 - ------------------------------------------------------------------------------ Earnings $ 42 $ 23 - ------------------------------------------------------------------------------ PERIOD-END BALANCE SHEET Goodwill $197 $206 Other assets 246 96 - ------------------------------------------------------------------------------ Total assets $443 $302 - ------------------------------------------------------------------------------ Borrowings $153 $130 Other liabilities 142 81 Shareholders' equity 148 91 - ------------------------------------------------------------------------------ Total funds $443 $302 - ------------------------------------------------------------------------------ PERFORMANCE RATIOS Return on average equity 44% 38% Operating margin 29 25 Efficiency 69 71 ==============================================================================
BlackRock, one of the largest publicly traded investment management firms in the United States, offers fixed income, domestic and international equity and liquidity investment products and is focused on expanding marketing and delivery channels for a wide range of institutional and retail customers. In October 1999, BlackRock, Inc. issued 9 million shares of class A common stock at $14.00 per share in an initial public offering with PNC Bank retaining approximately 70% of BlackRock's stock. The proceeds from the offering were used to retire a portion of BlackRock's revolving line of credit with the Corporation. Management anticipates that this offering will assist BlackRock in attracting and retaining the highest quality professionals and support its long-term growth objectives. BlackRock contributed 5% of total business earnings for the first nine months of 1999 compared with 3% a year ago. Earnings of $42 million for the first nine months of 1999 nearly doubled compared with the prior-year period primarily due to revenue growth resulting from new business. Advisory and administration fees for the first nine months of 1999 increased $64 million or 32% compared with the prior-year period primarily due to a 23% increase in assets under management and higher performance fees. The increase in operating expense in the period-to-period comparison supported revenue growth. At September 30, 1999, BlackRock managed $148 billion of assets for individual and institutional investors. Approximately 90% were invested in fixed income and liquidity funds that historically have been less volatile than equity funds.
ASSETS UNDER MANAGEMENT September 30 - in billions 1999 1998 - ---------------------------------------------------------------- Fixed income $83 $63 Liquidity 50 45 Equity and other 15 12 - ---------------------------------------------------------------- Total assets under management $148 $120 - ---------------------------------------------------------------- Proprietary mutual funds BlackRock Funds $25 $22 Provident Institutional Funds 22 22 - ---------------------------------------------------------------- Total proprietary mutual funds $47 $44 ================================================================
BlackRock's proprietary mutual fund family, representing approximately $47 billion of total assets under management, provides individual and institutional investors with a full range of equity, bond and money market investment products. BlackRock's revenue is affected by the volume of new business, the value of assets managed, investment performance and financial market conditions. Revenue may be positively affected by strong investment performance or improving financial markets. Conversely, declining performance or deteriorating financial markets may have an adverse effect on results of operations. PNC BANK CORP. ------ 7 9
PFPC WORLDWIDE Nine months ended September 30 - dollars in millions 1999 1998 - ----------------------------------------------------------------------------- INCOME STATEMENT Revenue $170 $141 Operating expense 116 95 - ----------------------------------------------------------------------------- Pretax earnings 54 46 Income taxes 20 17 - ----------------------------------------------------------------------------- Earnings $ 34 $ 29 - ----------------------------------------------------------------------------- AVERAGE BALANCE SHEET Total assets $257 $229 - ----------------------------------------------------------------------------- Deposits $130 $119 Other liabilities 18 19 Assigned capital 109 91 - ----------------------------------------------------------------------------- Total funds $257 $229 - ----------------------------------------------------------------------------- PERFORMANCE RATIOS Return on assigned capital 42% 43% Operating margin 32 33 Efficiency 67 66 =============================================================================
PFPC Worldwide ("PFPC"), the Corporation's global fund servicing operation, provides a wide range of accounting, administration, transfer agency, custody, securities lending and integrated banking transaction services to mutual funds, pension and money fund managers, partnerships, brokerage firms, insurance companies and banks. Continued growth of its Dublin, Ireland operation has expanded PFPC's international presence. PFPC will continue to leverage its technology platform, providing customized services for clients and promoting its full service capabilities to the global funds marketplace. In July 1999, the Corporation announced an agreement to acquire First Data Investor Services Group ("ISG"), the mutual fund servicing subsidiary of First Data Corp., for $1.1 billion in cash. ISG is one of the nation's leading providers of processing services for pooled investment products, a high-growth industry that includes mutual funds and retirement plans. ISG's integration with PFPC is expected to create one of the nation's leading full-service transfer agents, while significantly strengthening PFPC's position as a full-service provider of accounting services. The transaction will also add key related businesses, including retirement plan servicing, to PFPC's growing operations. The transaction is expected to close in the fourth quarter of 1999, subject to customary closing conditions. PFPC contributed 4% of total business earnings for the first nine months of 1999 and 1998. Earnings increased $5 million or 17% to $34 million for the first nine months of 1999 primarily due to revenue growth. Revenue increased $29 million or 21% to $170 million for the first nine months of 1999 driven by new business, existing client growth and market appreciation. Operating expense increased in the period-to-period comparison to support revenue growth and infrastructure costs associated with business expansion. At September 30, 1999, PFPC provided custody and accounting/administration services for $353 billion and $246 billion, respectively, of mutual fund and other pooled assets. The comparable amounts were $287 billion and $228 billion, respectively, a year ago. The increase in custody and accounting/administration assets serviced in the period-to-period comparison was 23% and 8%, respectively.
ASSETS SERVICED September 30 - in billions 1999 1998 - ---------------------------------------------------------------- Custody $353 $287 Accounting/administration 246 228 ================================================================
PFPC's revenue is affected by the number and value of customer accounts serviced and financial market conditions. Revenue may be positively affected by increasing customer account values or improving financial markets. Conversely, declining customer account values or deteriorating financial markets may have an adverse effect on results of operations. PNC BANK CORP. ------ 8 10 FINANCIAL REVIEW
PNC INSTITUTIONAL BANK Nine months ended September 30 - dollars in millions 1999 1998 - -------------------------------------------------------------------------------- INCOME STATEMENT Credit-related revenue $ 137 $ 126 Noncredit revenue 176 154 - -------------------------------------------------------------------------------- Total revenue 313 280 Provision for credit losses 19 42 Noninterest expense 166 150 - -------------------------------------------------------------------------------- Pretax earnings 128 88 Income taxes 44 30 - -------------------------------------------------------------------------------- Earnings $ 84 $ 58 - -------------------------------------------------------------------------------- AVERAGE BALANCE SHEET Loans Specialized industries $4,144 $3,628 Large corporate 3,370 2,988 Other 464 356 - -------------------------------------------------------------------------------- Total loans 7,978 6,972 Other assets 1,682 1,487 - -------------------------------------------------------------------------------- Total assets $9,660 $8,459 - -------------------------------------------------------------------------------- Net deposits $2,766 $2,503 Assigned funds and other liabilities 6,218 5,364 Assigned capital 676 592 - -------------------------------------------------------------------------------- Total funds $9,660 $8,459 - -------------------------------------------------------------------------------- PERFORMANCE RATIOS Return on assigned capital 17% 13% Noncredit revenue to total revenue 56 55 Efficiency 52 53 ================================================================================
PNC Institutional Bank provides specialized credit, capital markets and treasury management products and services to corporations, institutions and government entities nationwide. The strategic focus for PNC Institutional Bank is to further enhance shareholder value in a business that historically has been capital intensive as a result of credit-related balance sheet activities. PNC Institutional Bank is emphasizing relationships that utilize higher margin noncredit products and services, especially treasury management and capital markets, and is exiting certain businesses and relationships with limited opportunity for satisfactory returns. Consistent with this strategy, during the first quarter of 1999 PNC Institutional Bank made the decision to exit certain out-of-footprint large corporate, national healthcare and other non-strategic institutional lending businesses. The operating results for these activities are excluded from business results in both periods. PNC Institutional Bank contributed 9% of total business earnings for the first nine months of 1999 compared with 8% in the prior-year period. Earnings of $84 million for the first nine months of 1999 increased $26 million or 45% compared with the prior-year period due to higher revenue and a lower provision for credit losses. Total revenue of $313 million for the first nine months of 1999 increased $33 million or 12% compared with the first nine months of 1998. Credit-related revenue primarily represents net interest income from loans and increased 9% in the period-to-period comparison driven by higher loan outstandings. Noncredit revenue, which includes noninterest income and the benefit of compensating balances in lieu of fees, increased $22 million or 14% compared with the prior year primarily driven by growth in treasury management. The higher provision for credit losses in 1998 related to exposure to a single healthcare relationship. Treasury management and capital markets products offered through PNC Institutional Bank are sold by several businesses across the Corporation and related revenue is included in the results of those businesses. Total consolidated revenue from treasury management was $194 million for the first nine months of 1999, a 13% increase compared with the first nine months of 1998. Total consolidated revenue from capital markets was $75 million for the first nine months of 1999, a 16% increase compared with the prior-year period. PNC Institutional Bank engages in credit and capital markets activities, which are impacted by economic and financial market conditions. Accordingly, changes in the economy or financial markets could impact asset quality and results of operations. PNC BANK CORP. ------ 9 11
PNC SECURED FINANCE Nine months ended September 30 - dollars in millions 1999 1998 - -------------------------------------------------------------------------------- INCOME STATEMENT Net interest income $ 146 $ 120 Noninterest income Net commercial mortgage banking 45 4 Corporate finance 16 12 Other 17 11 - -------------------------------------------------------------------------------- Total noninterest income 78 27 - -------------------------------------------------------------------------------- Total revenue 224 147 Provision for credit losses 9 (5) Noninterest expense 112 80 - -------------------------------------------------------------------------------- Pretax earnings 103 72 Income taxes 24 20 - -------------------------------------------------------------------------------- Earnings $ 79 $ 52 - -------------------------------------------------------------------------------- AVERAGE BALANCE SHEET Loans Commercial - real estate related $2,670 $ 2,203 Commercial real estate 1,602 1,443 Business credit 1,667 1,275 Leasing 1,058 809 Affordable housing 152 185 - -------------------------------------------------------------------------------- Total loans 7,149 5,915 Commercial mortgages held for sale 136 238 Other assets 753 613 - -------------------------------------------------------------------------------- Total assets $8,038 $ 6,766 - -------------------------------------------------------------------------------- Deposits $1,157 $ 1,153 Assigned funds and other liabilities 6,318 5,139 Assigned capital 563 474 - -------------------------------------------------------------------------------- Total funds $8,038 $ 6,766 - -------------------------------------------------------------------------------- PERFORMANCE RATIOS Return on assigned capital 19% 15% Noninterest income to total revenue 35 18 Efficiency 41 46 ================================================================================
PNC Secured Finance, serving corporate clients nationwide, is engaged in commercial real estate finance, including loan origination, securitization and servicing; asset-based financing, including lending, syndication and treasury management services; and equipment lease financing. During the second quarter of 1998, PNC Secured Finance acquired Midland Loan Services, L.P. ("Midland"), one of the nation's largest servicers of commercial mortgages. This acquisition, along with several other investments made by PNC Secured Finance in 1998, reflects its continuing strategy to increase noninterest income and expand nationally. PNC Secured Finance contributed 9% of total business earnings for the first nine months of 1999 compared with 7% in the prior-year period. Earnings increased 52% to $79 million for the first nine months of 1999 driven by higher revenue. Net interest income increased $26 million or 22% to $146 million for the first nine months of 1999 compared with the prior-year period driven by higher average loans resulting from the strategic expansion of asset-based and equipment lease financing as well as an increase in outstandings to existing customers. Noninterest income increased $51 million to $78 million for the first nine months of 1999 primarily due to commercial mortgage banking revenue from Midland and the comparative impact of valuation adjustments recorded in 1998. The increase in the provision for credit losses was primarily due to the comparative impact of net recoveries in 1998.
COMMERCIAL MORTGAGE SERVICING PORTFOLIO In billions 1999 1998 - ---------------------------------------------------------------- January 1 $39 Acquisitions/additions 13 $36 Repayments/transfers (9) (4) - ---------------------------------------------------------------- September 30 $43 $32 ================================================================
At September 30, 1999, the commercial mortgage servicing portfolio totaled $43 billion compared with $32 billion at September 30, 1998, substantially all of which is serviced for others. PNC Secured Finance engages in credit and capital markets activities, which are impacted by economic and financial market conditions. Accordingly, changes in the economy or financial markets could impact asset quality and results of operations. PNC BANK CORP. ------ 10 12 FINANCIAL REVIEW
PNC MORTGAGE Nine months ended September 30 - dollars in millions 1999 1998 - ---------------------------------------------------------------------------------- INCOME STATEMENT Net mortgage banking revenue Residential mortgage servicing $ 252 $ 144 Origination and securitization 145 124 Sales of servicing and other 7 MSR amortization, net of servicing hedge (147) (92) - ---------------------------------------------------------------------------------- Net mortgage banking revenue 250 183 Net interest income 77 60 - ---------------------------------------------------------------------------------- Total revenue 327 243 Operating expense 253 205 - ---------------------------------------------------------------------------------- Pretax earnings 74 38 Income taxes 29 15 - ---------------------------------------------------------------------------------- Earnings $ 45 $ 23 - ---------------------------------------------------------------------------------- AVERAGE BALANCE SHEET Residential mortgages held for sale $ 2,720 $ 2,608 Securities available for sale 2,675 945 Mortgage servicing rights and other assets 1,697 1,081 - ---------------------------------------------------------------------------------- Total assets $ 7,092 $ 4,634 - ---------------------------------------------------------------------------------- Escrow deposits $ 1,192 $ 917 Assigned funds and other liabilities 5,439 3,416 Assigned capital 461 301 - ---------------------------------------------------------------------------------- Total funds $ 7,092 $ 4,634 - ---------------------------------------------------------------------------------- PERFORMANCE RATIOS Return on assigned capital 13% 10% Net mortgage banking revenue to total revenue 76 75 Efficiency 53 61 ==================================================================================
PNC Mortgage originates, purchases and services residential mortgages and related products. PNC Mortgage also acquires and securitizes residential mortgages as private-label mortgage-backed securities and performs the master servicing of those securities for investors. At September 30, 1999, PNC Mortgage was the nation's twelfth largest servicer and fourteenth largest originator of residential mortgages. PNC Mortgage contributed 5% of total business earnings for the first nine months of 1999 compared with 3% in the first nine months of 1998. Earnings nearly doubled to $45 million for the first nine months of 1999 primarily due to higher servicing volumes. Net mortgage banking revenue and operating expense increased in the comparison as a result of a larger servicing portfolio. The efficiency ratio improved significantly as PNC Mortgage continued to leverage its technology platform and servicing capabilities. During 1999, PNC Mortgage funded $16 billion of residential mortgages, with 37% consisting of retail originations. The comparable amounts were $15 billion and 36%, respectively, in the first nine months of 1998. Production volume for the first nine months of 1999 consisted of $6 billion of originated loans and $10 billion of mortgages acquired through correspondent and contractual flow agreements. The corresponding amounts for the first nine months of 1998 were $5 billion and $10 billion, respectively.
RESIDENTIAL MORTGAGE SERVICING PORTFOLIO In billions 1999 1998 - ---------------------------------------------------------------- January 1 $ 62 $ 41 Production volume 16 15 Acquisitions 7 16 Repayments (12) (11) Sales (1) - ---------------------------------------------------------------- September 30 $73 $60 ================================================================
At September 30, 1999, the residential mortgage servicing portfolio totaled $73 billion and had a weighted-average coupon of 7.50%. In addition, the master servicing portfolio grew 77% in the comparison to $34 billion at September 30, 1999. Capitalized residential MSR totaled $1.5 billion at September 30, 1999 and had an estimated fair value of $1.7 billion. Securities available for sale increased $1.7 billion for the first nine months of 1999 compared with the prior-year period and are utilized as part of PNC Mortgage's risk management strategies. For the first nine months of 1999 PNC Mortgage securitized $9 billion of loans and was the nation's fourth largest private mortgage conduit. The value of MSR and related amortization are affected by changes in interest rates. If interest rates decline and the rate of prepayments increases, the underlying servicing fees and related MSR value also would decline. In a period of rising interest rates, a converse relationship would exist. PNC Mortgage seeks to manage this risk by using financial instruments as hedges designed to move in the opposite direction of MSR value changes. Changes in interest rates also can affect the level of mortgage originations that generally decline as interest rates increase and increase as interest rates decline. PNC BANK CORP. ------ 11 13 CONSOLIDATED INCOME STATEMENT REVIEW
NET INTEREST INCOME ANALYSIS Taxable-equivalent basis Average Balances Interest Income/Expense Average Yields/Rates Nine months ended September 30 - ------------------------------ ------------------------- ------------------------- dollars in millions 1999 1998 Change 1999 1998 Change 1999 1998 Change - ---------------------------------------------------------------------- ------------------------- ------------------------- Interest-earning assets Loans held for sale $ 3,838 $ 3,059 $ 779 $ 205 $ 162 $ 43 7.11% 7.03% 8bp Securities available for sale 8,669 7,391 1,278 366 327 39 5.64 5.91 (27) Loans, net of unearned income Consumer 10,615 11,073 (458) 647 706 (59) 8.15 8.53 (38) Credit card 899 3,942 (3,043) 100 407 (307) 14.90 13.81 109 Residential mortgage 12,378 12,598 (220) 650 687 (37) 6.99 7.26 (27) Commercial 23,343 22,159 1,184 1,344 1,320 24 7.59 7.85 (26) Commercial real estate 3,394 3,224 170 198 208 (10) 7.70 8.52 (82) Other 2,993 2,133 860 159 112 47 7.11 7.01 10 - ----------------------------------------------------------------------- -------------------------- Total loans, net of unearned income 53,622 55,129 (1,507) 3,098 3,440 (342) 7.67 8.29 (62) Other 1,112 1,042 70 53 50 3 6.29 6.35 (6) - ----------------------------------------------------------------------- -------------------------- Total interest-earning assets/ interest income 67,241 66,621 620 3,722 3,979 (257) 7.35 7.94 (59) Noninterest-earning assets 8,007 7,078 929 - ----------------------------------------------------------------------- Total assets $75,248 $73,699 $ 1,549 ======================================================================= Interest-bearing liabilities Deposits Demand and money market $17,519 $14,430 $ 3,089 358 322 36 2.73 2.99 (26) Savings 2,450 2,644 (194) 30 39 (9) 1.61 1.98 (37) Other time 16,107 16,995 (888) 605 691 (86) 5.02 5.43 (41) Deposits in foreign offices 837 1,017 (180) 31 43 (12) 4.96 5.57 (61) - ----------------------------------------------------------------------- -------------------------- Total interest-bearing deposits 36,913 35,086 1,827 1,024 1,095 (71) 3.71 4.17 (46) Borrowed funds 20,785 21,501 (716) 823 950 (127) 5.23 5.83 (60) - ----------------------------------------------------------------------- -------------------------- Total interest-bearing liabilities/ interest expense 57,698 56,587 1,111 1,847 2,045 (198) 4.25 4.80 (55) -------------------------- ------------------------- Noninterest-bearing liabilities, capital securities and shareholders' equity 17,550 17,112 438 - ----------------------------------------------------------------------- Total liabilities, capital securities and shareholders' equity $75,248 $73,699 $ 1,549 ======================================================================= Interest rate spread 3.10 3.14 (4) Impact of noninterest-bearing sources .60 .72 (12) ------------------------- Net interest income/margin $1,875 $1,934 $ (59) 3.70% 3.86% (16)bp ===================================================================================================================================
NET INTEREST INCOME Changes in net interest income and margin result from the interaction between the volume and composition of earning assets, related yields and associated funding costs. Accordingly, portfolio size, composition and related yields earned and funding costs can have a significant impact on net interest income and margin. Taxable-equivalent net interest income was $1.875 billion for the first nine months of 1999, a $59 million decrease compared with the first nine months of 1998. The net interest margin was 3.70% for the first nine months of 1999 compared with 3.86% in the prior-year period. These declines were primarily due to the sale of the credit card business in the first quarter of 1999. Excluding the credit card business, net interest income was $1.809 billion for the first nine months of 1999, an increase of $113 million or 7% compared with the first nine months of 1998, and the net interest margin was 3.62% and 3.60% in 1999 and 1998, respectively. Average loans for the first nine months of 1999 were $1.5 billion lower than the prior-year period as growth in commercial and other loans were more than offset by lower credit card and indirect auto loans. Loans represented 80% of average earning assets for the first nine months of 1999 compared with 83% for the prior-year period. Average loans held for sale increased $0.8 billion in the period-to-period comparison, reflecting the decision in the first quarter of 1999 to exit certain institutional lending businesses. Average securities available for sale increased to $8.7 billion compared with $7.4 billion in the prior-year period and represented 13% of average earning assets for the first nine months of 1999 compared with 11% a year ago. The increase was primarily due to securities purchased as part of PNC Mortgage's risk management strategies. PNC BANK CORP. ------ 12 14 FINANCIAL REVIEW Funding cost is affected by the composition of funding sources as well as related rates paid thereon. Average deposits comprised 61% and 60% of total sources of funds for the first nine months of 1999 and 1998, respectively, with the remainder primarily comprised of wholesale funding obtained at prevailing market rates. Average demand and money market deposits increased $3.1 billion or 21% to $17.5 billion for the first nine months of 1999 primarily reflecting a shift from certificates and savings accounts as well as overall deposit growth. PROVISION FOR CREDIT LOSSES The provision for credit losses was $133 million in the first nine months of 1999 compared with $110 million in the prior-year period. Net charge-offs were $131 million or .33% of average loans for the first nine months of 1999 compared with $267 million or .65%, respectively, for the first nine months of 1998. The decreases were due to the sale of the credit card business in the first quarter of 1999.
DETAILS OF NONINTEREST INCOME Nine months ended September 30 - Dollars in millions 1999 1998 Change - ---------------------------------------------------------------------------------------- Asset management $ 505 $ 421 $ 84 Mutual fund servicing 159 134 25 Service charges on deposits 154 151 3 Consumer services Credit card 32 93 (61) Brokerage 138 48 90 Insurance 49 33 16 Other 121 99 22 - ---------------------------------------------------------------------------------------- Total 340 273 67 Corporate services Capital markets 60 36 24 Net commercial mortgage banking 45 4 41 Other 7 127 (120) - ---------------------------------------------------------------------------------------- Total 112 167 (55) Net residential mortgage banking Mortgage servicing 207 113 94 Origination and securitization 145 134 11 MSR amortization, net of servicing hedge (147) (92) (55) - ---------------------------------------------------------------------------------------- Total 205 155 50 Net securities gains 44 14 30 Other 527 289 238 - ---------------------------------------------------------------------------------------- Total $ 2,046 $ 1,604 $ 442 ========================================================================================
NONINTEREST INCOME Noninterest income was $2.046 billion for the first nine months of 1999, a 28% increase compared with the first nine months of 1998. Excluding gains and valuation adjustments in both years, noninterest income increased 18% in the period-to-period comparison primarily due to growth in fee-based revenue. Noninterest income for the first nine months of 1999 included $358 million of gains on the sales of PNC Bank's credit card business, an equity interest in EPS, Concord stock and twelve branches in western Pennsylvania. The first nine months of 1999 also included $142 million of valuation adjustments associated with exiting certain institutional lending businesses. Noninterest income for the first nine months of 1998 included $86 million of branch gains and $30 million of valuation adjustments. Asset management fees grew 20%, primarily reflecting new business. Assets under management increased to approximately $193 billion at September 30, 1999, compared with $152 billion at September 30, 1998. Mutual fund servicing fees grew 19% compared with the first nine months of 1998 due to new business, existing client growth and market appreciation. At September 30, 1999, PFPC Worldwide provided custody and accounting/administration services for $353 billion and $246 billion, respectively, of mutual fund and other pooled assets. The comparable amounts were $287 billion and $228 billion, respectively, a year ago. Consumer services revenue increased $67 million or 25% compared with the first nine months of 1998 primarily due to an increase in brokerage accounts associated with the Hilliard Lyons acquisition. The decrease in corporate services revenue primarily reflected the impact of the valuation adjustments in 1999 associated with the exited portfolios. Excluding valuation adjustments in both periods, corporate services revenue increased 29% compared with the prior-year period primarily due to growth in commercial mortgage banking, capital markets and treasury management fees. Net residential mortgage banking revenue grew $50 million or 32% compared with the prior-year period primarily due to a larger servicing portfolio. Residential mortgage production volume, including both retail and correspondent activity, totaled $16 billion for the first nine months of 1999 compared with $15 billion in the prior-year period. At September 30, 1999, approximately $73 billion of residential mortgages were serviced compared with $60 billion at September 30, 1998. Net securities gains were $44 million in the first nine months of 1999, primarily relating to the gain from the sale of Concord stock. Other noninterest income increased $238 million in the period-to-period comparison primarily due to the credit card, EPS and branch gains in the first nine months of 1999, partially offset by the impact of $86 million of branch gains recorded in the first nine months of 1998. PNC BANK CORP. ------ 13 15
DETAILS OF NONINTEREST EXPENSE Nine months ended September 30 - dollars in millions 1999 1998 Change - ----------------------------------------------------------------------------------- Staff expense Compensation $ 987 $ 867 $ 120 Employee benefits 151 156 (5) - ----------------------------------------------------------------------------------- Total 1,138 1,023 115 Net occupancy and equipment Net occupancy 191 152 39 Equipment 190 149 41 - ----------------------------------------------------------------------------------- Total 381 301 80 Amortization Goodwill 58 49 9 Other 12 32 (20) - ----------------------------------------------------------------------------------- Total 70 81 (11) Marketing 50 78 (28) Distributions on capital securities 48 43 5 Other 627 617 10 - ----------------------------------------------------------------------------------- Total $2,314 $2,143 $ 171 ===================================================================================
NONINTEREST EXPENSE Noninterest expense was $2.314 billion for the first nine months of 1999, an 8% increase compared with the first nine months of 1998. On a comparable basis, noninterest expense increased 5%, excluding costs related to efficiency initiatives in both years and a contribution to the PNC Bank Foundation in 1999. The increase was commensurate with revenue growth in fee-based businesses. The efficiency ratio improved to 53.78% compared with 55.50% in the prior year due to a continued focus on improving returns in traditional businesses. Average full-time equivalent employees totaled approximately 25,700 in the first nine months of 1999 compared with 25,300 a year ago, an increase of 2% mainly due to acquisitions. CONSOLIDATED BALANCE SHEET REVIEW LOANS Loans outstanding decreased $6.3 billion from year-end 1998 to $51.4 billion at September 30, 1999 primarily due to the impact of strategies designed to downsize certain portfolios. During 1999, the Corporation sold the credit card business, exited certain institutional lending businesses, decided to sell education loans in repayment and downsize the indirect auto portfolio. Total exposure and outstandings related to the exited institutional lending businesses were $4.2 billion and $1.2 billion, respectively, at September 30, 1999. Total outstandings in exited portfolios decreased approximately 40% since March 31, 1999.
DETAILS OF LOANS September 30 December 31 In millions 1999 1998 - --------------------------------------------------------------------------------- Consumer Home equity $ 6,001 $ 5,731 Automobile 1,864 2,444 Education 144 1,196 Other 1,513 1,609 - --------------------------------------------------------------------------------- Total consumer 9,522 10,980 Credit card 2,958 Residential mortgage 12,567 12,265 Commercial Manufacturing 4,911 5,336 Retail/wholesale 4,170 4,452 Service providers 3,147 3,263 Real estate related 2,915 3,093 Communications 1,431 1,529 Health care 792 1,136 Financial services 2,011 2,928 Other 3,282 3,445 - --------------------------------------------------------------------------------- Total commercial 22,659 25,182 Commercial real estate Mortgage 1,361 1,398 Real estate project 2,008 2,051 - --------------------------------------------------------------------------------- Total commercial real estate 3,369 3,449 Lease financing and other 3,882 3,370 Unearned income (601) (554) - --------------------------------------------------------------------------------- Total, net of unearned income $ 51,398 $ 57,650 =================================================================================
Loan portfolio composition continued to be geographically diversified among numerous industries and types of businesses.
NET UNFUNDED COMMITMENTS September 30 December 31 In millions 1999 1998 - --------------------------------------------------------------------------------- Consumer $ 4,687 $ 3,695 Credit card 14,794 Residential mortgage 1,903 2,756 Commercial 30,291 32,923 Commercial real estate 929 1,078 Other 1,913 652 - --------------------------------------------------------------------------------- Total $ 39,723 $ 55,898 =================================================================================
Commitments to extend credit represent arrangements to lend funds provided there is no violation of specified contractual conditions. The decrease in commitments to extend credit was the result of the sale of the credit card business and the decision to exit certain institutional lending businesses. Commercial commitments are reported net of participations, assignments and syndications totaling $6.1 billion at September 30, 1999 and $5.9 billion at December 31, 1998. Net outstanding letters of credit totaled $4.4 billion and $4.7 billion at September 30, 1999 and December 31, 1998, respectively, and consisted primarily of standby letters of credit that commit the Corporation to make payments on behalf of customers when certain specified future events occur. PNC BANK CORP. ------ 14 16 FINANCIAL REVIEW SECURITIES AVAILABLE FOR SALE The securities portfolio increased $1.0 billion from December 31, 1998 to $8.1 billion at September 30, 1999 primarily due to securities purchased as part of PNC Mortgage's risk management strategies. The expected weighted-average life of the securities portfolio increased to 5 years and 7 months at September 30, 1999 compared with 5 years and 3 months at year-end 1998.
DETAILS OF SECURITIES AVAILABLE FOR SALE September 30, 1999 December 31, 1998 --------------------------------------------------- Amortized Fair Amortized Fair In millions Cost Value Cost Value - ---------------------------------------------------------------------------------- Debt securities U.S. Treasury and government agencies $2,199 $2,023 $2,781 $2,754 Mortgage-backed 4,133 4,004 2,942 2,936 Asset-backed 1,192 1,176 709 708 State and municipal 143 142 122 128 Other debt 37 35 33 31 Corporate stocks and other 741 716 542 517 - ---------------------------------------------------------------------------------- Total $8,445 $8,096 $7,129 $7,074 ==================================================================================
Securities available for sale may be sold as part of the overall asset and liability management process. Realized gains and losses are reflected in results of operations. Unrealized gains and losses are reflected in accumulated other comprehensive loss. The notional value of financial derivatives designated to securities available for sale was $222 million at September 30, 1999. The negative fair value of such derivatives was $200 thousand at September 30, 1999. There were no derivatives designated to securities available for sale at December 31, 1998. FUNDING SOURCES Total funding sources were $64.0 billion at September 30, 1999, a decrease of $4.4 billion compared with December 31, 1998, primarily resulting from reduced funding related to the credit card business that was sold in the first quarter of 1999. The decrease in the first nine months of 1999 was primarily in time deposits and bank notes and senior debt partially offset by an increase in foreign deposits. Through September 30, 1999, the Corporation issued $250 million of 6 1/8% subordinated notes, $300 million of 6.95% notes and $300 million of 7.00% notes. In October 1999, the Corporation issued $400 million of 7.50% subordinated notes.
DETAILS OF FUNDING SOURCES September 30 December 31 In millions 1999 1998 - --------------------------------------------------------------------------- Deposits Demand, savings and money market $ 28,823 $ 29,359 Time 14,601 17,774 Foreign 1,722 363 - --------------------------------------------------------------------------- Total deposits 45,146 47,496 Borrowed funds Federal funds purchased 472 390 Repurchase agreements 857 1,669 Bank notes and senior debt 7,975 10,384 Other borrowed funds 7,563 6,722 Subordinated debt 2,031 1,781 - --------------------------------------------------------------------------- Total borrowed funds 18,898 20,946 - --------------------------------------------------------------------------- Total $ 64,044 $ 68,442 ===========================================================================
CAPITAL The access to and cost of funding new business initiatives including acquisitions, ability to pay dividends, deposit insurance costs, and the level and nature of regulatory oversight depend, in large part, on a financial institution's capital strength. At September 30, 1999, the Corporation and each bank subsidiary were considered well capitalized based on regulatory capital ratio requirements.
RISK-BASED CAPITAL September 30 December 31 Dollars in millions 1999 1998 - --------------------------------------------------------------------------- Capital components Shareholders' equity Common $ 5,558 $ 5,729 Preferred 313 314 Trust preferred capital securities 848 848 Goodwill and other (1,305) (1,381) Net unrealized securities losses 228 36 - --------------------------------------------------------------------------- Tier I risk-based capital 5,642 5,546 Subordinated debt 1,641 1,641 Eligible allowance for credit losses 674 753 - --------------------------------------------------------------------------- Total risk-based capital $ 7,957 $ 7,940 =========================================================================== Assets Risk-weighted assets and off-balance-sheet instruments $ 66,580 $ 71,146 Average tangible assets 72,929 76,135 =========================================================================== Capital ratios Tier I risk-based 8.47% 7.80% Total risk-based 11.95 11.16 Leverage 7.74 7.28 ===========================================================================
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. The $250 million of 6 1/8% subordinated notes and $400 million of 7.50% subordinated notes both qualify as Tier II risk-based capital. During the first nine months of 1999, PNC Bank repurchased 11.1 million shares of common stock. On February 18, 1999, the Board of Directors authorized the Corporation to purchase up to 15 million shares of common stock through February 29, 2000. Approximately 7.8 million shares remain under this authorization. PNC BANK CORP. ------ 15 17 RISK MANAGEMENT In the normal course of business, the Corporation assumes various types of risk, the most significant of which are credit, liquidity, interest rate and market risk. To manage these risks, PNC Bank has risk management processes designed to provide for risk identification, measurement, monitoring and control. CREDIT RISK Credit risk represents the possibility that a borrower or counter party may not perform in accordance with contractual terms. Credit risk is inherent in the financial services business and results from extending credit to customers, purchasing securities and entering into off-balance-sheet financial derivative transactions. The Corporation seeks to manage credit risk through, among others, diversification, limiting exposure to any single industry or customer, requiring collateral or selling participations to third parties and purchasing credit-related derivatives.
NONPERFORMING ASSETS September 30 December 31 Dollars in millions 1999 1998 - ------------------------------------------------------------------------ Nonaccrual loans Commercial $222 $188 Residential mortgage 57 51 Commercial real estate Real estate project 20 28 Mortgage 12 22 Consumer 3 6 - ------------------------------------------------------------------------ Total nonaccrual loans 314 295 Foreclosed and other assets Residential mortgage 14 17 Commercial real estate 10 15 Other 23 5 - ------------------------------------------------------------------------ Total foreclosed and other assets 47 37 - ------------------------------------------------------------------------ Total nonperforming assets $361 $332 ======================================================================== Nonaccrual loans to total loans .61% .51% Nonperforming assets to total loans, loans held for sale and foreclosed assets .65 .55 Nonperforming assets to total assets .49 .43 ========================================================================
The amount of nonperforming loans that were current as to principal and interest was $37 million at September 30, 1999 and $28 million at December 31, 1998. There were no troubled debt restructured loans outstanding as of either period end.
CHANGE IN NONPERFORMING ASSETS In millions 1999 1998 - ---------------------------------------------------------------- January 1 $ 332 $ 333 Transferred from accrual 307 216 Returned to performing (4) (11) Principal reductions (184) (139) Sales (33) (40) Charge-offs and other (57) (30) - ---------------------------------------------------------------- September 30 $ 361 $ 329 ================================================================
ACCRUING LOANS PAST DUE 90 DAYS OR MORE Amount Percent of Loans --------------------------------------------------------------------------- September 30 December 31 September 30 December 31 Dollars in millions 1999 1998 1999 1998 - -------------------------------------------------------------------------------------------------------- Consumer Education $ 23 1.92% Other $ 24 38 .26% .39 - ------------------------------------------------------------ Total consumer 24 61 .25 .56 Credit card 63 2.13 Commercial 65 56 .29 .22 Residential mortgage 47 55 .37 .45 Commercial real estate 24 32 .71 .93 Other 4 1 .12 .04 - ------------------------------------------------------------ Total $164 $268 .32 .46 ========================================================================================================
At September 30, 1999, education loans in repayment were reclassified to loans held for sale. ALLOWANCE FOR CREDIT LOSSES In determining the adequacy of the allowance for credit losses, the Corporation makes allocations to specific problem commercial, commercial real estate and other loans based on discounted cash flow analyses or collateral valuations for impaired loans and to pools of watchlist and nonwatchlist loans for various credit risk factors. Allocations to loan pools are developed by business segment and risk rating and are based on historical loss trends and management's judgment concerning those trends and other relevant factors. Those factors may include, among others, actual versus estimated losses, current regional and national economic conditions, business segment and portfolio concentrations, industry competition and consolidation, and the impact of government regulations. Consumer and residential mortgage loan allocations are made at a total portfolio level based on historical loss experience adjusted for portfolio activity and current economic conditions. While PNC Bank's commercial, commercial real estate and consumer pool reserve methodologies strive to reflect all risk factors, there continues to be a certain element of risk associated with, but not limited to, potential estimation or judgmental errors. Unallocated reserves are designed to provide coverage for such risks. While allocations are made to specific loans and pools of loans, the total reserve is available for all credit losses. Senior management's Reserve Adequacy Committee provides oversight for the allowance evaluation process including quarterly evaluations, and methodology and estimation changes. The results of the evaluations are reported to the Credit Committee of the Board of Directors. PNC BANK CORP. ------ 16 18 Financial Review The increase in the provision for credit losses in the first nine months of 1999 and the evaluation of the allowance for credit losses as of September 30, 1999 reflected changes in loan portfolio composition, changes in asset quality, the impact of selling the credit card business and the decision to exit certain institutional lending businesses. The unallocated portion of the allowance for credit losses represented 19% of the total allowance and .25% of total loans at September 30, 1999, compared with 22% and .29%, respectively, at December 31, 1998.
ROLLFORWARD OF ALLOWANCE FOR CREDIT LOSSES In millions 1999 1998 - ---------------------------------------------------------------- January 1 $ 753 $ 972 Charge-offs (173) (321) Recoveries 42 54 - ---------------------------------------------------------------- Net charge-offs (131) (267) Provision for credit losses 133 110 Sale of credit card business (81) Acquisitions 1 - ---------------------------------------------------------------- September 30 $ 674 $ 816 ================================================================
The allowance as a percent of nonaccrual loans and period-end loans was 215% and 1.31%, respectively, at September 30, 1999. The comparable year-end 1998 amounts were 255% and 1.31%, respectively.
CHARGE-OFFS AND RECOVERIES Nine months ended Percent of September 30 - Net Average dollars in millions Charge-offs Recoveries Charge-offs Loans - ------------------------------------------------------------------------------------------------ 1999 Consumer $ 49 $20 $ 29 .37% Credit card 60 2 58 8.63 Residential mortgage 7 1 6 .06 Commercial 48 17 31 .18 Commercial real estate 4 1 3 .12 Other 5 1 4 .18 - ------------------------------------------------------------------------- Total $173 $42 $131 .33 - ------------------------------------------------------------------------------------------------ 1998 Consumer $ 62 $26 $ 36 .43% Credit card 220 12 208 7.05 Residential mortgage 6 1 5 .05 Commercial 21 12 9 .05 Commercial real estate 7 2 5 .21 Other 5 1 4 .25 - ------------------------------------------------------------------------- Total $321 $54 $267 .65 ================================================================================================
The actual level of net charge-offs and the provision for credit losses in future periods can be affected by many business and economic factors and may differ from current or historical experience. LIQUIDITY RISK Liquidity represents the Corporation's ability to obtain cost-effective funding to meet the needs of customers, as well as the Corporation's financial obligations. Liquidity is centrally managed by Asset and Liability Management, with oversight provided by the Corporate Asset and Liability Committee and the Finance Committee of the Board of Directors. Access to capital markets funding sources is a key factor affecting liquidity management. Access to such markets is in part based on the Corporation's credit ratings, which are influenced by a number of factors including capital ratios, credit quality, and earnings. Additional factors that impact liquidity include the maturity structure of existing assets and liabilities, the level of liquid investment securities and loans available for sale and the Corporation's ability to securitize various types of loans. Liquidity risk management includes consideration of the Corporation's contractual asset and liability maturities, as well as off-balance sheet positions. This is complemented by an assessment of additional anticipated funding requirements. Based upon these factors, the Corporation seeks to manage its deposits and wholesale funding sources to provide a diversified mix of products and maturities designed to produce the desired level of liquidity. Liquidity can also be provided through sale of liquid assets and alternative forms of borrowing. Liquid assets consist of short term investments, loans held for sale and securities available for sale. At September 30, 1999, such assets totaled $13 billion with $3.9 billion pledged as collateral for borrowing, trust and other commitments. Funding can also be obtained through secured advances from the Federal Home Loan Bank ("FHLB") system, of which PNC Bank is a member. These borrowings are generally secured by residential mortgages. At September 30, 1999, approximately $4.9 billion of residential mortgages were available as collateral for borrowings from the FHLB. PNC BANK CORP. ------ 17 19 In order to prepare for potential liquidity needs related to the century change event, Asset and Liability Management has implemented a plan designed to provide the Corporation with a greater degree of liquidity flexibility in the fourth quarter of 1999. Key aspects of this plan include a reduced amount of wholesale debt maturing in the fourth quarter of 1999, as well as a significant increase in the amount of collateral identified and available to support securitized alternative borrowings. At September 30, 1999, the Corporation had over $13 billion of loans available to support borrowings from the FHLB system or the Federal Reserve's special liquidity facility ("SLF"). The SLF was put into place by the Federal Reserve in August, 1999 to provide member banks with an additional funding source to meet year-end 1999 liquidity requirements. Liquidity for the parent company and subsidiaries is also generated through the issuance of securities in public or private markets and lines of credit and through asset securitizations and sales. During the first nine months of 1999, the Corporation issued $850 million of senior and subordinated debt. In October 1999, the Corporation issued $400 million of subordinated debt reducing the unused capacity under effective shelf registration statements to approximately $1.5 billion of debt and equity securities and $400 million of trust preferred capital securities. In addition, the Corporation has an unused line of credit of $500 million. The principal source of parent company revenue and cash flow is dividends from subsidiary banks. PNC Bancorp, Inc. is a wholly-owned subsidiary of the parent company and is the holding company for all bank subsidiaries. There are legal limitations on the ability of bank subsidiaries to pay dividends and make other distributions to PNC Bancorp, Inc. and in turn the parent company. Without regulatory approval, the amount available for dividend payments to PNC Bancorp, Inc. by all bank subsidiaries was $586 million at September 30, 1999. Dividends may also be impacted by capital needs, regulatory requirements, corporate policies, contractual restrictions and other factors. Management believes the Corporation has sufficient liquidity to meet current obligations to borrowers, depositors, debt holders and others. The impact of replacing maturing liabilities is reflected in the income simulation model in the overall asset and liability management process. INTEREST RATE RISK Interest rate risk arises primarily through the Corporation's traditional business activities of extending loans and accepting deposits. Many factors, including economic and financial conditions, movements in market interest rates and consumer preferences, affect the spread between interest earned on assets and interest paid on liabilities. In managing interest rate risk, the Corporation seeks to minimize its reliance on a particular interest rate scenario as a source of earnings, while maximizing net interest income and net interest margin. To achieve these objectives, the Corporation uses securities purchases and sales, long-term and short-term funding, financial derivatives and other capital markets instruments. Interest rate risk is centrally managed by Asset and Liability Management. The Corporation actively measures and monitors components of interest rate risk including term structure or repricing risk, yield curve or nonparallel rate shift risk, basis risk and options risk. Senior management's Corporate Asset and Liability Committee provides strategic direction to Asset and Liability Management and, in doing so, reviews capital markets activities and interest rate risk exposures. The Finance Committee of the Board of Directors is responsible for overseeing the Corporation's interest rate risk management process. The Corporation measures and manages both the short-term and long-term effects of changing interest rates. An income simulation model is used to measure the sensitivity of net interest income to changing interest rates over the next twenty-four month period. An economic value of equity model is used to measure the sensitivity of the value of existing on-balance-sheet and off-balance-sheet positions to changing interest rates. The income simulation model is the primary tool used to measure the direction and magnitude of changes in net interest income resulting from changes in interest rates. Forecasting net interest income and its sensitivity to changes in interest rates requires that the Corporation make assumptions about the volume and characteristics of new business and the behavior of existing positions. These business assumptions are based on the Corporation's experience, business plans and published industry experience. Key assumptions employed in the model include prepayment speeds on mortgage-related assets and consumer loans, loan volumes and pricing, deposit volumes and pricing, the expected life and repricing characteristics of nonmaturity loans and deposits, and management's financial and capital plans. PNC BANK CORP. ------ 18 20 FINANCIAL REVIEW Because these assumptions are inherently uncertain, the model cannot precisely estimate net interest income or precisely predict the effect of higher or lower interest rates on net interest income. Actual results will differ from simulated results due to the timing, magnitude and frequency of interest rate changes, the difference between actual experience and the assumed volume and characteristics of new business and behavior of existing positions, and changes in market conditions and management strategies, among other factors. The Corporation's interest rate risk management policies provide that net interest income should not decrease by more than 3% if interest rates gradually increase or decrease from current rates by 100 basis points over a twelve-month period. At September 30, 1999, if interest rates were to gradually increase by 100 basis points over the next twelve months, the model indicates that net interest income would decrease by 0.9%. If interest rates were to gradually decrease by 100 basis points over the next twelve months, the model indicates that net interest income would increase by 1.2%. The Corporation models additional interest rate scenarios covering a wider range of rate movements to identify yield curve, term structure and basis risk exposures. These scenarios are developed based on historical rate relationships or management's expectations regarding the future direction and level of interest rates. Depending on market conditions and other factors, these scenarios may be modeled more or less frequently. Such analyses are used in conjunction with the net interest income simulation model and economic value of equity model to identify inherent risk and develop appropriate strategies. The Corporation measures the sensitivity of the value of its on-balance-sheet and off-balance-sheet positions to movements in interest rates using an economic value of equity model. The model computes the value of all current on-balance-sheet and off-balance-sheet positions under a range of instantaneous interest rate changes. The resulting change in the value of equity is the measure of overall long-term interest rate risk inherent in the Corporation's existing on-balance-sheet and off-balance-sheet positions. The Corporation uses the economic value of equity model to complement the net interest income simulation modeling process. The Corporation's risk management policies provide that the change in economic value of equity should not decline by more than 1.5% of the book value of assets for a 200 basis point instantaneous increase or decrease in interest rates. Based on the results of the economic value of equity model at September 30, 1999, if interest rates were to instantaneously increase by 200 basis points, the economic value of existing on-balance-sheet and off-balance-sheet positions would decline by 1.02% of assets. If interest rates were to instantaneously decrease by 200 basis points, the economic value of existing on-balance-sheet and off-balance-sheet positions would increase by .24% of assets. MARKET RISK Most of PNC Bank's trading activities are designed to provide capital markets services for customers of PNC Institutional Bank, PNC Secured Finance, and PNC Advisors. The performance of PNC Bank's trading operations is predominantly based on providing services to customers and not on positioning the Corporation's portfolio for gains from market movements. Market risk associated with trading, capital markets and foreign exchange activities is managed using a value-at-risk approach that combines interest rate risk, foreign exchange rate risk, spread risk and volatility risk. Exposure is measured as the potential loss due to a two standard deviation, one-day move. The combined period-end value-at-risk of all trading operations using this measurement was less than $700 thousand at September 30, 1999. PNC BANK CORP. ------ 19 21 FINANCIAL DERIVATIVES A variety of off-balance-sheet financial derivatives are used as part of the overall risk management process to manage interest rate, market and credit risk inherent in the Corporation's business activities. Interest rate swaps and purchased interest rate caps and floors are the primary instruments used for interest rate risk management. Interest rate swaps are agreements to exchange fixed and floating interest rate payments calculated on a notional principal amount. The floating rate is based on a money market index, primarily short-term LIBOR indices. Purchased interest rate caps and floors are agreements where, for a fee, the counterparty agrees to pay the Corporation the amount, if any, by which a specified market interest rate exceeds or is less than a defined rate applied to a notional amount, respectively. Forward contracts provide for the delivery of financial instruments at a specified future date and at a specified price or yield. Such contracts are primarily used to manage risk positions associated with certain mortgage banking activities. Credit-related derivatives provide, for a fee, an assumption of a portion of the credit risk associated with the underlying financial instruments. Such contracts are primarily used to manage credit risk and regulatory capital associated with commercial lending activities. Financial derivatives involve, to varying degrees, interest rate, market and credit risk in excess of the amount on the balance sheet, but less than the notional amount of the contract. For interest rate swaps, caps and floors, only periodic cash payments and, with respect to caps and floors, premiums, are exchanged. Therefore, cash requirements and exposure to credit risk are significantly less than the notional value. During the first nine months of 1999, financial derivatives used in interest rate risk management increased net interest income by $44 million compared with a $9 million increase in the prior-year period. The following table sets forth changes in the notional value of off-balance-sheet financial derivatives used for risk management during the first nine months of 1999.
FINANCIAL DERIVATIVES ACTIVITY Weighted- Average 1999 - dollars in millions January 1 Additions Maturities Terminations September 30 Maturity - ------------------------------------------------------------------------------------------------------------------------------------ Interest rate risk management Interest rate swaps Receive fixed $ 7,163 $ 750 $ (650) $ (250) $ 7,013 2 yr. 4 mo. Pay fixed 13 4 (11) 6 1 yr. 3 mo. Basis swaps 2,274 (87) 2,187 2 yr. 11 mo. Interest rate caps 722 (183) 539 4 yr. Interest rate floors 1,939 3,000 (1,588) 3,351 2 yr. 8 mo. - -------------------------------------------------------------------------------------------------------------- Total interest rate risk management 12,111 3,754 (2,519) (250) 13,096 Mortgage banking activities Residential Forward contracts Commitments to purchase loans 1,286 23,941 (24,060) 1,167 2 mo. Commitments to sell loans 3,248 29,637 (31,406) 1,479 2 mo. Options 207 734 (867) 74 2 mo. Interest rate floors - MSR 4,875 2,800 (525) (700) 6,450 4 yr. 3 mo. Option on swaps - MSR 725 725 13 yr. - -------------------------------------------------------------------------------------------------------------- Total residential 9,616 57,837 (56,858) (700) 9,895 Commercial 657 1,084 (88) (759) 894 7 yr. 11 mo. - -------------------------------------------------------------------------------------------------------------- Total mortgage banking activities 10,273 58,921 (56,946) (1,459) 10,789 Credit-related activities Credit default swaps 4,255 60 4,315 1 yr. 11 mo. - -------------------------------------------------------------------------------------------------------------- Total $26,639 $ 62,735 $(59,465) $(1,709) $28,200 ====================================================================================================================================
PNC BANK CORP. ------ 20 22 The following table sets forth, by designated assets and liabilities, the notional value and the estimated fair value of financial derivatives used for risk management. Weighted-average interest rates presented are those expected to be in effect based on the implied forward yield curve at September 30, 1999.
FINANCIAL DERIVATIVES Weighted-Average Interest Rates Notional Estimated ------------------------- September 30, 1999 - dollars in millions Value Fair Value Paid Received - ---------------------------------------------------------------------------------------------------------------------------- Interest rate risk management Asset rate conversion Interest rate swaps (1) Receive fixed designated to loans $ 5,550 $(26) 6.09% 5.49% Basis swaps designated to other earning assets 243 4 5.88 6.40 Interest rate caps designated to loans (2) 539 11 NM NM Interest rate floors designated to loans (3) 3,351 NM NM - ----------------------------------------------------------------------------------------- Total asset rate conversion 9,683 (11) Liability rate conversion Interest rate swaps (1) Receive fixed designated to: Interest-bearing deposits 150 2 6.45 6.65 Borrowed funds 1,313 (10) 6.35 5.97 Pay fixed designated to borrowed funds 6 1 6.09 7.33 Basis swaps designated to borrowed funds 1,944 9 6.12 6.22 - ----------------------------------------------------------------------------------------- Total liability rate conversion 3,413 2 - ----------------------------------------------------------------------------------------- Total interest rate risk management 13,096 (9) Mortgage banking activities Residential Forward contracts Commitments to purchase loans 1,167 NM NM Commitments to sell loans 1,479 (9) NM NM Options 74 2 NM NM Interest rate floors - MSR (3) 6,450 15 NM NM Option on swaps - MSR 725 9 NM NM - ----------------------------------------------------------------------------------------- Total residential 9,895 17 Commercial Pay fixed interest rate swaps designated to securities (1) 222 6.78 6.18 Pay fixed interest rate swaps designated to loans (1) 672 43 5.60 6.70 - ----------------------------------------------------------------------------------------- Total commercial 894 43 - ----------------------------------------------------------------------------------------- Total mortgage banking activities 10,789 60 Credit-related activities Credit default swaps 4,315 (2) NM NM - ----------------------------------------------------------------------------------------- Total financial derivatives $28,200 $ 49 ============================================================================================================================
(1) The floating rate portion of interest rate contracts is based on money-market indices. As a percent of notional value, 29% were based on 1-month LIBOR, 68% on 3-month LIBOR and the remainder on other short-term indices. (2) Interest rate caps with notional values of $166 million, $156 million and $213 million require the counterparty to pay the excess, if any, of 3-month LIBOR over a weighted-average strike of 6.18%, 1-month LIBOR over a weighted-average strike of 5.74% and Prime over a weighted-average strike of 8.76%, respectively. At September 30, 1999, 3-month LIBOR was 6.08%, 1-month LIBOR was 5.40% and Prime was 8.25%. (3) Interest rate floors with notional values of $3.0 billion, $3.3 billion and $3.2 billion require the counterparty to pay the Corporation the excess, if any, of the weighted-average strike of 4.63% over 3-month LIBOR, the weighted-average strike of 5.01% over 10-year CMT and the weighted-average strike of 4.99% over 10-year CMS, respectively. At September 30, 1999, 3-month LIBOR was 6.08%, 10-year CMT was 5.90% and 10-year CMS was 6.90%. NM - Not meaningful OTHER DERIVATIVES To accommodate customer needs, PNC Bank enters into customer-related financial derivative transactions primarily consisting of interest rate swaps, caps, floors and foreign exchange contracts. Risk exposure from customer positions is managed through transactions with other dealers. Additionally, the Corporation enters into other derivative transactions for risk management purposes. These positions are recorded at estimated fair value and changes in value are included in results of operations.
OTHER DERIVATIVES Positive Negative Notional Fair Fair Net Asset September 30, 1999 - in millions Value Value Value (Liability) - --------------------------------------------------------------------------------------------- Customer-related Interest rate Swaps $17,076 $ 68 $ (81) $(13) Caps/floors Sold 2,907 (20) (20) Purchased 2,778 17 17 Foreign exchange 2,968 38 (28) 10 Other 684 3 (3) - --------------------------------------------------------------------------------------------- Total customer-related 26,413 126 (132) (6) Other 2,270 (1) (1) - --------------------------------------------------------------------------------------------- Total other derivatives $28,683 $ 126 $(133) $ (7) =============================================================================================
PNC BANK CORP. ------ 21 23 YEAR 2000 READINESS The Corporation has been working since 1995 to prepare its computer systems and applications to meet the year 2000 challenge. This process involves reviewing, modifying and replacing existing hardware, software and embedded chip technology systems, as necessary. The Corporation is also assessing the year 2000 preparedness of third parties such as vendors, customers, governmental entities and others. As of September 30, 1999, the Corporation's MIS-supported mainframe, mid-range and PC client-server systems have been tested and returned to use as year 2000 ready and non-PC related hardware and systems have been tested and determined to be year 2000 ready. The Corporation has completed its organization-wide assessment of year 2000 issues relating to its identified mission critical embedded chip systems and continues to review and monitor these systems as necessary. No significant problems have been identified to date with respect to these systems. The Corporation has completed its assessment of the year 2000 preparedness of its identified mission critical service providers and continues to review and monitor them. The Corporation has not to date identified any material problems associated with its mission critical service providers. However, the Corporation can make no guarantee as to the year 2000 readiness of any such service provider or other third party. The year 2000 issue may have an adverse impact on the operations and financial condition of the Corporation's borrowers. PNC Bank periodically compiles and updates year 2000 profiles for certain of its largest lending relationships for the purpose of assessing their overall risks. Determination of these risks is based on an assessment of the borrowers' vulnerability to year 2000 issues, resources and capacity, adequacy of year 2000 readiness plans, remediation costs and state of remediation. This information is compiled and analyzed periodically to determine the possible year 2000 impact on the loan portfolio and allowance for credit losses. Based on the Corporation's current assessment of the information it has received to date, management believes the year 2000 issue will not have a material adverse impact on the quality of the loan portfolio. The Corporation will continue to review and assess the year 2000 preparedness of its borrowers during 1999. PNC Bank has conducted integrated testing to determine whether its mission critical application systems will perform in coordination with one another. The Corporation has also conducted testing with certain mission critical vendors that provide systems-related services. Such testing has not identified any significant problem that would have a material adverse impact on the Corporation. The estimated total cumulative cost to become year 2000 ready, which is being expensed as incurred, is approximately $25 million. Through September 30, 1999, on a cumulative basis, the Corporation had expensed approximately $23 million related to the year 2000 effort. Expenses incurred for year 2000 readiness efforts are not expected to exceed 2% of technology-related expenses in 1999. No significant outlays have been made to replace existing systems solely for year 2000 reasons. The costs and the timetable in which the Corporation plans to complete its year 2000 readiness activities are based on management's best estimates, which were derived using numerous assumptions of future events including the continued availability of certain resources, third party preparedness and other factors. The Corporation can make no guarantee that these estimates will be achieved, and actual results could differ from such plans. Contingency plans for year 2000 issues have been and will continue to be developed and the Corporation will continue to review contingency plans during 1999 and modify them when necessary or appropriate. Certain critical service provider and systems contingency plans will be tested during 1999. The Corporation's business continuity plans continue to be reviewed and strengthened to address year 2000 implications. PNC Bank's year 2000 remediation efforts and contingency plans are also subject to oversight and regulation by certain federal bank regulatory authorities. It is not possible to predict with certainty all of the adverse effects that could result from a failure of the Corporation or of third parties to become fully year 2000 ready or whether such effects could have a material adverse impact on the Corporation. However, if the Corporation were to fail to correct internal year 2000 problems, if one or more third parties were unable to provide services required by the Corporation due to year 2000 issues, or if the Corporation's contingency plans fail to mitigate any such problems, a disruption of operations could occur, resulting in increased operating costs, loss of revenues and other material adverse effects. Such disruptions could include a temporary inability to process transactions and delays in providing services. The Corporation could also be subject to liquidity risk in the event of deposit withdrawals due to year 2000 concerns, or if its lenders cannot provide funds due to year 2000 issues. In addition, to the extent that customers' financial positions are weakened due to year 2000 issues, credit quality could be adversely affected. PNC BANK CORP. ------ 22 24 FINANCIAL REVIEW THIRD QUARTER 1999 VS. THIRD QUARTER 1998 Net income for the third quarter of 1999 totaled $320 million or $1.06 per diluted share. Results included a $17 million net after-tax gain or $.06 per diluted share resulting from the sale of twelve branches in western Pennsylvania. Core earnings for the quarter were $303 million or $1.00 per diluted share and, on that basis, return on average common shareholders' equity was 21.81% and return on average assets was 1.63%. Earnings for the third quarter of 1998 were $281 million or $0.91 per diluted share. Return on average common shareholders' equity was 20.52% and return on average assets was 1.48% in the third quarter of 1998. Taxable-equivalent net interest income was $599 million in the third quarter of 1999, a $54 million decrease compared with the prior-year quarter. The net interest margin was 3.59% for the third quarter of 1999 compared with 3.81% in the third quarter of 1998. These declines were primarily due to the sale of the credit card business in the first quarter of 1999. Excluding the credit card business from the third quarter of 1998, net interest income for the third quarter of 1999 increased 5% and the net interest margin widened six basis points compared with the prior-year period. The provision for credit losses was $30 million in the third quarter of 1999 and net charge-offs were $29 million compared with $45 million and $88 million, respectively, in the prior-year period. Noninterest income was $651 million in the third quarter of 1999, a 23% increase compared with the third quarter of 1998. Excluding branch gains in both years and valuation adjustments in 1998, noninterest income for the third quarter of 1999 increased 18% compared with the prior-year quarter driven by growth in fee-based revenue. Noninterest income in the third quarter of 1999 included $27 million of pretax gains from branch sales. Noninterest income in the third quarter of 1998 included $30 million of pretax gains from branch sales that were offset by valuation adjustments. Asset management fees grew 22% compared with the third quarter of 1998 primarily reflecting new business. Mutual fund servicing fees grew 17% compared with the prior-year quarter due to new business, existing client growth and market appreciation. Consumer services revenue of $105 million for the third quarter of 1999 increased 7% compared with the third quarter of 1998 primarily due to an increase in brokerage fees associated with the Hilliard Lyons acquisition that was substantially offset by lower credit card fees. Corporate services revenue increased $30 million compared with the prior-year due to higher capital markets and treasury management fees and the comparative impact of valuation adjustments recorded in 1998. Net residential mortgage banking revenue grew $28 million or 60% compared with the prior-year quarter primarily due to growth in the servicing portfolio. Residential mortgage originations, including both retail and correspondent activity, totaled $4 billion compared with $7 billion in the prior-year period. Net securities gains were $2 million in the third quarter of 1999. Excluding the branch gains in both periods, other noninterest income increased $19 million compared with the third quarter of 1998 due to various operating items. Noninterest expense of $724 million increased 4% compared with the third quarter of 1998 primarily to support growth in fee-based businesses. The efficiency ratio of 53.3% for the third quarter of 1999 remained consistent with the prior-year quarter reflecting a continued focus on improving returns in traditional businesses. PNC BANK CORP. ------ 23 25 Total assets were $73.0 billion at September 30, 1999. Average earning assets decreased $2 billion to $66 billion for the third quarter of 1999 compared with the prior-year quarter at $68 billion. The decrease was primarily due to a $4.2 billion decrease in average loans in the period-to-period comparison that resulted from the sale of the credit card business and the decision to exit certain institutional lending businesses. Loans represented 78% of average earning assets in the third quarter of 1999 compared with 82% a year ago. Partially offsetting the decrease in average loans was a $1.7 billion increase in average securities available for sale that was attributable to securities held to hedge residential mortgage servicing rights. Average securities available for sale represented 13% and 10% of average earning assets in the third quarter of 1999 and 1998, respectively. Average deposits were $44.9 billion and represented 61% of total sources of funds for the third quarter of 1999 compared with $44.5 billion and 59%, respectively, in the third quarter of 1998. The increase in average deposits was primarily in consumer deposits. Average borrowed funds decreased $2.4 billion to $20.2 billion compared with the third quarter of 1998. Overall asset quality characteristics remained relatively stable during the third quarter of 1999. The ratio of nonperforming assets to total loans, loans held for sale and foreclosed assets was .65% at September 30, 1999 compared with .54% at September 30, 1998. Nonperforming assets were $361 million at September 30, 1999 compared with $329 million at September 30, 1998. The allowance for credit losses was $674 million and represented 1.31% of period-end loans and 215% of nonaccrual loans at September 30, 1999. The comparable amounts were 1.44% and 289%, respectively, at September 30, 1998. Net charge-offs were $29 million or .22% of average loans for the third quarter of 1999 compared with $88 million or .62% in the third quarter of 1998. The decrease was due to the sale of the credit card business in the first quarter of 1999. PNC BANK CORP. ------ 24 26 Consolidated Statement of Income
Three months ended September 30 Nine months ended September 30 ---------------------------------------------------------------- In millions, except per share data 1999 1998 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------- INTEREST INCOME Loans and fees on loans $ 985 $1,166 $3,086 $3,424 Securities available for sale 127 103 363 324 Other 100 85 257 211 - ------------------------------------------------------------------------------------------------------------------------------- Total interest income 1,212 1,354 3,706 3,959 - ------------------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE Deposits 340 371 1,024 1,095 Borrowed funds 278 337 823 950 - ------------------------------------------------------------------------------------------------------------------------------- Total interest expense 618 708 1,847 2,045 - ------------------------------------------------------------------------------------------------------------------------------- Net interest income 594 646 1,859 1,914 Provision for credit losses 30 45 133 110 - ------------------------------------------------------------------------------------------------------------------------------- Net interest income less provision for credit losses 564 601 1,726 1,804 - ------------------------------------------------------------------------------------------------------------------------------- NONINTEREST INCOME Asset management 175 143 505 421 Mutual fund servicing 55 47 159 134 Service charges on deposits 53 53 154 151 Consumer services 105 98 340 273 Corporate services 84 54 112 167 Net residential mortgage banking 75 47 205 155 Net securities gains 2 1 44 14 Other 102 86 527 289 - ------------------------------------------------------------------------------------------------------------------------------- Total noninterest income 651 529 2,046 1,604 - ------------------------------------------------------------------------------------------------------------------------------- NONINTEREST EXPENSE Staff expense 362 335 1,138 1,023 Net occupancy and equipment 103 101 381 301 Amortization 21 28 70 81 Marketing 18 14 50 78 Distributions on capital securities 16 16 48 43 Other 204 202 627 617 - ------------------------------------------------------------------------------------------------------------------------------- Total noninterest expense 724 696 2,314 2,143 - ------------------------------------------------------------------------------------------------------------------------------- Income before income taxes 491 434 1,458 1,265 Income taxes 171 153 498 435 - ------------------------------------------------------------------------------------------------------------------------------- Net income $ 320 $ 281 $ 960 $ 830 - ------------------------------------------------------------------------------------------------------------------------------- Net income applicable to diluted earnings $ 315 $ 276 $ 946 $ 817 EARNINGS PER COMMON SHARE Basic $ 1.07 $ .92 $ 3.17 $ 2.71 Diluted 1.06 .91 3.14 2.68 CASH DIVIDENDS DECLARED PER COMMON SHARE .41 .39 1.23 1.17 AVERAGE COMMON SHARES OUTSTANDING Basic 294.5 300.6 298.0 300.5 Diluted 297.6 304.2 301.3 305.3 ===============================================================================================================================
See accompanying Notes to Consolidated Financial Statements. PNC BANK CORP. ---- 25 27 Consolidated Balance Sheet
September 30 December 31 In millions, except par value 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 2,194 $ 2,534 Short-term investments 1,102 1,014 Loans held for sale 4,117 3,226 Securities available for sale 8,096 7,074 Loans, net of unearned income of $601 and $554 51,398 57,650 Allowance for credit losses (674) (753) - ------------------------------------------------------------------------------------------------------------------------------- Net loans 50,724 56,897 Goodwill and other amortizable assets 2,943 2,548 Other 3,827 3,914 - ------------------------------------------------------------------------------------------------------------------------------- Total assets $73,003 $77,207 =============================================================================================================================== LIABILITIES Deposits Noninterest-bearing $ 8,660 $ 9,943 Interest-bearing 36,486 37,553 - ------------------------------------------------------------------------------------------------------------------------------- Total deposits 45,146 47,496 Borrowed funds Federal funds purchased 472 390 Repurchase agreements 857 1,669 Bank notes and senior debt 7,975 10,384 Other borrowed funds 7,563 6,722 Subordinated debt 2,031 1,781 - ------------------------------------------------------------------------------------------------------------------------------- Total borrowed funds 18,898 20,946 Other 2,240 1,874 - ------------------------------------------------------------------------------------------------------------------------------- Total liabilities 66,284 70,316 - ------------------------------------------------------------------------------------------------------------------------------- Mandatorily redeemable capital securities of subsidiary trusts 848 848 SHAREHOLDERS' EQUITY Preferred stock 7 7 Common stock - $5 par value Authorized 450 shares Issued 353 shares 1,764 1,764 Capital surplus 1,270 1,250 Retained earnings 5,839 5,262 Deferred benefit expense (33) (36) Accumulated other comprehensive loss (236) (43) Common stock held in treasury at cost: 59 and 49 shares (2,740) (2,161) - ------------------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 5,871 6,043 - ------------------------------------------------------------------------------------------------------------------------------- Total liabilities, capital securities and shareholders' equity $73,003 $77,207 ===============================================================================================================================
See accompanying Notes to Consolidated Financial Statements. PNC BANK CORP. ---- 26 28 Consolidated Statement of Cash Flows
Nine months ended September 30 - in millions 1999 1998 - ----------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $ 960 $ 830 Adjustments to reconcile net income to net cash provided (used) by operating activities Provision for credit losses 133 110 Depreciation, amortization and accretion 256 431 Deferred income taxes 172 73 Net securities losses (gains) 73 (76) Net gain on sales of businesses and assets (412) (235) Valuation adjustments 177 7 Change in Loans held for sale 1,127 (1,509) Other (431) (628) - ----------------------------------------------------------------------------------------------------------------------- Net cash provided (used) by operating activities 2,055 (997) - ----------------------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Net change in loans 99 (4,070) Repayment of securities available for sale 1,045 1,599 Sales Securities available for sale 8,454 9,786 Loans 463 1,503 Foreclosed assets 28 47 Purchases Securities available for sale (10,018) (9,243) Loans (363) (79) Net cash received (paid) for acquisitions/divestitures 2,975 (1,074) Other (69) 203 - ----------------------------------------------------------------------------------------------------------------------- Net cash provided (used) by investing activities 2,614 (1,328) - ----------------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Net change in Noninterest-bearing deposits (1,259) (1,022) Interest-bearing deposits (704) 890 Federal funds purchased 82 (2,861) Sale/issuance Repurchase agreements 107,107 84,509 Bank notes and senior debt 2,416 8,228 Other borrowed funds 27,689 76,483 Subordinated debt 254 140 Capital securities 198 Common stock 84 114 Repayment/maturity Repurchase agreements (107,919) (84,182) Bank notes and senior debt (4,826) (7,496) Other borrowed funds (26,876) (74,358) Subordinated debt (4) (2) Acquisition of treasury stock (670) (270) Cash dividends paid (383) (367) - ----------------------------------------------------------------------------------------------------------------------- Net cash (used) provided by financing activities (5,009) 4 - ----------------------------------------------------------------------------------------------------------------------- DECREASE IN CASH AND DUE FROM BANKS (340) (2,321) Cash and due from banks at beginning of year 2,534 4,303 - ----------------------------------------------------------------------------------------------------------------------- Cash and due from banks at end of period $ 2,194 $ 1,982 ======================================================================================================================= CASH PAID FOR Interest $ 1,898 $ 2,047 Income taxes 208 262 NONCASH ITEMS Transfer from loans to loans held for sale 2,142 Transfers from loans to other assets 32 33 Conversion of debt to equity 55 =======================================================================================================================
See accompanying Notes to Consolidated Financial Statements. PNC BANK CORP. ---- 27 29 Notes to Consolidated Financial Statements BUSINESS PNC Bank Corp. ("Corporation" or "PNC Bank") is one of the largest diversified financial services companies in the United States operating retail banking, asset management and wholesale banking businesses that provide financial products and services nationally and in PNC Bank's primary geographic markets in Pennsylvania, New Jersey, Delaware, Ohio and Kentucky. PNC Bank is subject to intense competition from other financial services companies with respect to these businesses and is subject to the regulations of certain federal and state agencies and undergoes periodic examinations by those authorities. ACCOUNTING POLICIES BASIS OF FINANCIAL STATEMENT PRESENTATION The unaudited consolidated interim financial statements include the accounts of PNC Bank and its subsidiaries, most of which are wholly owned. Such statements have been prepared in accordance with generally accepted accounting principles. All significant intercompany accounts and transactions have been eliminated. In the opinion of management, the financial statements reflect all adjustments of a normal recurring nature necessary for a fair statement of results for the interim periods presented. Certain prior-period amounts have been reclassified to conform to reporting classifications utilized for the current reporting period. These classifications did not impact the Corporation's financial condition or results of operations. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the amounts reported. Actual results will differ from such estimates and the differences may be material to the consolidated financial statements. The notes included herein should be read in conjunction with the audited consolidated financial statements included in PNC Bank's 1998 Annual Report. RECENT ACCOUNTING PRONOUNCEMENTS Statement of Financial Accounting Standards ("SFAS") No. 137, "Accounting for Derivative Instruments and Hedging Activities - - Deferral of the Effective Date of FASB Statement No. 133" (an amendment of SFAS No. 133), issued in June 1999, defers the effective date of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," until fiscal years beginning after June 15, 2000. The Corporation expects to adopt SFAS No. 133, as amended by SFAS No. 137, effective January 1, 2001. Management has not yet determined what effect this statement will have on the financial position and results of operations of the Corporation. CASH FLOWS During the first nine months of 1999, divestiture activity which affected cash flows consisted of $3.2 billion of divested assets and receipt of $3.0 billion in cash and due from banks. Acquisition and divestiture activity for the first nine months of 1998 consisted of $539 million of acquired assets, $535 million of divested liabilities, cash payments totaling $1.1 million and receipt of $30 million in cash and due from banks. PNC BANK CORP. ---- 28 30 Notes to Consolidated Financial Statements SECURITIES AVAILABLE FOR SALE
September 30, 1999 December 31, 1998 ------------------------------------------------------------------------------------------- Unrealized Unrealized Amortized -------------------- Fair Amortized ------------------ Fair In millions Cost Gains Losses Value Cost Gains Losses Value - ------------------------------------------------------------------------------------------------------------------------------------ Debt securities U.S. Treasury and government agencies $ 2,199 $ (176) $ 2,023 $ 2,781 $ 10 $ (37) $2,754 Mortgage-backed 4,133 $ 2 (131) 4,004 2,942 5 (11) 2,936 Asset-backed 1,192 (16) 1,176 709 1 (2) 708 State and municipal 143 3 (4) 142 122 6 128 Other debt 37 (2) 35 33 (2) 31 - ------------------------------------------------------------------------------------------------------------------------------------ Total debt securities 7,704 5 (329) 7,380 6,587 22 (52) 6,557 Corporate stocks and other 741 9 (34) 716 542 10 (35) 517 - ------------------------------------------------------------------------------------------------------------------------------------ Total securities available for sale $ 8,445 $ 14 $ (363) $ 8,096 $ 7,129 $ 32 $ (87) $7,074 ====================================================================================================================================
Net securities gains were $44 million for the first nine months of 1999, substantially all relating to the gain from the sale of Concord EFS, Inc. ("Concord") stock. Net securities losses related to residential mortgage banking risk management strategies of $117 million were reported in net residential mortgage banking revenue. Net securities gains of $76 million for the first nine months of 1998 included $62 million that were reported in net residential mortgage banking revenue. ALLOWANCE FOR CREDIT LOSSES Changes in the allowance for credit losses were as follows: In millions 1999 1998 - ------------------------------------------------------------- Allowance at January 1 $ 753 $ 972 Charge-offs Consumer (49) (62) Credit card (60) (220) Residential mortgage (7) (6) Commercial (48) (21) Commercial real estate (4) (7) Other (5) (5) - ------------------------------------------------------------- Total charge-offs (173) (321) Recoveries Consumer 20 26 Credit card 2 12 Residential mortgage 1 1 Commercial 17 12 Commercial real estate 1 2 Other 1 1 - ------------------------------------------------------------- Total recoveries 42 54 - ------------------------------------------------------------- Net charge-offs Consumer (29) (36) Credit card (58) (208) Residential mortgage (6) (5) Commercial (31) (9) Commercial real estate (3) (5) Other (4) (4) - ------------------------------------------------------------- Total net charge-offs (131) (267) Provision for credit losses 133 110 Sale of credit card business (81) Acquisitions 1 - ------------------------------------------------------------- Allowance at September 30 $ 674 $ 816 ============================================================= NONPERFORMING ASSETS Nonperforming assets were as follows: September 30 December 31 In millions 1999 1998 - ------------------------------------------------------------------ Nonaccrual loans $314 $295 Foreclosed and other assets 47 37 - ------------------------------------------------------------------ Total nonperforming assets $361 $332 ================================================================== PNC BANK CORP. ---- 29 31 FINANCIAL DERIVATIVES FAIR VALUE OF FINANCIAL DERIVATIVES The notional and fair values of financial derivatives used for risk management and mortgage banking activities were as follows: Positive Negative Notional Fair Notional Fair In millions Value Value Value Value - ------------------------------------------------------------------- SEPTEMBER 30, 1999 Interest rate Swaps $ 4,052 $ 35 $ 5,154 $(55) Caps 539 11 Floors 3,000 2 351 (2) - ------------------------------------------------------------------- Total interest rate risk management 7,591 48 5,505 (57) Mortgage banking activities 8,092 71 2,697 (11) Credit default swaps 4,315 (2) - ------------------------------------------------------------------- Total $15,683 $119 $12,517 $(70) =================================================================== DECEMBER 31, 1998 Interest rate Swaps $ 6,915 $177 $ 2,535 $(10) Caps 722 6 Floors 1,500 439 (9) - ------------------------------------------------------------------- Total interest rate risk management 9,137 183 2,974 (19) Mortgage banking activities 9,367 74 906 (10) Credit default swaps 4,255 (2) - ------------------------------------------------------------------- Total $18,504 $257 $ 8,135 $(31) =================================================================== OTHER DERIVATIVES The following schedule sets forth information relating to positions associated with customer-related and other derivatives. Positive Negative Notional Fair Fair Net Asset In millions Value Value Value (Liability) - ------------------------------------------------------------------------------ SEPTEMBER 30, 1999 Customer-related Interest rate Swaps $17,076 $ 68 $ (81) $(13) Caps/floors Sold 2,907 (20) (20) Purchased 2,778 17 17 Foreign exchange 2,968 38 (28) 10 Other 684 3 (3) - ----------------------------------------------------------------------------- Total customer- related 26,413 126 (132) (6) Other 2,270 (1) (1) - ----------------------------------------------------------------------------- Total $28,683 $126 $(133) $ (7) ============================================================================= DECEMBER 31, 1998 Customer-related Interest rate Swaps $11,040 $ 69 $ (89) $(20) Caps/floors Sold 2,844 (19) (19) Purchased 2,589 20 20 Foreign exchange 2,108 33 (27) 6 Other 457 7 (8) (1) - ----------------------------------------------------------------------------- Total customer- related 19,038 129 (143) (14) Other 709 1 1 - ----------------------------------------------------------------------------- Total $19,747 $130 $(143) $(13) ============================================================================= PNC BANK CORP. ---- 30 32 Notes to Consolidated Financial Statements SEGMENT REPORTING PNC Bank operates seven major businesses engaged in retail banking, asset management and wholesale banking activities: PNC Regional Bank, PNC Advisors, BlackRock, PFPC Worldwide, PNC Institutional Bank, PNC Secured Finance and PNC Mortgage. Business results presented are based on PNC Bank's management accounting practices and the Corporation's current management structure. The following changes were made in the first quarter of 1999 to the presentation of business results: PNC Regional Bank reflects the combination of PNC Regional Community Bank and PNC National Consumer Bank. Branch-based brokerage activities (previously included in PNC Advisors), the middle market customer segment (previously included in PNC Corporate Bank) and regional real estate lending and leasing activities in PNC Bank's geographic footprint (previously included in PNC Secured Finance) were also combined with PNC Regional Bank. Additionally, residential mortgages (previously included in PNC Mortgage) were realigned with PNC Regional Bank. Certain out-of-footprint large corporate, national healthcare and other non-strategic institutional lending businesses as well as venture capital activities (previously included in PNC Corporate Bank) are included in Other. PNC Institutional Bank is comprised of the remaining activities that were previously in PNC Corporate Bank. BlackRock reflects legal entity results for BlackRock, Inc. Financial results for 1999 and 1998 are presented consistent with this structure. The management accounting process uses various balance sheet and income statement assignments and transfers to measure performance of the businesses. Methodologies change from time-to-time as management accounting practices are enhanced and businesses change. Securities or borrowings and related net interest income are assigned based on the net asset or liability position of each business. Capital is assigned based on management's assessment of inherent risks and equity levels at independent companies providing similar products and services. Support areas not directly aligned with the businesses are allocated primarily based on the utilization of these services. Total business financial results differ from consolidated financial results primarily due to differences between management accounting practices and generally accepted accounting principles, divested and exited businesses, venture capital activities, sales of equity interests, minority interests in subsidiaries, eliminations and unassigned items; the impact of which is reflected in Other. Additionally, Other for the first nine months of 1999 included gains on the sales of the credit card business an equity interest in EPS, Concord stock and twelve branches in Western Pennsylvania. The first nine months of 1999 also included valuation adjustments associated with exiting certain institutional lending businesses, costs related to efficiency initiatives and a contribution to the PNC Bank Foundation. BUSINESS SEGMENT PRODUCTS AND SERVICES PNC Regional Bank provides credit, deposit, branch-based brokerage and electronic banking products and services to retail customers as well as credit, leasing, treasury management and capital markets products and services to mid-sized and small businesses primarily within PNC Bank's geographic footprint. PNC Advisors offers personalized investment management, high-end brokerage services, personal trust, estate planning and traditional banking services to affluent and wealthy individuals; and investment management, trust and administrative services to pensions, 401(k) plans and charitable organizations. BlackRock offers fixed income, domestic and international equity and liquidity investment products, and utilizes technology-based risk management capabilities to provide investment advisory and asset management capabilities for a wide range of institutional and retail customers. PFPC Worldwide provides a wide range of accounting, administration, transfer agency, custody, securities lending and integrated banking transaction services to mutual funds, pension and money fund managers, partnerships, brokerage firms, insurance companies and banks. PNC Institutional Bank provides specialized credit, capital markets and treasury management products and services to corporations, institutions and government entities nationwide. PNC Secured Finance, serving corporate clients nationwide, is engaged in commercial real estate finance, including loan origination, securitization and servicing; asset-based financing, including lending, syndication and treasury management services; and equipment lease financing. PNC Mortgage originates, purchases and services residential mortgages and related products. PNC Mortgage also acquires and securitizes residential mortgages as private-label mortgage-backed securities and performs the master servicing of those securities for investors. PNC BANK CORP. ---- 31 33 RESULTS OF BUSINESSES
PNC Three months ended PNC Insti- PNC Total September 30 - Regional PNC PFPC tutional Secured PNC PNC Bank in millions Bank Advisors BlackRock Worldwide Bank Finance Mortgage Other Corp. - ------------------------------------------------------------------------------------------------------------------------------------ 1999 INCOME STATEMENT Net interest income* $ 439 $ 31 $ (2) $ 3 $ 62 $ 48 $ 21 $ (3) $ 599 Noninterest income 143 155 100 56 49 23 89 36 651 - ------------------------------------------------------------------------------------------------------------------------------------ Total revenue 582 186 98 59 111 71 110 33 1,250 Provision for credit losses 11 5 3 11 30 Noninterest expense 300 123 70 40 60 39 77 15 724 - ------------------------------------------------------------------------------------------------------------------------------------ Pretax earnings 271 58 28 19 48 21 33 18 496 Income taxes 102 22 12 7 17 12 4 176 - ----------------------------------------------------------------------------------------------------------------------------------- Earnings $ 169 $ 36 $ 16 $ 12 $ 31 $ 21 $ 21 $ 14 $ 320 =================================================================================================================================== Inter-segment revenue $ 7 $ 2 $ 25 $ (8) $ 2 $ 9 $ (37) =================================================================================================================================== Average assets ** $39,572 $3,289 $403 $245 $9,735 $7,944 $7,175 $ 5,400 $73,763 =================================================================================================================================== 1998 INCOME STATEMENT Net interest income* $ 426 $ 29 $ (2) $ 2 $ 61 $ 42 $ 21 $ 74 $ 653 Noninterest income 161 91 79 48 38 1 63 48 529 - ----------------------------------------------------------------------------------------------------------------------------------- Total revenue 587 120 77 50 99 43 84 122 1,182 Provision for credit losses 11 42 1 (9) 45 Noninterest expense 321 75 59 33 51 33 70 54 696 - ----------------------------------------------------------------------------------------------------------------------------------- Pretax earnings 255 45 18 17 6 9 14 77 441 Income taxes 100 16 9 6 1 1 6 21 160 - ----------------------------------------------------------------------------------------------------------------------------------- Earnings $ 155 $ 29 $ 9 $ 11 $ 5 $ 8 $ 8 $ 56 $ 281 =================================================================================================================================== Inter-segment revenue $ 4 $ 2 $ (7) $ 4 $ 8 $ (11) =================================================================================================================================== Average assets ** $38,613 $2,630 $315 $259 $8,731 $7,874 $5,555 $11,313 $75,290 =================================================================================================================================== Nine months ended September 30 in millions - ------------------------------------------------------------------------------------------------------------------------------------ 1999 INCOME STATEMENT Net interest income* $ 1,305 $ 98 $ (8) $ 8 $ 180 $ 146 $ 77 $ 69 $ 1,875 Noninterest income 429 453 280 162 133 78 250 261 2,046 - ------------------------------------------------------------------------------------------------------------------------------------ Total revenue 1,734 551 272 170 313 224 327 330 3,921 Provision for credit losses 33 5 19 9 67 133 Noninterest expense 908 366 199 116 166 112 253 194 2,314 - ------------------------------------------------------------------------------------------------------------------------------------ Pretax earnings 793 180 73 54 128 103 74 69 1,474 Income taxes 303 69 31 20 44 24 29 (6) 514 - ------------------------------------------------------------------------------------------------------------------------------------ Earnings $ 490 $ 111 $ 42 $ 34 $ 84 $ 79 $ 45 $ 75 $ 960 =================================================================================================================================== Inter-segment revenue $ 24 $ 6 $ 63 $ (30) $ 8 $ 27 $ (98) =================================================================================================================================== Average assets ** $39,485 $3,299 $443 $257 $9,660 $8,038 $ 7,092 $ 6,974 $75,248 =================================================================================================================================== 1998 INCOME STATEMENT Net interest income* $ 1,271 $ 88 $ (9) $ 6 $ 167 $ 120 $ 60 $ 231 $ 1,934 Noninterest income 475 260 210 135 113 27 183 201 1,604 - ----------------------------------------------------------------------------------------------------------------------------------- Total revenue 1,746 348 201 141 280 147 243 432 3,538 Provision for credit losses 41 (1) 42 (5) 33 110 Noninterest expense 961 209 157 95 150 80 205 286 2,143 - ------------------------------------------------------------------------------------------------------------------------------------ Pretax earnings 744 140 44 46 88 72 38 113 1,285 Income taxes 293 53 21 17 30 20 15 6 455 - ------------------------------------------------------------------------------------------------------------------------------------ Earnings $ 451 $ 87 $ 23 $ 29 $ 58 $ 52 $ 23 $ 107 $ 830 =================================================================================================================================== Inter-segment revenue $ 13 $ 1 $ 4 $ (19) $ 7 $ 25 $ (31) =================================================================================================================================== Average assets ** $38,741 $2,646 $302 $229 $8,459 $6,766 $ 4,634 $ 11,922 $73,699 ===================================================================================================================================
* Taxable-equivalent basis ** BlackRock's assets are presented as of period end. PNC BANK CORP. ---- 32 34 Notes to Consolidated Financial Statements EARNINGS PER SHARE The following table sets forth basic and diluted earnings per share calculations.
Three months ended Nine months ended September 30 September 30 ---------------------------------------------------- In millions, except share and per share data 1999 1998 1999 1998 - ---------------------------------------------------------------------------------------------------------------------------------- CALCULATION OF BASIC EARNINGS PER COMMON SHARE Net income $ 320 $ 281 $ 960 $ 830 Less: Preferred dividends declared 5 5 15 14 - ---------------------------------------------------------------------------------------------------------------------------------- Net income applicable to basic earnings per common share $ 315 $ 276 $ 945 $ 816 - ---------------------------------------------------------------------------------------------------------------------------------- Basic weighted-average common shares outstanding (in thousands) 294,497 300,640 298,047 300,521 - ---------------------------------------------------------------------------------------------------------------------------------- BASIC EARNINGS PER COMMON SHARE $ 1.07 $ .92 $ 3.17 $ 2.71 ================================================================================================================================== CALCULATION OF DILUTED EARNINGS PER COMMON SHARE Net income $ 320 $ 281 $ 960 $ 830 Add: Interest expense on convertible debentures (net of tax) 1 Less: Dividends declared on nonconvertible preferred stock 5 5 14 14 - ---------------------------------------------------------------------------------------------------------------------------------- Net income applicable to diluted earnings per common share $ 315 $ 276 $ 946 $ 817 - ---------------------------------------------------------------------------------------------------------------------------------- Basic weighted-average common shares outstanding (in thousands) 294,497 300,640 298,047 300,521 Weighted-average common shares to be issued using average market price and assuming: Conversion of preferred stock Series A and B 132 147 134 151 Conversion of preferred stock Series C and D 1,064 1,134 1,080 1,153 Conversion of debentures 24 26 24 1,009 Exercise of stock options 1,472 1,606 1,602 1,966 Incentive share awards 379 633 381 502 - ---------------------------------------------------------------------------------------------------------------------------------- Diluted weighted-average common shares outstanding (in thousands) 297,568 304,186 301,268 305,302 - ---------------------------------------------------------------------------------------------------------------------------------- DILUTED EARNINGS PER COMMON SHARE $ 1.06 $ .91 $ 3.14 $ 2.68 ==================================================================================================================================
LITIGATION The Corporation and persons to whom the Corporation may have indemnification obligations, in the normal course of business, are subject to various pending and threatened lawsuits in which claims for monetary damages are asserted. Management, after consultation with legal counsel, does not at the present time anticipate the ultimate aggregate liability, if any, arising out of such lawsuits will have a material adverse effect on the Corporation's financial position. At the present time, management is not in a position to determine whether any such pending or threatened litigation will have a material adverse effect on the Corporation's results of operations in any future reporting period. COMPREHENSIVE INCOME Total comprehensive income was $332 million for the third quarter of 1999 and $767 million for the first nine months of 1999 compared with $313 million and $870 million, respectively, in 1998. PNC BANK CORP. ---- 33 35 OTHER FINANCIAL INFORMATION In connection with the 1995 Midlantic Corporation ("Midlantic") merger, the parent company and its wholly-owned subsidiary, PNC Bancorp, Inc., jointly and severally assumed borrowed funds of Midlantic in the aggregate principal amount of $200 million at September 30, 1999. Summarized financial information for PNC Bancorp, Inc. and subsidiaries is as follows: PNC BANCORP, INC., AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET September 30 December 31 In millions 1999 1998 - ---------------------------------------------------------------- ASSETS Cash and due from banks $ 2,187 $ 2,527 Securities available for sale 7,897 6,868 Loans, net of unearned income 50,976 57,282 Allowance for credit losses (674) (753) - ---------------------------------------------------------------- Net loans 50,302 56,529 Other assets 10,320 9,261 - ---------------------------------------------------------------- Total assets $70,706 $75,185 - ---------------------------------------------------------------- LIABILITIES Deposits $45,915 $47,578 Borrowed funds 16,752 19,402 Other liabilities 1,470 1,130 - ---------------------------------------------------------------- Total liabilities 64,137 68,110 Mandatorily redeemable capital securities of subsidiary trust 350 350 SHAREHOLDERS' EQUITY 6,219 6,725 - ---------------------------------------------------------------- Total liabilities, capital securities and shareholders' equity $70,706 $75,185 ================================================================ PNC BANCORP, INC., AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME Nine months ended September 30 - in millions 1999 1998 - ---------------------------------------------------------------- Interest income $3,647 $3,923 Interest expense 1,759 1,970 - ---------------------------------------------------------------- Net interest income 1,888 1,953 Provision for credit losses 133 110 - ---------------------------------------------------------------- Net interest income less provision for credit losses 1,755 1,843 Noninterest income 1,450 1,671 Noninterest expense 1,903 2,273 - ---------------------------------------------------------------- Income before income taxes 1,302 1,241 Income taxes 466 438 - ---------------------------------------------------------------- Net income $ 836 $ 803 ================================================================ BORROWED FUNDS In February 1999, the Corporation issued $250 million of 6 1/8% subordinated notes due 2009 that qualify as Tier II risk-based capital. In August 1999, the Corporation issued $300 million of 6.95% notes due 2002 and $300 million of 7.00% notes due 2004. In October 1999, the Corporation, issued $400 million of 7.50% subordinated notes due 2009 that qualify as Tier II risk-based capital. The net proceeds from the sale of the notes are expected to be used to fund the acquisition of ISG. SUBSEQUENT EVENTS In October 1999 BlackRock, Inc., PNC Bank's investment management subsidiary, issued 9 million shares of class A common stock at $14.00 per share in an initial public offering. PNC Bank will continue to own approximately 70% of BlackRock's stock and will record an after tax gain of approximately $60 million during the fourth quarter as a result of this offering. PNC BANK CORP. ---- 34 36 Statistical Information CONSOLIDATED AVERAGE BALANCE SHEET AND NET INTEREST ANALYSIS
Nine months ended September 30 ------------------------------------------------------------------------ 1999 1998 ------------------------------------------------------------------------ Dollars in millions Average Average Average Average Taxable-equivalent basis Balances Interest Yields/Rates Balances Interest Yields/Rates - ---------------------------------------------------------------------------------------------------------------------------------- ASSETS Interest-earning assets Loans held for sale $ 3,838 $ 205 7.11% $ 3,059 $ 162 7.03% Securities available for sale U.S. Treasury and government agencies and corporations 4,640 178 5.14 5,179 220 5.67 Other debt 3,361 157 6.21 1,672 81 6.46 Other 668 31 6.16 540 26 6.49 - -------------------------------------------------------------------------------- --------------------- Total securities available for sale 8,669 366 5.64 7,391 327 5.91 Loans, net of unearned income Consumer 10,615 647 8.15 11,073 706 8.53 Credit card 899 100 14.90 3,942 407 13.81 Residential mortgage 12,378 650 6.99 12,598 687 7.26 Commercial 23,343 1,344 7.59 22,159 1,320 7.85 Commercial real estate 3,394 198 7.70 3,224 208 8.52 Other 2,993 159 7.11 2,133 112 7.01 - -------------------------------------------------------------------------------- --------------------- Total loans, net of unearned income 53,622 3,098 7.67 55,129 3,440 8.29 Other 1,112 53 6.29 1,042 50 6.35 - -------------------------------------------------------------------------------- --------------------- Total interest-earning assets/interest income 67,241 3,722 7.35 66,621 3,979 7.94 Noninterest-earning assets Allowance for credit losses (699) (887) Cash and due from banks 2,020 2,274 Other assets 6,686 5,691 - --------------------------------------------------------------------- ------- Total assets $75,248 $73,699 - --------------------------------------------------------------------- ------- LIABILITIES, CAPITAL SECURITIES AND SHAREHOLDERS' EQUITY Interest-bearing liabilities Interest-bearing deposits Demand and money market $17,519 358 2.73 $14,430 322 2.99 Savings 2,450 30 1.61 2,644 39 1.98 Other time 16,107 605 5.02 16,995 691 5.43 Deposits in foreign offices 837 31 4.96 1,017 43 5.57 - -------------------------------------------------------------------------------- --------------------- Total interest-bearing deposits 36,913 1,024 3.71 35,086 1,095 4.17 Borrowed funds Bank notes and senior debt 8,899 345 5.13 10,827 467 5.68 Federal funds purchased 1,574 59 4.90 2,663 112 5.55 Repurchase agreements 2,121 61 3.77 1,624 59 4.81 Other borrowed funds 6,164 243 5.19 4,603 209 5.99 Subordinated debt 2,027 115 7.51 1,784 103 7.67 - -------------------------------------------------------------------------------- --------------------- Total borrowed funds 20,785 823 5.23 21,501 950 5.83 - -------------------------------------------------------------------------------- --------------------- Total interest-bearing liabilities/interest expense 57,698 1,847 4.25 56,587 2,045 4.80 Noninterest-bearing liabilities and shareholders' equity Demand and other noninterest-bearing deposits 8,676 9,353 Accrued expenses and other liabilities 2,167 1,518 Mandatorily redeemable capital securities of subsidiary trusts 848 733 Shareholders' equity 5,859 5,508 - --------------------------------------------------------------------- ------- Total liabilities, capital securities and shareholders' equity $75,248 $73,699 - ---------------------------------------------------------------------------------------------------------------------------------- Interest rate spread 3.10 3.14 Impact of noninterest-bearing sources .60 .72 - ---------------------------------------------------------------------------------------------------------------------------------- Net interest income/margin $ 1,875 3.70% $1,934 3.86% - ----------------------------------------------------------------------------------------------------------------------------------
Nonaccrual loans are included in loans, net of unearned income. The impact of financial derivatives used in interest rate risk management is included in the interest income/expense and average yields/rates of the related assets and liabilities. Average balances of securities available for sale are based on amortized historical cost (excluding SFAS No. 115 adjustments to fair value). PNC BANK CORP. ---- 35 37
- ----------------------------------------------------------------------------------------------------------------------------------- Third Quarter 1999 Second Quarter 1999 Third Quarter 1998 - ----------------------------------------------------------------------------------------------------------------------------------- Average Average Average Average Average Average Balances Interest Yields/Rates Balances Interest Yields/Rates Balances Interest Yields/Rates - ----------------------------------------------------------------------------------------------------------------------------------- $ 4,385 $ 82 7.51% $ 3,727 $ 67 7.07% $ 3,850 $ 67 7.00% 4,484 58 5.20 5,187 66 5.12 4,714 66 5.58 3,705 59 6.33 3,521 55 6.19 1,842 29 6.35 614 11 6.89 729 10 5.70 517 9 6.43 - ---------------------------- --------------------------- ---------------------------- 8,803 128 5.79 9,437 131 5.56 7,073 104 5.85 10,171 207 8.08 10,729 218 8.16 11,038 235 8.47 4,029 142 13.94 12,451 216 6.94 12,496 218 6.97 12,455 225 7.21 22,631 444 7.68 22,846 438 7.58 23,359 468 7.84 3,389 67 7.67 3,396 66 7.66 2,850 63 8.65 3,104 55 7.12 3,012 52 6.98 2,207 39 7.06 - ---------------------------- --------------------------- ---------------------------- 51,746 989 7.55 52,479 992 7.53 55,938 1,172 8.28 1,102 18 6.26 1,236 19 6.37 1,097 18 6.41 - ---------------------------- --------------------------- ---------------------------- 66,036 1,217 7.29 66,879 1,209 7.20 67,958 1,361 7.92 (677) (678) (830) 1,959 2,038 2,022 6,445 6,821 6,140 - ------------- ------------- -------------- $73,763 $75,060 $75,290 - ------------- ------------- -------------- $18,034 127 2.80 $17,686 118 2.66 $14,787 113 3.04 2,345 10 1.59 2,472 10 1.60 2,610 13 1.97 15,136 189 4.97 15,946 197 4.97 16,896 230 5.41 1,066 14 5.16 682 8 4.83 1,060 15 5.54 - ---------------------------- --------------------------- ---------------------------- 36,581 340 3.69 36,786 333 3.63 35,353 371 4.17 7,823 103 5.28 9,214 117 5.03 11,845 172 5.67 1,828 24 5.07 1,230 15 4.77 2,496 36 5.60 1,892 20 4.17 2,629 25 3.62 1,587 19 4.79 6,668 90 5.27 5,441 69 5.05 4,871 75 6.01 2,031 41 7.48 2,030 38 7.50 1,843 35 7.63 - ---------------------------- --------------------------- ---------------------------- 20,242 278 5.40 20,544 264 5.08 22,642 337 5.83 - ---------------------------- --------------------------- ---------------------------- 56,823 618 4.30 57,330 597 4.15 57,995 708 4.82 8,318 8,684 9,169 2,042 2,325 1,632 848 848 848 5,732 5,873 5,646 - ------------- ------------- -------------- $73,763 $75,060 $75,290 - ----------------------------------------------------------------------------------------------------------------------------------- 2.99 3.05 3.10 .60 .59 .71 - ----------------------------------------------------------------------------------------------------------------------------------- $ 599 3.59% $ 612 3.64% $ 653 3.81% - -----------------------------------------------------------------------------------------------------------------------------------
PNC BANK CORP. ---- 36 38 Quarterly Report on Form 10-Q Securities and Exchange Commission Washington, D.C. 20549 Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 1999. Commission File Number 1-9718 PNC BANK CORP. Incorporated in the Commonwealth of Pennsylvania IRS Employer Identification No. 25-1435979 Address: One PNC Plaza 249 Fifth Avenue Pittsburgh, Pennsylvania 15222-2707 Telephone: (412) 762-1553 As of October 31, 1999, PNC Bank Corp. had 294,292,472 shares of common stock ($5 par value) outstanding. PNC Bank Corp. (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. The following sections of the Financial Review set forth in the cross-reference index are incorporated in the Quarterly Report on Form 10-Q. Cross-Reference Page(s) ----------------------------------------------------- PART I FINANCIAL INFORMATION Item 1 Consolidated Statement of Income for the three and nine months ended September 30, 1999 and 1998 25 Consolidated Balance Sheet as of September 30, 1999 and December 31, 1998 26 Consolidated Statement of Cash Flows for the nine months ended September 30, 1999 and 1998 27 Notes to Consolidated Financial Statements 28 - 34 Consolidated Average Balance Sheet and Net Interest Analysis 35 - 36 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 2 - 24 Item 3 Quantitative and Qualitative Disclosures About Market Risk 17 - 19 - ---------------------------------------------------------------- PART II OTHER INFORMATION Item 6 Exhibits and Reports on Form 8-K The following exhibit index lists Exhibits to this Quarterly Report on Form 10-Q: 12.1 Computation of Ratio of Earnings to Fixed Charges 12.2 Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends 27 Financial Data Schedule ================================================================== Copies of these Exhibits may be obtained electronically at the Securities and Exchange Commission's home page at www.sec.gov. Copies may also be obtained without charge by writing to Lynn Fox Evans, Director of Financial Reporting, at corporate headquarters, by calling (412) 762-1553 or via e-mail at financial.reporting@pncbank.com. Since June 30, 1999, the Corporation filed the following Current Reports on Form 8-K: Form 8-K dated as of July 15, 1999, reporting the Corporation's consolidated financial results for the three and six months ended June 30, 1999 and financial information about the Corporation's businesses for the six months ended June 30, 1999 and 1998, filed pursuant to Item 5. Form 8-K dated as of July 20, 1999, with respect to the announcement of an agreement to acquire First Data Investor Services Group, Inc., filed pursuant to Item 5. Form 8-K dated as of August 27, 1999, reporting the public offering of $300,000,000 of 6.95% Notes due 2002 and $300,000,000 of 7.00% Notes due 2004, filed pursuant to Item 5. Form 8-K dated as of October 20, 1999, reporting the Corporation's consolidated financial results for the three and nine months ended September 30, 1999 and financial information about the Corporation's businesses for the nine months ended September 30, 1999 and 1998, filed pursuant to Item 5. Form 8-K dated as of October 26, 1999, reporting the public offering of $400,000,000 of 7.50% Subordinated Notes due 2009, filed pursuant to Item 5. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on November 15, 1999, on its behalf by the undersigned thereunto duly authorized. PNC Bank Corp. Robert L. Haunschild Senior Vice President and Chief Financial Officer PNC BANK CORP. ---- 37 39 Corporate Information CORPORATE HEADQUARTERS PNC Bank Corp. One PNC Plaza 249 Fifth Avenue Pittsburgh, Pennsylvania 15222-2707 STOCK LISTING PNC Bank Corp. common stock is traded on the New York Stock Exchange ("NYSE") under the symbol PNC. INTERNET INFORMATION Information about PNC Bank Corp.'s financial results and its products and services is available on the Internet at www.pncbank.com. FINANCIAL INFORMATION The Annual Report on Form 10-K is filed with the Securities and Exchange Commission ("SEC"). Copies of this document and other filings, including Exhibits thereto, may be obtained electronically at the SEC's home page at www.sec.gov. Copies may also be obtained without charge by writing to Lynn Fox Evans, Director of Financial Reporting, at corporate headquarters, by calling (412) 762-1553 or via e-mail at 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 or via e-mail at invrela@pncmail.com. News media representatives and others seeking general information should contact Jeep Bryant, Director of Corporate Communications, at (412) 762-8221 or via e-mail at public.relations@pncbank.com. COMMON STOCK PRICES/DIVIDENDS DECLARED The table below sets forth by quarter the range of high and low sale and quarter-end closing prices for PNC Bank Corp. common stock and the cash dividends declared per common share. Cash Dividends 1999 QUARTER High Low Close Declared - --------------------------------------------------------------------- First $59.750 $47.000 $55.563 $ .41 Second 60.125 54.375 57.625 .41 Third 58.063 49.688 52.688 .41 - --------------------------------------------------------------------- Total $1.23 ===================================================================== Cash Dividends 1998 QUARTER High Low Close Declared - --------------------------------------------------------------------- First $61.625 $49.500 $59.938 $ .39 Second 66.750 53.813 53.875 .39 Third 60.000 41.625 45.000 .39 Fourth 54.625 38.750 54.000 .41 - --------------------------------------------------------------------- Total $1.58 ===================================================================== DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN The PNC Bank Corp. dividend reinvestment and stock purchase plan enables holders of common and preferred stock to purchase additional shares of common stock conveniently and without paying brokerage commissions or service charges. A prospectus and enrollment card may be obtained by writing to Shareholder Relations at corporate headquarters. REGISTRAR AND TRANSFER AGENT The Chase Manhattan Bank P.O. Box 590 Ridgefield Park, New Jersey 07660 800-982-7652 PNC BANK CORP. ---- 38 EX-12.1 2 EXHIBIT 12.1 1 PNC BANK CORP. EXHIBIT 12.1 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
Nine Year ended December 31 months ended ------------------------------------------------------------- Dollars in millions September 30, 1999 1998 1997 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------------------- EARNINGS Income before taxes and cumulative effect of changes in accounting principles $ 1,458 $ 1,710 $ 1,618 $ 1,527 $ 627 $ 1,209 Fixed charges excluding interest on deposits 909 1,366 1,171 1,098 1,487 1,104 ------------- ----------- ----------- ----------- ----------- ----------- Subtotal 2,367 3,076 2,789 2,625 2,114 2,313 Interest on deposits 1,024 1,471 1,457 1,428 1,552 1,160 ------------- ----------- ----------- ----------- ----------- ----------- Total $ 3,391 $ 4,547 $ 4,246 $ 4,053 $ 3,666 $ 3,473 ============= =========== =========== =========== =========== =========== FIXED CHARGES Interest on borrowed funds $ 823 $ 1,267 $ 1,098 $ 1,065 $ 1,454 $ 1,071 Interest component of rentals 38 37 29 31 32 32 Amortization of notes and debentures 2 1 1 1 1 Distributions on Mandatorily Redeemable Capital Securities of Subsidiary Trusts 48 60 43 1 ------------- ----------- ----------- ----------- ----------- ----------- Subtotal 909 1,366 1,171 1,098 1,487 1,104 Interest on deposits 1,024 1,471 1,457 1,428 1,552 1,160 ------------- ----------- ----------- ----------- ----------- ----------- Total $ 1,933 $ 2,837 $ 2,628 $ 2,526 $ 3,039 $ 2,264 ============= =========== =========== =========== =========== =========== RATIO OF EARNINGS TO FIXED CHARGES Excluding interest on deposits 2.60 x 2.25 x 2.38 x 2.39 x 1.42 x 2.10 x Including interest on deposits 1.75 1.60 1.62 1.60 1.21 1.53 ==============================================================================================================================
EX-12.2 3 EXHIBIT 12.2 1 PNC BANK CORP. EXHIBIT 12.2 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
Nine Year ended December 31 months ended ------------------------------------------------------------- Dollars in millions September 30, 1999 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------ EARNINGS Income before taxes and cumulative effect of changes in accounting principles $ 1,458 $ 1,710 $ 1,618 $ 1,527 $ 627 $ 1,209 Fixed charges and preferred stock dividends excluding interest on deposits 931 1,395 1,201 1,106 1,492 1,112 ------------- ----------- ----------- ----------- ----------- ----------- Subtotal 2,389 3,105 2,819 2,633 2,119 2,321 Interest on deposits 1,024 1,471 1,457 1,428 1,552 1,160 ------------- ----------- ----------- ----------- ----------- ----------- Total $ 3,413 $ 4,576 $ 4,276 $ 4,061 $ 3,671 $ 3,481 ============= =========== =========== =========== =========== =========== FIXED CHARGES Interest on borrowed funds $ 823 $ 1,267 $ 1,098 $ 1,065 $ 1,454 $ 1,071 Interest component of rentals 38 37 29 31 32 32 Amortization of notes and debentures 2 1 1 1 1 Distributions on Mandatorily Redeemable Capital Securities of Subsidiary Trusts 48 60 43 1 Preferred stock dividend requirements 22 29 30 8 5 8 ------------- ----------- ----------- ----------- ----------- ----------- Subtotal 931 1,395 1,201 1,106 1,492 1,112 Interest on deposits 1,024 1,471 1,457 1,428 1,552 1,160 ------------- ----------- ----------- ----------- ----------- ----------- Total $ 1,955 $ 2,866 $ 2,658 $ 2,534 $ 3,044 $ 2,272 ============= =========== =========== =========== =========== =========== RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS Excluding interest on deposits 2.57 x 2.23 x 2.35 x 2.38 x 1.42 x 2.09 x Including interest on deposits 1.75 1.60 1.61 1.60 1.21 1.53 ===============================================================================================================================
EX-27 4 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL INFORMATION INCORPORATED BY REFERENCE TO THE 1999 THIRD QUARTER FINANCIAL REVIEW AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL INFORMATION. 1,000,000 U.S. DOLLARS 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 1 2,194 0 0 0 8,096 0 0 51,398 (674) 73,003 45,146 7,375 2,240 11,523 0 7 1,764 4,100 73,003 3,086 363 257 3,706 1,024 1,847 1,859 133 44 2,314 1,458 960 0 0 960 3.17 3.14 3.70 314 164 0 0 753 (173) 42 674 674 0 0
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