0000950152-95-001816.txt : 19950821 0000950152-95-001816.hdr.sgml : 19950821 ACCESSION NUMBER: 0000950152-95-001816 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19950630 FILED AS OF DATE: 19950814 DATE AS OF CHANGE: 19950818 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PNC BANK CORP CENTRAL INDEX KEY: 0000713676 STANDARD INDUSTRIAL CLASSIFICATION: 6021 IRS NUMBER: 251435979 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-09718 FILM NUMBER: 95563936 BUSINESS ADDRESS: STREET 1: ONE PNC PLAZA STREET 2: FIFTH AVE & WOOD ST CITY: PITTSBURGH STATE: PA ZIP: 15265 BUSINESS PHONE: 4127622666 MAIL ADDRESS: STREET 1: ONE PNC PLAZA STREET 2: FIFTH AVENUE & WOOD STREET CITY: PITTSBURGH STATE: PA ZIP: 15265 FORMER COMPANY: FORMER CONFORMED NAME: PNC BANK CORP /PA/ DATE OF NAME CHANGE: 19930428 FORMER COMPANY: FORMER CONFORMED NAME: PNC FINANCIAL CORP DATE OF NAME CHANGE: 19920703 10-Q 1 PNC BANK 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT 0F 1934 For the quarterly period ended June 30, 1995 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________________ to _______________________ COMMISSION FILE NUMBER 1-9718 PNC BANK CORP. (Exact name of registrant as specified in its charter) PENNSYLVANIA 25-1435979 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.)
ONE PNC PLAZA FIFTH AVENUE AND WOOD STREET PITTSBURGH, PENNSYLVANIA 15265 (Address of principal executive offices) (Zip Code) (412) 762-1553 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practical date. Common Stock ($5 par value): 228,316,293 shares outstanding at July 31, 1995. 2 PART I--FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS The following consolidated financial information of PNC Bank Corp. and subsidiaries ("Corporation") is incorporated herein by reference to the 1995 Second Quarter Corporate Financial Review ("Financial Review") which is filed herewith as Exhibit 99.1. Page references are to such Financial Review.
FINANCIAL INFORMATION PAGE REFERENCE --------------------- -------------- Consolidated Balance Sheet as of June 30, 1995 and December 31, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Consolidated Statement of Income for the three months and six months ended June 30, 1995 and 1994 . . . . . . . . . . . . . . . . . . 24 Consolidated Statement of Cash Flows for the six months ended June 30, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . 25 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . 26-31
The statistical disclosure under the caption "Average Consolidated Balance Sheet and Net Interest Analysis" in the Financial Review at pages 32 and 33 is incorporated herein by reference. Certain other statistical disclosure is included below in Part I, Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations, as permitted by Guide 3, Statistical Disclosures by Bank Holding Companies. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information contained under the caption "Corporate Financial Review" in the Financial Review at pages 2 through 22 is incorporated herein by reference. 2 3 PART II--OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS A purported class action lawsuit was filed in July 1995 in the Superior Court of New Jersey, Middlesex County, against Midlantic Corporation ("Midlantic"), Midlantic's chief executive officer and its directors and the Corporation, on behalf of a purported class of persons who own securities of Midlantic. The amended complaint alleges, among other things, that the proposed merger announced on July 10, 1995, pursuant to which the Corporation will acquire Midlantic, is unfair to Midlantic's public shareholders and that consideration to be paid in the merger is grossly unfair, inadequate, and substantially below the fair or inherent value of Midlantic. The Corporation is alleged to have aided and abetted the breach of fiduciary duties by the other defendants. The lawsuit seeks, among other things: an injunction preliminarily and then permanently enjoining the merger; in the event the merger is consummated, rescission of the merger; an accounting for all profits realized and to be realized by defendants as a result of the merger; an order requiring defendants to permit a shareholders' committee to participate in any process undertaken in connection with the sale of Midlantic; and unquantified compensatory damages. Management believes that the allegations contained in the amended complaint are without merit and intends to defend them vigorously. ITEM 4. SUBMISSION OF MATTERS FOR A VOTE OF SECURITY HOLDERS An annual meeting of shareholders of the Corporation was held on April 25, 1995 for the purpose of electing seventeen directors. All seventeen nominees were elected. A summary of the votes cast with respect to the election of directors is filed herewith as Exhibit 99.2 and incorporated herein by reference. ITEM 5. OTHER INFORMATION As previously reported, on July 10, 1995, the Corporation entered into a definitive merger agreement with Midlantic, a regional bank holding company headquartered in Edison, New Jersey. The agreement, provides, among other things, for (i) the merger (the "Merger') of Midlantic with and into a wholly owned subsidiary of the Corporation and (ii) the exchange of each outstanding share of Midlantic common stock for 2.05 shares of the Corporation's common stock. The transaction is valued at approximately $3 billion and will be accounted for as a pooling of interests. The Merger is expected to be completed by year-end 1995, pending approval by shareholders of both companies and various regulatory agencies. Unaudited consolidated interim financial statements of Midlantic as of June 30, 1995 and for the six months ended June 30, 1995 and 1994 are incorporated herein by reference to Midlantic's Form 10-Q for the quarterly period ended June 30, 1995 (File No. 0-15870). FDIC ASSESSMENTS Since the deposits of the Corporation's banking subsidiaries are insured by the Federal Deposit Insurance Corporation (the "FDIC"), such banking subsidiaries are subject to FDIC insurance assessments. The amount of FDIC assessments paid by individual insured depository institutions is based on their relative risk as measured by regulatory capital ratios and certain other factors. Until recently, FDIC regulations provided for a minimum assessment of 23 cents per $100 of eligible deposits for the best-rated banks and savings associations, with a maximum of 31 cents per $100 of eligible deposits for the weakest-rated institutions. On August 8, 1995, the FDIC's Board of Directors voted to reduce the assessment rates paid by most banks and to keep existing assessment rates intact for savings associations. Under the new rate structure, the best-rated banks will pay 4 cents per $100 of deposits, while the weakest ones would continue to pay 31 cents per $100 of deposits. The new rate structure will apply from the first day of the month after which the Bank Insurance Fund (the "BIF") was recapitalized. Such recapitalization is expected to be confirmed by the FDIC in September 1995. Assuming that the BIF recapitalized during the second quarter of 1995, BIF members (including each of the Corporation's banking subsidiaries) that have overpaid their assessments based on the newly adopted premium rate can eaxpect to receive a refund of any overpayment plus interest. Under the old regulations, the rate assessed for each banking subsidiary was 23 cents per $100 of eligible deposits. Under the new rate structure, the rate assessed for such banks is 4 cents per $100 of eligible deposits. The assessment rate for any of the Corporation's savings association deposits insured under the Savings Association Insurance Fund ("SAIF") will continue to be 23 cents per $100 of eligible deposits. Congress and various governmental agencies are reported to be considering a numbaer of proposals to recapitalize the SAIF, including a one-time assessment of up to approximately $6.6 billion of all SAIF-insured deposits or the merger of the SAIF and the BIF. The Corporation cannot predict the likelihood of any of the proposals being adopted or the effect, if any, that the adoption of such proposals would have on the Corporation. DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN A Registration Statement on Form S-3 (No. 33-61083) was filed on July 17, 1995 to register 2,000,000 shares of the Corporation's common stock to be issued in connection with the Corporation's Dividend Reinvestment and Stock Purchase Plan. 3 4 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) The exhibits listed below are filed herewith: 11 Calculation of primary and fully diluted earnings per common share for the three months and six months ended June 30, 1995 and 1994, filed herewith. 12.1 Computation of Earnings to Fixed Charges for the six months ended June 30, 1995 and for each of the five years in the period ended December 31, 1994, filed herewith. 12.2 Computation of Earnings to Combined Fixed Charges and Preferred Stock Dividends for the six months ended June 30, 1995 and for each of the five years in the period ended December 31, 1994, filed herewith. 27 Financial Data Schedule, filed herewith. 99.1 1995 Second Quarter Corporate Financial Review as of and for the three months and six months ended June 30, 1995 and 1994. 99.2 Summary of votes cast at the Corporation's 1995 Annual Shareholders' Meeting, filed herewith. 99.3 Unaudited pro forma consolidated financial information giving effect to the proposed merger of Midlantic with and into a wholly-owned subsidiary of the Corporation, filed herewith. (b) The following Current Reports on Form 8-K were filed by the Corporation: A Current Report on Form 8-K dated as of April 17, 1995, was filed pursuant to Item 5 to report the Corporation's consolidated financial results for the three months ended March 31, 1995. A Current Report on Form 8-K dated as of July 10, 1995, was filed pursuant to Item 5 to report the execution of an Agreement and Plan of Reorganization dated as of July 10, 1995, by and among Midlantic, the Corporation and PNC Bancorp, Inc., a wholly-owned subsidiary of the Corporation and related matters. A Current Report on Form 8-K/A, Amendment No. 1 to the form 8-K dated as of July 10, 1995, was filed pursuant to Item 5 to report unaudited pro forma consolidated financial information giving effect to the proposed Merger of Midlantic with and into PNC Bancorp, Inc. Such report also included audited consolidated financial statements of Midlantic as of December 31, 1994 and 1993, and for each of the three years in the period ended December 31, 1994, and the unaudited consolidated financial statements of Midlantic as of March 31, 1995 and 1994. A Current Report on Form 8-K dated as of July 20, 1995, was filed pursuant to Item 5 to report the Corporation's consolidated financial results for the three months and six months ended June 30, 1995. 4 5 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PNC BANK CORP. (Registrant) Date: August 14, 1995 By /s/ Robert L. Haunschild ---------------------- Robert L. Haunschild Senior Vice President and Chief Financial Officer 5 6 EXHIBIT INDEX The following exhibits are filed herewith: 11 Calculation of Primary and Fully Diluted Earnings per Common Share. 12.1 Computation of Ratio of Earnings to Fixed Charges. 12.2 Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends. 27 Financial Data Schedule. 99.1 1995 Second Quarter Corporate Financial Review. 99.2 Summary of Votes Cast. 99.3 Pro forma consolidated financial information. 6 EX-11 2 PNC BANK 1 EXHIBIT 11 PNC BANK CORP. AND SUBSIDIARIES CALCULATION OF PRIMARY AND FULLY DILUTED EARNINGS PER COMMON SHARE
Three months ended Six months ended June 30 June 30 ----------------------- ---------------------- In thousands, except per share data 1995 1994 1995 1994 -------------------------------------------------------------------------------------------------------------------------- PRIMARY WEIGHTED AVERAGE COMMON SHARES OUTSTANDING Weighted average shares of common stock outstanding 228,607 235,320 230,000 235,093 Weighted average common shares to be issued using average market price and assuming exercise of stock options 1,571 1,921 1,388 1,881 Primary weighted average common shares outstanding 230,178 237,241 231,388 236,974 ========================================================== FULLY DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING Weighted average shares of common stock outstanding 228,607 235,320 230,000 235,093 Weighted average commons shares to be issued using average market price or period-end market price, whichever is higher, and assuming: Conversion of preferred stock Series A & B 199 223 204 232 Conversion of preferred stock Series C 614 684 632 694 Conversion of preferred stock Series D 826 864 829 869 Conversion of debentures 67 74 68 74 Exercise of stock options 1,647 1,921 1,679 1,925 ---------------------------------------------------------- Fully diluted weighted average common shares outstanding 231,960 239,086 233,412 238,887 ========================================================== PRIMARY EARNINGS PER COMMON SHARE Net income $136,988 $187,845 $262,639 $393,534 Less: Preferred dividends declared 381 410 774 829 ---------------------------------------------------------- Net income applicable to primary earnings per common share $136,607 $187,435 $261,865 $392,705 Primary earnings per common share $ .59 $ .79 $ 1.13 $ 1.66 ========================================================== FULLY DILUTED EARNINGS PER COMMON SHARE Net income $136,988 $187,845 $262,639 $393,534 Add: Interest expense on convertible debentures (net of tax) 13 13 24 24 ---------------------------------------------------------- Net income applicable to fully diluted earnings per common share $137,001 $187,858 $262,663 $393,559 Fully diluted earnings per common share $ .59 $ .79 $ 1.13 $ 1.65 --------------------------------------------------------------------------------------------------------------------------
7 EX-12.1 3 PNC BANK 1 EXHIBIT 12.1 PNC BANK CORP. AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
Year ended December 31 Six months ended -------------------------------------------------------------------- Dollars in thousands June 30, 1995 1994 1993 1992 1991 1990 --------------------------------------------------------------------------------------------------------------------------------- EARNINGS Income before taxes and cumulative effect of changes in accounting principles................ $ 384,667 $ 902,389 $1,116,612 $ 778,122 $ 548,201 $ 29,425 Fixed charges excluding interest on deposits.......................... 719,530 1,043,195 649,898 517,424 513,370 918,698 -------------------------------------------------------------------------------------- Subtotal............................ 1,104,197 1,945,584 1,766,510 1,295,546 1,061,571 948,123 Interest on deposits.................. 612,618 935,876 742,772 1,063,422 1,727,765 1,973,087 -------------------------------------------------------------------------------------- Total............................... $1,716,815 $2,881,460 $2,509,282 $2,358,968 $2,789,336 $2,921,210 ====================================================================================== FIXED CHARGES Interest on notes and debentures...... $ 288,544 $ 515,732 $ 265,353 $ 145,125 $ 95,207 $ 84,045 Interest on borrowed funds............ 418,867 499,252 362,995 352,162 398,779 816,448 Amortization of notes and debentures.. 391 1,346 967 970 584 538 Interest component of rentals ........ 11,728 26,865 20,583 19,167 18,800 17,667 -------------------------------------------------------------------------------------- Subtotal............................ 719,530 1,043,195 649,898 517,424 513,370 918,698 Interest on deposits.................. 612,618 935,876 742,772 1,063,422 1,727,765 1,973,087 -------------------------------------------------------------------------------------- Total............................... $1,332,148 $1,979,071 $1,392,670 $1,580,846 $2,241,135 $2,891,785 ====================================================================================== RATIO OF EARNINGS TO FIXED CHARGES Excluding interest on deposits...... 1.53x 1.87x 2.72x 2.50x 2.07x 1.03x Including interest on deposits...... 1.29 1.46 1.80 1.49 1.24 1.01 ---------------------------------------------------------------------------------------------------------------------------------
8 2 MIDLANTIC CORPORATION AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
Year ended December 31 Six months ended -------------------------------------------------------------------- Dollars in thousands June 30, 1995 1994 1993 1992 1991 1990 --------------------------------------------------------------------------------------------------------------------------------- EARNINGS Income before taxes and cumulative effect of changes in accounting principles................ $175,467 $304,005 $ 20,353 $ 9,872 $ (586,779) $ (295,839) Fixed charges excluding interest on deposits.......................... 40,350 61,378 54,330 65,430 100,220 202,249 -------------------------------------------------------------------------------------- Subtotal........................... $215,817 365,383 74,683 75,302 (486,559) (93,590) Interest on deposits................... 135,857 223,366 262,886 483,154 1,011,800 1,175,719 -------------------------------------------------------------------------------------- Total.............................. $351,674 $588,749 $337,569 $558,456 $ 525,241 $1,082,129 ====================================================================================== FIXED CHARGES Interest on notes and debentures....... $ 17,170 $ 34,453 $ 36,385 $ 41,517 $ 42,220 $ 42,178 Interest on borrowed funds............. 20,371 21,128 11,586 16,806 50,224 152,391 Amortization of notes and debentures... 125 415 451 535 535 534 Interest component of rentals.......... 2,684 5,382 5,908 6,572 7,241 7,146 -------------------------------------------------------------------------------------- Subtotal........................... 40,350 61,378 54,330 65,430 100,220 202,249 Interest on deposits................... 135,857 223,366 262,886 483,154 1,011,800 1,175,719 -------------------------------------------------------------------------------------- Total.............................. $176,207 $284,744 $317,216 $548,584 $1,112,020 $1,377,968 ====================================================================================== RATIO OF EARNINGS TO COMBINED FIXED CHARGES Excluding interest on deposits......... 5.35x 5.95x 1.37x 1.15x (4.85)x (.46)x Including interest on deposits......... 2.00 2.07 1.06 1.02 .47 .79 ---------------------------------------------------------------------------------------------------------------------------------
9 3 PNC BANK CORP. AND SUBSIDIARIES PRO FORMA COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES GIVING EFFECT TO MIDLANTIC MERGER
Year ended December 31 Six months ended -------------------------------------------------------------------- Dollars in thousands June 30, 1995 1994 1993 1992 1991 1990 --------------------------------------------------------------------------------------------------------------------------------- EARNINGS Income before taxes and cumulative effect of changes in accounting principles................ $ 560,134 $1,206,394 $1,136,965 $ 787,994 $ (38,578) $ (266,414) Fixed charges excluding interest on deposits.......................... 759,880 1,104,573 704,228 582,854 613,590 1,120,947 -------------------------------------------------------------------------------------- Subtotal........................... $1,320,014 2,310,967 1,841,193 1,370,848 575,012 854,533 Interest on deposits................... 748,475 1,159,242 1,005,658 1,546,576 2,739,565 3,148,806 -------------------------------------------------------------------------------------- Total.............................. $2,068,489 $3,470,209 $2,846,851 $2,917,424 $3,314,577 $4,003,339 ====================================================================================== FIXED CHARGES Interest on notes and debentures....... $ 305,714 $ 550,185 $ 301,738 $ 186,642 $ 137,427 $ 126,223 Interest on borrowed funds............. 439,238 520,380 374,581 368,968 449,003 968,839 Amortization of notes and debentures... 516 1,761 1,418 1,505 1,119 1,072 Interest component of rentals.......... 14,412 32,247 26,491 25,739 26,041 24,813 -------------------------------------------------------------------------------------- Subtotal........................... 759,880 1,104,573 704,228 582,854 613,590 1,120,947 Interest on deposits................... 748,475 1,159,242 1,005,658 1,546,576 2,739,565 3,148,806 -------------------------------------------------------------------------------------- Total.............................. $1,508,355 $2,263,815 $1,709,886 $2,129,430 $3,353,155 $4,269,753 ====================================================================================== RATIO OF EARNINGS TO FIXED CHARGES Excluding interest on deposits......... 1.74x 2.09x 2.63x 2.35x .94x .76x Including interest on deposits......... 1.37 1.53 1.67 1.37 .99 .94 ---------------------------------------------------------------------------------------------------------------------------------
The pro forma computation of ratio of earnings to fixed charges gives effect to the Merger to be accounted for as a pooling of interests. The financial information on the preceding pages presents (i) the historical computation of ratio of earnings to fixed charges of both the Corporation and Midlantic, for the six months ended June 30, 1995 and for each of the five years in the period ended December 31, 1994 and (ii) the computation of ratio of earnings to fixed charges, giving effect to the Merger as if it had occurred at the beginning of the earliest period presented. During 1995 and 1994, the Corporation and Midlantic completed or have pending, various other acquisitions which individually and in the aggregate are not "significant subsidiaries" in relation to the Corporation. Accordingly, pro forma financial information with respect to those acquisitions is not included herein. The pro forma consolidated financial information is intended for informational purposes and may not be indicative of the financial position or results that actually would have occurred had the transaction been consummated on the dates indicated, or which will be attained in the future. The pro forma consolidated financial information should be read in conjunction with the 1994 Annual Reports on Form 10-K and the Quarterly Reports on Form 10-Q for the quarterly period ended June 30, 1995 of the Corporation and Midlantic. 10 EX-12.2 4 PNC BANK 1 EXHIBIT 12.2 PNC BANK CORP. AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
Year ended December 31 Six months ended ------------------------------------------------------------------- Dollars in thousands June 30, 1995 1994 1993 1992 1991 1990 ----------------------------------------------------------------------------------------------------------------------------------- EARNINGS Income before taxes and cumulative effect of changes in accounting principles.. $ 384,667 $ 902,389 $1,116,612 $ 778,122 $ 548,201 $ 29,425 Fixed charges and preferred stock dividends excluding interest on deposits.............. 720,664 1,045,609 652,432 521,908 518,004 922,156 ----------------------------------------------------------------------------------- Subtotal................................... $1,105,331 1,947,998 1,769,044 1,300,030 1,066,205 951,581 Interest on deposits......................... 612,618 935,876 742,772 1,063,422 1,727,765 1,973,087 ----------------------------------------------------------------------------------- Total...................................... $1,717,949 $2,883,874 $2,511,816 $2,363,452 $2,793,970 $2,924,668 =================================================================================== FIXED CHARGES Interest on notes and debentures............. $ 288,544 $ 515,732 $ 265,353 $ 145,125 $ 95,207 $ 84,045 Interest on borrowed funds................... 418,867 499,252 362,995 352,162 398,779 816,448 Amortization of notes and debentures......... 391 1,346 967 970 584 538 Interest component of rentals................ 11,728 26,865 20,583 19,167 18,800 17,667 Preferred stock dividend requirements........ 1,134 2,414 2,534 4,484 4,634 3,458 ----------------------------------------------------------------------------------- Subtotal................................... 720,664 1,045,609 652,432 521,908 518,004 922,156 Interest on deposits......................... 612,618 935,876 742,772 1,063,422 1,727,765 1,973,087 ----------------------------------------------------------------------------------- Total...................................... $1,333,282 $1,981,485 $1,395,204 $1,585,330 $2,245,769 $2,895,243 =================================================================================== RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS Excluding interest on deposits.............. 1.53x 1.86x 2.71x 2.49x 2.06x 1.03x Including interest on deposits.............. 1.29 1.46 1.80 1.49 1.24 1.01 -----------------------------------------------------------------------------------------------------------------------------------
11 2 MIDLANTIC CORPORATION AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED DIVIDENDS
Year ended December 31 Six months ended -------------------------------------------------------------------- Dollars in thousands June 30, 1995 1994 1993 1992 1991 1990 --------------------------------------------------------------------------------------------------------------------------------- EARNINGS Income before taxes and cumulative effect of changes in accounting principles................ $175,467 $304,005 $ 20,353 $ 9,872 $ (586,779) $ (295,839) Fixed charges and preferred stock dividends excluding interest on deposits.......................... 43,139 66,955 59,907 70,994 105,996 208,025 -------------------------------------------------------------------------------------- Subtotal........................... $218,606 370,960 80,260 80,866 (480,783) (87,814) Interest on deposits................... 135,857 223,366 262,886 483,154 1,011,800 1,175,719 -------------------------------------------------------------------------------------- Total.............................. $354,463 $594,326 $343,146 $564,020 $ 531,017 $1,087,905 ====================================================================================== FIXED CHARGES Interest on notes and debentures....... $ 17,170 $ 34,453 $ 36,385 $ 41,517 $ 42,220 $ 42,178 Interest on borrowed funds............. 20,371 21,128 11,586 16,806 50,224 152,391 Amortization of notes and debentures... 125 415 451 535 535 534 Interest component of rentals.......... 2,684 5,382 5,908 6,572 7,241 7,146 Preferred stock dividend requirements.. 2,789 5,577 5,577 5,564 5,776 5,776 -------------------------------------------------------------------------------------- Subtotal........................... 43,139 66,955 59,907 70,994 105,996 208,025 Interest on deposits................... 135,857 223,366 262,886 483,154 1,011,800 1,175,719 -------------------------------------------------------------------------------------- Total.............................. $178,996 $290,321 $322,793 $554,148 $1,117,796 $1,383,744 ====================================================================================== RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS Excluding interest on deposits......... 5.07x 5.54x 1.34x 1.14x (4.54)x (.42)x Including interest on deposits......... 1.98 2.05 1.06 1.02 .48 .79 ---------------------------------------------------------------------------------------------------------------------------------
12 3 PNC BANK CORP. PRO FORMA COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED DIVIDENDS GIVING EFFECT TO MIDLANTIC MERGER
Year ended December 31 Six months ended -------------------------------------------------------------------- Dollars in thousands June 30, 1995 1994 1993 1992 1991 1990 --------------------------------------------------------------------------------------------------------------------------------- EARNINGS Income before taxes and cumulative effect of changes in accounting principles................ $ 560,134 $1,206,394 $1,136,965 $ 787,994 $ (38,578) $ (266,414) Fixed charges and preferred stock dividends excluding interest on deposits.......................... 763,803 1,112,564 712,339 592,902 624,000 1,130,181 -------------------------------------------------------------------------------------- Subtotal........................... 1,323,937 2,318,958 1,849,304 1,380,896 585,422 863,767 Interest on deposits................... 748,475 1,159,242 1,005,658 1,546,576 2,739,565 3,148,806 -------------------------------------------------------------------------------------- Total.............................. $2,072,412 $3,478,200 $2,854,962 $2,927,472 $3,324,987 $4,012,573 ====================================================================================== FIXED CHARGES Interest on notes and debentures....... $ 305,714 $ 550,185 $ 301,738 $ 186,642 $ 137,427 $ 126,223 Interest on borrowed funds............. 439,238 520,380 374,581 368,968 449,003 968,839 Amortization of notes and debentures... 516 1,761 1,418 1,505 1,119 1,072 Interest component of rentals.......... 14,412 32,247 26,491 25,739 26,041 24,813 Preferred stock dividend requirements.. 3,923 7,991 8,111 10,048 10,410 9,234 -------------------------------------------------------------------------------------- Subtotal........................... 763,803 1,112,564 712,339 592,902 624,000 1,130,181 Interest on deposits................... 748,475 1,159,242 1,005,658 1,546,576 2,739,565 3,148,806 -------------------------------------------------------------------------------------- Total.............................. $1,512,278 $2,271,806 $1,717,997 $2,139,478 $3,363,565 $4,278,987 ====================================================================================== RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS Excluding interest on deposits......... 1.73x 2.08x 2.60x 2.33x .94x .76x Including interest on deposits......... 1.37 1.53 1.66 1.37 .99 .94 ---------------------------------------------------------------------------------------------------------------------------------
The pro forma computation of ratio of earnings to combined fixed charges and preferred stock dividends gives effect to the Merger to be accounted for as a pooling of interests. The financial information on the preceding pages presents (i) the historical computation of ratio of earnings to fixed charges and preferred stock dividends of both the Corporation and Midlantic, for the six months ended June 30, 1995 and for each of the five years in the period ended December 31, 1994 and (ii) the computation of ratio of earnings to fixed charges and preferred stock dividends, giving effect to the Merger as if it had occurred at the beginning of the earliest period presented. During 1995 and 1994, the Corporation and Midlantic completed or have pending, various other acquisitions which individually and in the aggregate are not "significant subsidiaries" in relation to the Corporation. Accordingly, pro forma financial information with respect to those acquisitions is not included herein. The pro forma consolidated financial information is intended for informational purposes and may not be indicative of the financial position or results that actually would have occurred had the transaction been consummated on the dates indicated, or which will be attained in the future. The pro forma consolidated financial information should be read in conjunction with the 1994 Annual Reports on Form 10-K and the Quarterly Reports on Form 10-Q for the quarterly period ended June 30, 1995 of the Corporation and Midlantic. 13 EX-27 5 PNC BANK
9 This schedule contains summary financial information extracted from the consolidated financial information incorporated by reference to the 1995 Second Quarter Corporate Financial Review which is filed herewith as Exhibit 99.1 and is qualified in its entirety by reference to such financial information. 0000713676 PNC BANK 1,000,000 6-MOS DEC-31-1995 JUN-30-1995 2,612 0 0 0 2,447 16,658 16,434 36,690 (961) 62,763 35,290 12,386 1,656 8,995 1,182 0 1 3,253 62,763 1,445 579 43 2,067 613 1,321 746 0 9 864 385 263 0 0 263 1.13 1.13 2.65 301 151 7 0 1,002 (74) 32 961 961 0 0
EX-99.1 6 PNC BANK 1 Exhibit 99.1 l FINANCIAL HIGHLIGHTS l
Three months ended Six months ended June 30 June 30 ------------------------------------------------------------ 1995 1994 1995 1994 ----------------------------------------------------------------------------------------------------------------------- FINANCIAL PERFORMANCE (Dollars in thousands, except per share data) Net interest income (taxable-equivalent basis) $370,571 $501,363 $762,739 $1,007,167 Net income 136,988 187,845 262,639 393,534 Fully diluted earnings per common share .59 .79 1.13 1.65 Return on average assets .89% 1.26% .86% 1.34% Return on average common shareholders' equity 12.59 17.70 12.16 18.51 Net interest margin 2.58 3.58 2.65 3.63 After-tax profit margin 21.55 25.75 20.76 26.34 Overhead ratio 67.09 57.33 68.29 56.57 SELECTED AVERAGE BALANCES (In millions) Assets $61,918 $59,625 $61,806 $59,297 Earning assets 57,220 56,062 57,333 55,625 Loans, net of unearned income 36,191 32,531 35,755 32,278 Securities 19,858 21,859 20,378 21,550 Deposits 33,787 32,252 33,422 31,996 Borrowings 13,281 10,967 13,302 11,253 Shareholders' equity 4,369 4,268 4,363 4,299 -----------------------------------------------------------------------------------------------------------------------
JUNE 30 December 31 June 30 1995 1994 1994 ---------------------------------------------------------------------------------------------------------------------- SELECTED RATIOS Capital Risk-based Tier I 8.07% 8.62% 8.99% Total 11.63 11.45 11.88 Leverage 6.29 6.59 6.99 Common shareholders' equity to assets 7.04 6.82 6.77 Average common shareholders' equity to average assets 7.03 7.09 7.22 Asset quality Net charge-offs to average loans .23 .29 .32 Nonperforming loans to loans .84 .90 1.11 Nonperforming assets to loans and foreclosed assets 1.21 1.25 1.55 Nonperforming assets to assets .71 .69 .85 Allowance for credit losses to loans 2.62 2.83 2.97 Allowance for credit losses to nonperforming loans 311.53 314.17 267.09 Book value per common share As reported $19.37 $18.76 $18.37 Excluding net unrealized securities losses 19.55 19.26 19.02 ----------------------------------------------------------------------------------------------------------------------
l TABLE OF CONTENTS l 2 Corporate Financial Review 23 Consolidated Financial Statements 32 Statistical Information 34 Corporate Information 2 l CORPORATE FINANCIAL REVIEW l THE FOLLOWING CORPORATE FINANCIAL REVIEW SHOULD BE READ IN CONJUNCTION WITH THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS OF PNC BANK CORP. AND SUBSIDIARIES ("CORPORATION") INCLUDED HEREIN AND THE CORPORATE FINANCIAL REVIEW AND AUDITED CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN THE CORPORATION'S 1994 ANNUAL REPORT. overview --------------------------------------------------------------- Net income for the first quarter of 1995 was $262.6 million, or $1.13 per fully diluted share, compared with $393.5 million, or $1.65 per share, for the first six months of 1994. Return on assets and return on common shareholders' equity were .86 percent and 12.16 percent, respectively, in the first six months of 1995 compared with 1.34 percent and 18.51 percent a year ago. The results for the first six months of 1995 reflect the impact of a strategic realignment of the Corporation's balance sheet to reduce investment and wholesale funding activities. In the first six months of 1995, the nation's real gross domestic product grew at a preliminary annual rate of 1.6 percent and consumer price inflation was estimated to be approximately 3 percent, according to the United States Departments of Commerce and Labor, respectively. In July 1995, after seven rate increases since February 1994, the Federal Reserve lowered the federal funds rate by 25 basis points in response to indications of less inflationary pressures and a slower rate of growth in the economy. Management expects such economic conditions to continue throughout 1995, and accordingly expects short-term rates to decline modestly. Should interest rates be higher than management's expectations or a relatively flat yield curve persists, the Corporation's financial results would likely be adversely affected. mergers and acquisitions --------------------------------------------------------------- In July 1995, the Corporation entered into a definitive merger agreement with Midlantic Corporation ("Midlantic"), a regional bank holding company headquartered in Edison, New Jersey. At June 30, 1995, Midlantic had assets and deposits of $13.7 billion and $10.9 billion, respectively. Under terms of the agreement, the Corporation will exchange 2.05 shares of its common stock for each share of Midlantic common stock. Based on share data as of June 30, 1995, the Corporation expects to issue 110.8 million shares of its common stock to consummate the merger. In addition, the Corporation and Midlantic have granted each other options to purchase up to 19.9 percent of each other's outstanding common stock, under certain circumstances. The transaction is valued at approximately $3 billion and will be accounted for as a pooling of interests. The merger is targeted to be completed by year-end 1995, pending approval by shareholders of both companies and various regulatory agencies. In March 1995, the Corporation announced a definitive agreement to acquire Chemical Holdings, Inc., and its wholly-owned subsidiary Chemical Bank New Jersey ("Chemical"). The transaction includes approximately $3.2 billion of assets and $2.7 billion of retail deposits, and 82 branches in southern and central New Jersey. The purchase price will approximate $490 million and the transaction will be accounted for under the purchase method. The Corporation expects to complete this transaction in the fourth quarter of 1995. Upon completion of the Midlantic and Chemical transactions, the Corporation expects to have the second largest deposit market share in both the New Jersey and greater Philadelphia, Pennsylvania regions. The in-market nature of the transactions is expected to generate substantial economies by reducing costs associated with overlapping and duplicative operations and to enhance revenue growth through the marketing of the Corporation's products and services to an expanded customer base. The Corporation's balance sheet is also expected to be enhanced by the addition of a large and stable base of customer deposits. In February 1995, the Corporation completed the acquisition of BlackRock Financial Management L.P. ("BlackRock"), a New York-based, fixed-income investment management firm with approximately $25 billion in assets under management at closing. The transaction was accounted for under the purchase method and the Corporation paid $71 million in cash and issued $169 million of unsecured notes. In the first quarter of 1995, the Corporation acquired Indian River Federal Savings Bank, Vero Beach, Florida, and Brentwood Financial Corporation, Cincinnati, Ohio, for a total of $33 million in cash. The acquisitions added assets and deposits of approximately $175 million and $140 million, respectively. During 1994, the Corporation completed the acquisitions of United Federal Bancorp, Inc., State College, Pennsylvania, and First Eastern Corp., Wilkes-Barre, Pennsylvania. The acquisitions added assets and deposits of $2.8 billion and $2.4 billion, respectively. In addition, in June 1994, the Corporation purchased a $10 billion residential mortgage servicing portfolio from the Associates Corporation of North America. 2 3 l CORPORATE FINANCIAL REVIEW l income statement review --------------------------------------------------------------- INCOME STATEMENT HIGHLIGHTS
Six months ended June 30 Change Dollars in ----------------- millions 1995 1994 Amount Percent --------------------------------------------------------------- Net interest income (taxable-equivalent basis) $763 $1,007 $(244) (24.3)% Provision for credit losses 50 (50) (100.0) Noninterest income 502 487 15 3.2 Noninterest expense 864 845 19 2.2 Net income 263 394 (131) (33.3) ---------------------------------------------------------------
NET INTEREST INCOME AND NET INTEREST MARGIN l On a fully taxable-equivalent basis, net interest income for the first six months of 1995 decreased $244.4 million, compared with the first six months of 1994. A $1.7 billion increase in average earning assets was more than offset by a narrower net interest margin. NET INTEREST INCOME
Six months ended June 30 Taxable-equivalent basis Change ------------------- Dollars in millions 1995 1994 Amount Percent --------------------------------------------------------------- Net interest income before swaps and caps Interest income $2,110 $1,761 $ 349 19.8% Loan fees 36 35 1 2.9 Taxable-equivalent adjustment 16 17 (1) (5.9) ------------------------------- Total interest income 2,162 1,813 349 19.2 Interest expense 1,308 902 406 45.0 ------------------------------- Net interest income before swaps and caps 854 911 (57) (6.3) Effect of swaps and caps on Interest income (79) 34 (113) (332.4) Interest expense 12 (62) 74 119.4 ------------------------------- Total swaps and caps (91) 96 (187) (194.8) ------------------------------- Net interest income $ 763 $1,007 $(244) (24.3)% ---------------------------------------------------------------
VOLUME/RATE ANALYSIS
Six months ended Increase (Decrease) June 30 Due to Changes in 1995 versus 1994 ------------------------ Rate/ In millions Volume Rate Volume TOTAL --------------------------------------------------------------- Interest income $55 $ 273 $21 $ 349 Interest expense 41 343 22 406 Interest rate swaps and caps 3 (193) 3 (187) --------- Net interest income 31 (270) (5) $(244) ---------------------------------------------------------------
Net interest income and net interest margin declines reflect the Corporation's strategic actions begun in the latter half of 1994 to reposition the balance sheet by reducing wholesale funding and investment activities, and the cost of actions taken to reduce interest rate sensitivity. These factors are expected to continue to adversely impact net interest income and net interest margin in 1995 compared with the prior year. However, management expects net interest income and margin to stabilize in the third quarter and increase in subsequent quarters. NET INTEREST MARGIN
Six months ended June 30 Basis Point Taxable-equivalent basis 1995 1994 Change --------------------------------------------------------------- Interest rate spread before swaps and caps Book-basis yield on earning assets 7.36% 6.36% 100 Effect of loan fees .12 .13 (1) Taxable-equivalent adjustment .06 .06 ----------------------------------- Taxable-equivalent yield on earning assets 7.54 6.55 99 Rate on interest-bearing liabilities 5.25 3.80 145 ----------------------------------- Interest rate spread before swaps and caps 2.29 2.75 (46) Effect of Noninterest-bearing sources .68 .50 18 Interest rate swaps and caps on Interest income (.27) .12 (39) Interest expense .05 (.26) 31 ----------------------------------- Total swaps and caps (.32) .38 (70) ----------------------------------- Net interest margin 2.65% 3.63% (98) ---------------------------------------------------------------
3 4 l CORPORATE FINANCIAL REVIEW l PROVISION FOR CREDIT LOSSES l The Corporation did not record a provision for credit losses in the first six months of 1995 compared with $50 million in the first six months of 1994. Stronger economic conditions combined with management's ongoing attention to asset quality resulted in a stable level of nonperforming assets and lower net charge-offs. Based on the current risk profile of the loan portfolio and assuming economic trends continue, management does not expect to record a provision for credit losses during the remainder of 1995. Should the risk profile of the loan portfolio or the economy deteriorate, asset quality may be adversely impacted and a provision for credit losses may be required. NONINTEREST INCOME l Noninterest income before securities transactions increased 8.0 percent to $493.1 million in the first six months of 1995 compared with the prior year period. Excluding securities transactions, noninterest income was 39.3 percent of total revenue in the first six months of 1995 compared with 31.2 percent a year earlier. Net securities gains totaled $9.0 million in the first six months of 1995 and $30.3 million in the year-earlier period. NONINTEREST INCOME
Six months ended June 30 Change --------------------- Dollars in thousands 1995 1994 Amount Percent -------------------------------------------------------------------------------------------------------------------------- Investment management and trust Trust $113,196 $ 98,805 $14,391 14.6% Mutual funds 63,453 47,656 15,797 33.1 ------------------------------------------ Total investment management and trust 176,649 146,461 30,188 20.6 Service charges, fees and commissions Deposit account and corporate services 78,338 82,225 (3,887) (4.7) Credit card and merchant services 24,269 26,797 (2,528) (9.4) Brokerage 20,061 17,223 2,838 16.5 Corporate finance 22,252 21,227 1,025 4.8 Other services 35,488 32,569 2,919 9.0 ------------------------------------------ Total service charges, fees and commissions 180,408 180,041 367 .2 Mortgage banking Servicing 60,884 60,702 182 .3 Sale of servicing 21,930 16,590 5,340 32.2 Marketing 12,506 3,071 9,435 307.2 ------------------------------------------ Total mortgage banking 95,320 80,363 14,957 18.6 Other 40,734 49,619 (8,885) (17.9) ------------------------------------------ Total noninterest income before securities transactions 493,111 456,484 36,627 8.0 Net securities gains 9,036 30,307 (21,271) (70.2) ------------------------------------------ Total $502,147 $486,791 $15,356 3.2% --------------------------------------------------------------------------------------------------------------------------
4 5 l CORPORATE FINANCIAL REVIEW l INVESTMENT MANAGEMENT AND TRUST
Assets at June 30 -------------------------------------------------------------------------- Revenue for the Six months Discretionary Nondiscretionary Total ended June 30 ---------------------- ------------------------- ------------------------- ------------------- In millions 1995 1994 1995 1994 1995 1994 1995 1994 ----------------------------------------------------------------------------------------------------------------------------- Personal and charitable $25,039 $23,853 $ 12,220 $ 9,560 $ 37,259 $ 33,413 $ 76 $ 73 Institutional 19,513 6,535 34,984 70,978 54,497 77,513 37 25 --------------------------------------------------------------------------------------------------- Total trust 44,552 30,388 47,204 80,538 91,756 110,926 113 98 Mutual funds 39,546 23,164 102,257 55,463 141,803 78,627 64 48 --------------------------------------------------------------------------------------------------- Total $84,098 $53,552 $149,461 $136,001 $233,559 $189,553 $177 $146 -----------------------------------------------------------------------------------------------------------------------------
Investment management and trust revenue increased $30.2 million, or 20.6 percent, to $176.6 million in the first six months of 1995 compared with the prior-year period. The BlackRock acquisition, which was completed on February 28, 1995, contributed approximately $22.7 million of the increase with the remainder attributable to new business and an increase in the value of managed assets. Compared with a year ago, total trust and mutual funds assets increased $44.0 billion to $233.6 billion at June 30, 1995. BlackRock added approximately $25 billion in discretionary assets, $15 billion of which are institutional funds and the remainder are mutual funds. At June 30, 1995, the composition of total discretionary assets was 46 percent fixed-income, 31 percent money market, 22 percent equity and one percent other assets. The PNC Family of Funds is included in the discretionary mutual funds category. Assets in these funds totaled $6.8 billion at June 30, 1995 compared with $4.3 billion a year ago. Service charges, fees and commissions remained relatively flat year-to-year. Deposit account and corporate services declined in the comparison due to lower business volumes. The decline in credit card and merchant services reflects the impact of the Corporation's agreements with Card Issuer Program Management Corporation and First Data Resources Inc. to provide certain administrative and marketing services and data processing, customer support and related services, respectively, for the Corporation's credit card business. Fee income and operating expenses related to the credit card business are each expected to be reduced by approximately $15 million during the remainder of 1995 as a result of this relationship. Brokerage, corporate finance, and other services fee income increased in the comparison due to higher business volumes and an increase in consumer-related fees, primarily related to automated teller machines. During the first six months of 1995, mortgage banking income increased $15.0 million to $95.3 million primarily due to marketing gains. The increase in marketing gains was due to originated mortgage servicing rights totaling $12.1 million. During the second quarter of 1995, the Corporation adopted Statement of Financial Accounting Standards ("SFAS") No. 122, "Accounting for Mortgage Servicing Rights," which provides for the immediate recognition of the value of originated mortgage servicing rights retained on loans sold. MORTGAGE SERVICING PORTFOLIO
In millions 1995 1994 ------------------------------------------------------------ Balance at January 1 $40,966 $35,527 Originations 2,309 3,943 Acquisitions 64 10,866 Repayments (1,975) (3,956) Sales (2,726) (1,959) --------------------------- Balance at June 30 $38,638 $44,421 ------------------------------------------------------------
During the first six months of 1995, the Corporation funded $2.3 billion of residential mortgages, approximately 90 percent of which represented new financing. PNC Mortgage directly originated 69 percent of total volume in 1995. At June 30, 1995, the Corporation's mortgage servicing portfolio totaled $38.6 billion, including $26.7 billion serviced for others. The servicing portfolio had a weighted-average coupon rate of 7.92 percent, an unamortized carrying value of $298 million and an estimated fair value of $461 million. The value of the mortgage servicing portfolio and capitalized servicing rights is affected, in part, by the level of interest rates. 5 6 l CORPORATE FINANCIAL REVIEW l Should interest rates decline and the rate of prepayments increase, these values may be adversely impacted. Other noninterest income decreased $8.9 million primarily due to lower venture capital income and lower gains from sales of assets. NONINTEREST EXPENSE l Noninterest expense increased 2.2 percent to $863.8 million in the first six months of 1995 primarily due to acquisitions. Excluding acquisitions, noninterest expense decreased 4.5 percent in the comparison, reflecting the Corporation's continued emphasis on developing alternative lower-cost delivery systems and reducing the costs of traditional banking operations. NONINTEREST EXPENSE
Six months ended June 30 Change Dollars in --------------- thousands 1995 1994 Amount Percent --------------------------------------------------------------- Compensation $330,207 $ 329,402 $ 805 .2% Employee benefits 76,241 81,469 (5,228) (6.4) ----------------------------- Total staff expense 406,448 410,871 (4,423) (1.1) Net occupancy 69,712 66,562 3,150 4.7 Equipment 67,047 65,580 1,467 2.2 Amortization of intangible assets 43,186 37,830 5,356 14.2 Federal deposit insurance 36,649 36,339 310 .9 Taxes other than income 24,405 21,878 2,527 11.6 Other 216,335 206,081 10,254 5.0 ----------------------------- Total $863,782 $ 845,141 $18,641 2.2% ---------------------------------------------------------------
The overhead ratio was 68.3 percent in the first six months of 1995 compared with 56.6 percent in the year-earlier period. The higher overhead ratio primarily reflects the impact of lower net interest income. Staff expense decreased 1.1 percent in the year-to-year comparison primarily due to lower staff levels. Average full-time equivalent employees decreased to approximately 20,200 for the first six months of 1995 compared with approximately 20,900 a year ago. The impact of approximately 1,300 employees added from acquisitions was more than offset by lower staffing levels, primarily in the Consumer Banking line of business. The Mass Market sector experienced reductions due to centralization and branch rationalization initiatives. Mortgage Banking benefitted from the consolidation of operations centers and efficiencies gained from the use of technology. Pension and postretirement benefit expense declined $4.2 million due to lower staff levels and a higher discount rate used to estimate pension obligations. Amortization of intangibles increased $5.4 million reflecting additional goodwill from recent acquisitions. The increase in the remaining noninterest expense categories was primarily due to acquisitions. In connection with the closing in the fourth quarter of 1995 of its pending merger with Midlantic, the Corporation expects to record merger related and nonrecurring charges of approximately $130 million. Such charges are related to anticipated staff reductions, back office, operations, and facilities consolidations and expenses to complete the merger. 6 7 l CORPORATE FINANCIAL REVIEW l line of business results --------------------------------------------------------------- The management accounting process uses various methods of balance sheet and income statement allocations, transfers and assignments to evaluate the performance of various business units. Unlike financial accounting, there is no comprehensive, authoritative body of guidance for management accounting equivalent to generally accepted accounting principles. The following information is based on management accounting practices which conform to and support the management structure of the Corporation and is not necessarily comparable with similar information for any other financial services institution. Designations, assignments, and allocations may change from time to time as the management accounting system is enhanced and business or product lines change. In 1995, the Corporation realigned its line of business management structure along customer segments. The principal change was segregating the trust business, previously managed separately, into the corporate and consumer banking organizations, as applicable. In addition, consistent with the Corporation's strategic focus and balance sheet realignment, asset/liability management has been redefined as a support function for the core lines of business. Results for the first six months of 1994 are presented on a basis consistent with this new structure. For management reporting purposes, the Corporation has designated three lines of business: Corporate Banking, Consumer Banking, and Asset Management. The financial results presented in this section reflect each line of business as if it operated on a stand-alone basis. Securities or borrowings, and related interest rate spread, have been assigned to each line of business based on its net asset or liability position. Consumer Banking and Asset Management were net generators of funds and, accordingly, were assigned securities, while Corporate Banking received an assignment of borrowings as a net asset generator. An assignment of securities is accompanied by an assignment of equity in accordance with the methodology described below. The interest rate spread on the remaining securities, the impact of financial derivatives, and securities transactions are excluded from line of business results and are reported separately in asset/liability management activities. Capital is assigned to each business unit based on management's assessment of inherent risks. Equity levels at independent companies that provide products and services similar to those provided by the respective business unit are also considered. Capital assignments are not equivalent to risk-based capital guidelines and the total amount assigned may vary from consolidated shareholders' equity. LINE OF BUSINESS HIGHLIGHTS
Return on Average Assigned Six months ended June 30 Balance Sheet Revenue Earnings Equity -------------------------------------------------------------------------------- Dollars in millions 1995 1994 1995 1994 1995 1994 1995 1994 ---------------------------------------------------------------------------------------------------------------------------- Corporate Banking Large Corporate $ 3,894 $ 3,778 $ 72 $ 91 $ 25 $ 39 11% 18% Middle Market 11,224 10,224 263 266 81 115 11 18 Equity Management 185 175 13 21 7 12 26 50 ------------------------------------------------------------ Total Corporate Banking 15,303 14,177 348 378 113 166 12 19 ------------------------------------------------------------ Consumer Banking Private Banking 1,029 842 116 105 20 18 28 29 Mass Market 25,627 24,273 602 566 110 107 16 17 Mortgage Banking 11,250 9,963 183 191 25 25 10 11 ------------------------------------------------------------ Total Consumer Banking 37,906 35,078 901 862 155 150 15 16 ------------------------------------------------------------ Asset Management 276 273 83 64 20 15 53 57 ------------------------------------------------------------ Total lines of business 53,485 49,528 1,332 1,304 288 331 14 18 Asset/liability management activities 8,084 9,016 (58) 180 (43) 113 Unallocated provision 19 (41) Other unallocated items 237 753 (9) 10 (1) (9) ------------------------------------------------------------ Total $61,806 $59,297 $1,265 $1,494 $263 $394 12% 18% ---------------------------------------------------------------------------------------------------------------------------------
7 8 l CORPORATE FINANCIAL REVIEW l Total earnings contributed by the lines of business were $288 million in the first six months of 1995 compared with $331 million in the first six months of 1994. The decline primarily resulted from an increase in Corporate Banking's allocated provision for credit losses which was negative in the prior-year period. Line of business earnings differed from reported consolidated net income in both periods due to asset/liability management activities, differences between specific reserve allocations to the lines of business and the consolidated provision for credit losses, and certain unallocated revenues and expenses. The decline in earnings from asset/liability management activities was primarily due to the impact of interest rate swaps and caps and lower net securities gains. CORPORATE BANKING l Corporate Banking provides traditional financing, liquidity and treasury management, corporate and employee benefit trust, capital markets, direct investment and other financial services to businesses and governmental entities. It serves customers within the Corporation's primary markets as well as from a network of offices located in major U.S. cities. Corporate Banking includes: Large Corporate--customers having annual sales of more than $250 million; Middle Market--customers with annual sales of $5 million to $250 million and those in certain specialized industries such as real estate, communications, health care, natural resources, leasing and automobile dealer finance; and Equity Management--private equity investments. Corporate Banking provided 39 percent of line of business earnings in the first six months of 1995 compared with 50 percent in the first six months of 1994. Large Corporate earnings declined in 1995 as the benefit of an increase in average loans was more than offset by the impact of narrower spreads in the loan portfolio and a $15 million pretax benefit a year ago from resolution of a problem asset. Middle Market earnings declined primarily due to the allocation of provision for credit losses. A modest provision was allocated in 1995 compared with a negative provision in 1994 resulting from a significant reduction of problem assets. Asset quality continued to improve in the current period, however the impact was less and was offset by a provision allocation associated with loan growth. CONSUMER BANKING l Consumer Banking provides lending, deposit, personal trust, brokerage and investment, payment system access and other financial services to consumers and small businesses. It provides services through a network of community banking and mortgage offices, alternative delivery systems such as ATMs and telephone banking, and regional banking centers offering a wide-array of products at a single point of contact. Consumer Banking includes: Private Banking--affluent consumers and charitable organizations with specialized banking requirements; Mass Market--small business customers having annual sales of up to $5 million and all other consumers who use traditional branch and direct banking services; and Mortgage Banking--residential and loan origination, acquisition and servicing activities and residential mortgage loans held in portfolio. The earnings contribution from Consumer Banking increased to 54 percent in the first six months of 1995 from 45 percent a year ago. Earnings from Private Banking increased in the first six months of 1995 as the benefit from loan growth, new trust business and higher brokerage fees. Mass Market earnings benefitted from an increase in average loans and deposits as a result of acquisitions and a greater assigned value for core deposits in the higher interest rate environment in 1995. Mortgage Banking continued to operate in an environment characterized by significantly reduced volumes. Earnings remained flat year to year as the benefit of an increase in portfolio loans, gains from originated mortgage servicing rights and higher gains from sales of servicing were offset by the impact of lower originations and narrower spreads in the loan portfolio. ASSET MANAGEMENT l Asset Management provides trust and mutual fund investment management, strategy, research, and asset servicing for institutional and family wealth customers. It serves customers through one unified money management organization. Asset Management contributed 7 percent of line of business earnings in the first six months of 1995 compared with 5 percent a year ago. Asset Management earnings increased due to the impact of BlackRock, new business and an increase in the level of managed assets. 8 9 l CORPORATE FINANCIAL REVIEW l balance sheet review ---------------------------------------------------------------- AVERAGE ASSETS
Six months ended June 30 In millions 1995 1994 ------------------------------------------------------------ Assets $61,806 $59,297 Earning assets 57,333 55,625 Loans, net of unearned income 35,755 32,278 Securities 20,378 21,550 ------------------------------------------------------------
LOANS l Average loans for the first six months of 1995 increased 10.8 percent over the comparable period in 1994, to $35.8 billion. Acquisitions increased the loan portfolio primarily in the Consumer Banking line of business. Excluding the impact of acquisitions, average loans increased 7.3 percent, of which the majority was in residential mortgages. The proportion of average loans to average earning assets increased to 62.4 percent in the first six months of 1995 compared with 58.0 percent a year ago. Management expects this ratio to increase further in 1995 as a result of loan growth and a decline in the securities portfolio. The Corporation manages credit risk associated with its lending activities through underwriting policies and procedures, portfolio diversification and loan monitoring practices. The composition of loan outstandings did not change significantly since year-end 1994. LOAN PORTFOLIO COMPOSITION
JUNE 30 December 31 Percent of gross loans 1995 1994 -------------------------------------------------------------- Commercial 34.7% 34.9% Real estate project 4.6 4.6 Real estate mortgage Residential 28.2 26.0 Commercial 3.2 3.5 Total real estate mortgage 31.4 29.5 Consumer 24.6 25.8 Other 4.7 5.2 ---------------------------- Total 100.0% 100.0% --------------------------------------------------------------
At June 30, 1995, loan outstandings and net unfunded commitments increased $3.1 billion, or 5.0 percent, since year-end 1994. Unfunded commitments are net of participations and syndications. In addition, the Corporation had letters of credit outstanding totaling $4.0 billion and $4.3 billion at June 30, 1995 and December 31, 1994, respectively, primarily consisting of standby letters of credit. Total commercial loan outstandings increased $342 million from year-end 1994, partially offset by a reduction in certain low-spread loans. Growth in commercial unfunded commitments was broad based and increased $1.4 billion, or 7.4 percent, in the comparison. Total real estate project exposure increased slightly since year-end 1994. Real estate projects primarily consist of retail and office, multi-family, hotel/motel and residential projects. Approximately 70 percent of total outstandings are located in the Corporation's primary markets. The remaining projects are geographically dispersed throughout the United States. Real estate mortgage outstandings increased 10.0 percent primarily due to acquisitions and portfolio management strategies. As part of its overall asset/liability management strategy, the Corporation retains certain originated residential mortgage products in the loan portfolio. The remainder of its originations are securitized and sold. Consumer loan outstandings totaled $9.1 billion at June 30, 1995 compared with $9.2 billion at year-end 1994. The decline was primarily due to a planned reduction in indirect automobile loans. 9 10 l CORPORATE FINANCIAL REVIEW l LOANS
JUNE 30, 1995 December 31, 1994 ----------------------------------------------------------------- NET UNFUNDED Net Unfunded In millions OUTSTANDINGS COMMITMENTS Outstandings Commitments -------------------------------------------------------------------------------------------------------------------------- Commercial Manufacturing $ 2,473 $ 5,991 $ 2,434 $ 6,011 Retail/Wholesale 2,342 2,368 2,148 2,123 Service providers 1,589 1,643 1,534 1,384 Communications Cable 695 191 691 215 Telephone/cellular 330 1,114 285 923 Other 191 213 125 93 ----------------------------------------------------------------- Total communications 1,216 1,518 1,101 1,231 Financial services 552 2,742 691 2,502 Real estate related 677 281 610 180 Health care 658 862 606 958 Public utilities 204 1,094 254 1,079 Other 3,076 3,809 3,067 3,447 ----------------------------------------------------------------- Total commercial 12,787 20,308 12,445 18,915 Real estate project Construction and development 467 258 394 254 Medium-term financings 1,240 43 1,234 56 ----------------------------------------------------------------- Total real estate project 1,707 301 1,628 310 Real estate mortgage Residential 10,406 1,192 9,283 769 Commercial 1,194 13 1,261 19 ----------------------------------------------------------------- Total real estate mortgage 11,600 1,205 10,544 788 Consumer Home equity 2,602 1,638 2,625 1,761 Automobile 2,385 2,534 Student 1,316 6 1,258 30 Credit card 849 3,685 817 3,423 Other 1,941 242 1,953 330 ----------------------------------------------------------------- Total consumer 9,093 5,571 9,187 5,544 Other 1,729 880 1,843 917 Unearned income (226) (240) ----------------------------------------------------------------- Total, net of unearned income $36,690 $28,265 $35,407 $26,474 --------------------------------------------------------------------------------------------------------------------------
10 11 l CORPORATE FINANCIAL REVIEW l SECURITIES l The securities portfolio declined $1.8 billion from year-end 1994 to $19.1 billion at June 30, 1995. Securities represented 33.5 percent of earning assets at June 30, 1995 compared with 36.3 percent at December 31, 1994 and 39.0 percent a year ago. As part of the Corporation's strategic balance sheet realignment, management expects the securities portfolio to approximate 30 percent of earning assets by the end of 1995, excluding the impact of pending acquisitions. At June 30, 1995, the securities portfolio included $11.2 billion and $1.9 million of collateralized mortgage obligations and mortgage-backed securities, respectively. The characteristics of these investments include principal guarantees, primarily by U.S. Government agencies, marketability, and availability as collateral for additional liquidity. The expected lives of mortgage-related securities can vary as a result of changes in interest rates. In a declining rate environment, prepayments may accelerate and, therefore, shorten expected lives. The Corporation monitors the impact of this risk through the use of an income simulation model as part of the asset/liability management process. Other U.S. Government agencies securities and asset-backed private placements represent AAA-rated, variable-rate instruments. The interest rates on these instruments float with various indices and are limited by periodic and maximum caps. These securities have an initial specified term at the end of which the maturity may be extended or called at the option of the issuer. Other debt securities consist primarily of private label collateralized mortgage obligations.
SECURITIES JUNE 30, 1995 December 31, 1994 -------------------------------------------------------------------------------------------- AMORTIZED UNREALIZED Amortized Unrealized ------------------ ------------------- In millions COST GAINS LOSSES FAIR VALUE Cost Gains Losses Fair Value ------------------------------------------------------------------------------------------------------------------------------ Investment securities Debt securities U.S. Treasury $ 1,796 $29 $ 1,825 $ 1,794 $ 93 $ 1,701 U.S. Government agencies and corporations Mortgage-related 10,354 13 $286 10,081 10,920 1,025 9,895 Other 1,000 1 1,001 1,000 28 972 State and municipal 337 21 1 357 348 $12 2 358 Asset-backed private placements 1,597 12 1,609 1,597 33 1,564 Other debt Mortgage-related 677 1 13 665 726 43 683 Other 591 2 589 769 20 749 Other 306 1 307 310 1 311 -------------------------------------------------------------------------------------------- Total $16,658 $78 $302 $16,434 $17,464 $13 $1,244 $16,233 -------------------------------------------------------------------------------------------- Securities available for sale Debt securities U.S. Treasury $ 94 $ 1 $ 95 $ 401 $ 8 $ 393 U.S. Government agencies and corporations Mortgage-related 1,437 20 $10 1,447 2,161 69 2,092 Other 25 2 23 25 4 21 Other debt Mortgage-related 670 1 2 669 749 17 732 Other 108 1 109 117 $2 119 Corporate stocks and other 104 2 2 104 105 1 6 100 ------------------------------------------------------------------------------------------- Total $2,438 $25 $16 $2,447 $3,558 $3 $104 $3,457 ------------------------------------------------------------------------------------------------------------------------------
11 12 l CORPORATE FINANCIAL REVIEW l EXPECTED MATURITY DISTRIBUTION OF SECURITIES
Weighted 1997 and Average Dollars in millions 1995 1996 beyond Total Life ----------------------------------------------------------------------------------------------------------------------------- Investment securities Debt securities U.S. Treasury $ 1,796 $ 1,796 3.6 yr U.S. Government agencies and corporations Mortgage-related $ 1,184 $ 2,242 6,928 10,354 2.6 Other 1,000 1,000 1.1 State and municipal 10 22 305 337 8.9 Asset-backed private placements 1,347 250 1,597 1.2 Other debt Mortgage-related 65 144 468 677 2.9 Other 163 237 191 591 1.3 Other 306 306 NM ------------------------------------------------------ Total investment securities 1,422 4,992 10,244 16,658 2.6 Securities available for sale Debt securities U.S. Treasury 51 3 40 94 2.3 U.S. Government agencies and corporations Mortgage-related 178 261 998 1,437 5.6 Other 5 20 25 2.6 Other debt Mortgage-related 83 151 436 670 3.4 Other 3 4 101 108 7.0 Corporate stocks and other 104 104 NM ------------------------------------------------------ Total securities available for sale 315 424 1,699 2,438 4.9 ------------------------------------------------------ Total $ 1,737 $ 5,416 $11,943 $19,096 2.9 yr ------------------------------------------------------ Percent of total 9.1% 28.4% 62.5% 100.0% ------------------------------------------------------ Securities with interest rates that are Fixed $ 1,495 $ 2,693 $10,394 $14,582 Variable 242 2,723 1,549 4,514 -----------------------------------------------------------------------------------------------------------------------------
NM--not meaningful The expected weighted average life of the securities portfolio was 2 years and eleven months at June 30, 1995 compared with 4 years at year-end 1994. Mortgage-related securities and other instruments are distributed based on expected weighted average lives determined by historical experience. Securities available for sale are recorded at fair value in the consolidated balance sheet and net unrealized gains or losses, net of tax, are reflected as an adjustment to shareholders' equity. The Corporation may sell such securities as part of the overall asset/liability management process should market conditions or other factors warrant. Gains and losses from such transactions would be reflected in results of operations. 12 13 l CORPORATE FINANCIAL REVIEW l Management is currently reviewing the asset and liability management position of Midlantic and is considering various actions to maintain the Corporation's existing interest rate risk position. As a result of further analyses, certain investment securities may be reclassified or sold and, under such circumstances, will be accounted for at fair value. On a pro forma basis, the combined investment securities held to maturity of the Corporation and Midlantic, had a net unrealized pretax loss of $274 million at June 30, 1995. In addition, certain interest rate swaps are associated with investment securities. If such securities are reclassified or sold, the fair value of such securities will also reflect the estimated fair value of the related interest rate swaps, if any. On a pro forma basis, interest rate swaps designated to investment securities had an estimated net unrealized pretax loss of $249 million at June 30, 1995. Management has not made a determination with respect to such matters. AVERAGE FUNDING SOURCES
Six months ended June 30 In millions 1995 1994 ------------------------------------------------------------- Deposits $33,422 $31,996 Borrowed funds 13,302 11,253 Notes and debentures 9,475 10,589 Shareholders' equity 4,363 4,299 -------------------------------------------------------------
FUNDING SOURCES l Average deposits increased $1.4 billion, or 4.5 percent, compared with the first six months of 1994 primarily due to acquisitions. Average noninterest-bearing sources were 12.9 percent of total funding sources during the first six months of 1995 compared with 14.1 percent a year ago. FUNDING SOURCES
JUNE 30 December 31 In millions 1995 1994 ------------------------------------------------------------- Deposits Demand, savings and money market $17,549 $19,313 Time 14,341 13,100 Foreign 3,400 2,598 -------------------------- Total deposits 35,290 35,011 Borrowed funds Repurchase agreements 5,793 3,785 Treasury, tax and loan 1,425 1,989 Federal funds purchased 2,153 2,181 Commercial paper 576 1,226 Other 2,439 2,427 -------------------------- Total borrowed funds 12,386 11,608 Notes and debentures Bank notes 5,132 8,825 Federal Home Loan Bank 1,826 1,384 Other 2,037 1,545 -------------------------- Total notes and debentures 8,995 11,754 -------------------------- Total $56,671 $58,373 -------------------------------------------------------------
Total deposits at June 30, 1995 were relatively unchanged from year-end 1994. Demand, savings and money market deposits declined $1.8 billion to $17.5 billion and time deposits increased $1.2 billion to $14.3 billion at June 30, 1995. The change in composition of such deposit products was primarily due to customers shifting to higher rate deposit products. The rate of customer product migration is expected to decline during the remainder of 1995. 13 14 l CORPORATE FINANCIAL REVIEW l Brokered deposits totaled $2.3 billion at June 30, 1995 compared with $2.8 billion at December 31, 1994. Retail brokered deposits are issued or participated-out by brokers in denominations of $100,000 or less. Such deposits represented 75.8 percent of the total brokered at June 30, 1995 compared with 77.2 percent at year-end 1994. The change in the composition of borrowed funds and notes and debentures reflects asset/liability management activities to utilize less costly sources of funds. In addition, the Corporation extended the maturity structure of approximately $24 billion of interest-bearing funding sources that matured in the first six months of 1995. These initiatives were achieved through a variety of funding sources, primarily repurchase agreements and term Federal funds, with maturities ranging from six months to one year. CAPITAL l Acquisition capability, funding alternatives, new business activities, deposit insurance costs, and the level and nature of expanded regulatory oversight depend in large part on a banking institution's capital strength. The minimum regulatory capital ratios are 4.00 percent for Tier I, 8.00 percent for total risk-based and 3.00 percent for leverage. However, regulators may require higher capital levels when a bank's particular circumstances warrant. To be classified as well capitalized, regulators require capital ratios of 6.00 percent for Tier I, 10.00 percent for total risk-based and 5.00 percent for leverage. At June 30, 1995, the capital position of each bank affiliate was classified as well capitalized. RISK-BASED CAPITAL AND CAPITAL RATIOS
JUNE 30 December 31 Dollars in millions 1995 1994 ------------------------------------------------------------ RISK-BASED CAPITAL Shareholders' equity $4,436 $4,394 Goodwill (615) (373) Net unrealized securities losses 41 119 -------------------------- Tier I risk-based capital 3,862 4,140 Subordinated debt 1,102 752 Eligible allowance for credit losses 603 605 -------------------------- Total risk-based capital $5,567 $5,497 -------------------------- ASSETS Risk-weighted assets and off-balance-sheet instruments $47,880 $48,007 Average tangible assets 61,363 62,842 CAPITAL RATIOS Tier I risk-based capital 8.07% 8.62% Total risk-based capital 11.63 11.45 Leverage 6.29 6.59 ------------------------------------------------------------
The decline in Tier I risk-based capital reflects the impact of goodwill from acquisitions and the stock repurchase program. Goodwill increased in the comparison due to the acquisition of BlackRock in February 1995. The pending merger with Midlantic is expected to enhance capital ratios. In January 1995, the board of directors approved a stock repurchase program which authorized the Corporation to purchase up to 24 million additional common shares over the following two years. As of June 30, 1995, approximately 6.5 million shares were purchased by the Corporation pursuant to this plan at an average price of $24.74 per share. The Corporation expects its ability to repurchase additional shares will be significantly limited due to pooling of interests constraints associated with the pending Midlantic merger. The Corporation maintains its capital positions primarily through the issuance of debt and equity instruments, its dividend policy and retained earnings. 14 15 l CORPORATE FINANCIAL REVIEW l risk management --------------------------------------------------------------- The Corporation's ordinary course of business involves varying degrees of risk taking, the most significant of which are interest rate, credit and liquidity risk. In order to manage these risks, the Corporation has risk management processes designed to provide for risk identification, measurement, monitoring and control. INTEREST RATE RISK l Interest rate risk is the sensitivity of net interest income and the market value of financial instruments to the magnitude, direction and frequency of changes in interest rates. Interest rate risk results from various repricing frequencies, changes in the relationship or spread between interest rates and the maturity structure of assets, liabilities, and off-balance-sheet positions. Asset/liability management uses a variety of investments, funding sources and off-balance-sheet instruments in managing the overall interest rate risk profile of the Corporation. A number of tools are used to measure interest rate risk including income simulation modeling and interest sensitivity ("gap") analyses. In addition, the Corporation is in the process of developing longer-term measures of interest rate sensitivity including duration of equity and equity at risk. Such models estimate the impact on the value of equity resulting from changes in interest rates and are designed to supplement the simulation model and gap analyses. An income simulation model is the primary mechanism used by management to measure interest rate risk. The primary purpose of the simulation model is to assess the direction and magnitude of the impact of most likely (a "base case" which management believes is reasonably likely to occur) and higher and lower ("alternative") interest rate scenarios on net interest income. The results of the simulation model are highly dependent on numerous assumptions. These assumptions generally fall into two categories: those relating to the interest rate environment and those relating to general business and economic factors. Assumptions related to the interest rate environment include the level of various interest rates, the shape of the yield curve, and the relationship among these factors as rates change. Also included are other rate-related factors, such as prepayment speeds on mortgage-related assets and the cash flows and maturities of financial instruments including index-amortizing interest rate swaps. Assumptions related to general business and economic factors include changes in market conditions, loan volumes and pricing, deposit sensitivity, customer preferences, competition, and management's financial and capital plans. The assumptions are developed based on current business and asset/liability management strategies, historical experience, the current economic environment, forecasted economic conditions and other analyses. These assumptions are inherently uncertain and subject to change as time passes. Accordingly, they are updated on at least a quarterly basis and will not necessarily provide a precise estimate of net interest income or the impact of higher or lower interest rates. Using these assumptions, the model simulates net interest income under the base case scenario and evaluates the relative risk of changes in interest rates by simulating the impact on net interest income of gradual parallel shifts in interest rates of 100 basis points higher and lower than the base case scenario. In such alternative scenarios, certain assumptions that are directly dependent on the interest rate environment are adjusted for the respective higher or lower interest rate environment. Other assumptions related to general and economic factors are held constant with those developed for the base case scenario. As a result, the alternative interest rate scenarios indicate what may happen to net interest income if interest rates were to change to the levels of the higher and lower scenarios but do not predict what may happen to net interest income if business and economic assumptions are not realized. 15 16 l CORPORATE FINANCIAL REVIEW l Actual results will differ from the simulated results of the base case scenario and of each alternative scenario due to various factors including timing, direction, magnitude and frequency of interest rate changes, the relationship or spread between various interest rates, changes in market conditions, loan volumes and pricing, deposit sensitivity, customer preferences, competition, and the actual interaction of the numerous assumptions. In addition, the actual results will be affected by the impact of mergers or acquisitions and business and asset/ liability management strategies that differ from those assumed in the model. While the simulation model measures the relative risk of changes in interest rates on net interest income, the actual impact on net interest income could exceed or be less than the amounts projected in the base case and in each alternative scenario. If interest rates exceed those assumed in the high alternative scenario, or if interest rates are less than those assumed in the low alternative scenario, the actual impact on net interest income could further differ from the simulated results. In July 1995, the Federal Reserve lowered the federal funds rate by 25 basis points in response to indications of less inflationary pressures and a slower rate of growth in the economy. Management expects economic growth in 1995 to continue to be at a slower pace. The following table sets forth interest rates for the periods indicated including management's base case scenario and the industry consensus for the twelve months ended June 30, 1996 as reported in the Blue Chip Financial Forecasts. INTEREST RATES [CAPTION] Industry Consensus Base case scenario Average for ------------------ Twelve Months June December June Ended June 1995 1995 1996 1996 ----------------------------------------------------------------- Federal funds 6.00 5.25 5.00 5.58 3-month LIBOR 6.01 5.35 5.20 5.75 5-year U.S. Treasury Note 5.93 5.70 5.70 5.98 Spread between Fed funds and 5-year Treasury (7)BP 45bp 70bp 40bp ------------------------------------------------------------------
If interest rates increase evenly over the next four quarters by 100 basis points more than the base case scenario, the simulation model projects net interest income would decline from the base case scenario by 1.26 percent. Conversely, if interest rates decline by 100 basis points, net interest would remain substantially unchanged from the base case scenario. The simulated results of management's base case scenario for 1995 are consistent with previously reported expectations. However, the model does not reflect the impact of pending acquisitions. 16 17 l CORPORATE FINANCIAL REVIEW l An interest sensitivity (gap) analysis represents a point-in-time net position of assets, liabilities and off-balance-sheet instruments subject to repricing in specified time periods. A cumulative liability-sensitive gap position indicates liabilities are expected to reprice more quickly than assets over a specified time period. Alternatively, a cumulative asset-sensitive gap position indicates assets are expected to reprice more quickly than liabilities. The gap analysis alone does not accurately measure the magnitude of changes in net interest income since changes in interest rates over time do not impact all categories of assets, liabilities and off-balance-sheet instruments equally or simultaneously. The cumulative one-year gap position was 2.6 percent asset sensitive at June 30, 1995, compared with a liability sensitive position of 1.5 percent and 18.4 percent at year end 1994 and June 30, 1994, respectively. FINANCIAL DERIVATIVES [CAPTION] Positive Negative Total Notional Fair Notional Fair Notional In millions Value Value Value Value Value ----------------------------------------------------------------------------- June 30, 1995 Interest rate swaps Receive-fixed $ 589 $11 $ 9,479 $ (142) $10,068 Pay-fixed 10 5,608 (293) 5,618 Basis swap 465 8 465 ------------------------------------------------- Total swaps 1,064 19 15,087 (435) 16,151 Interest rate caps 5,500 27 5,500 ------------------------------------------------- Total $6,564 $46 $15,087 $ (435) $21,651 ------------------------------------------------- December 31, 1994 Interest rate swaps Receive-fixed $ 119 $ 4 $11,375 $ (772) $11,494 Pay-fixed 5,060 26 658 (19) 5,718 ------------------------------------------------- Total swaps 5,179 30 12,033 (791) 17,212 Interest rate caps 5,500 132 5,500 ------------------------------------------------- Total $10,679 $162 $12,033 $ (791) $22,712 ---------------------------------------------------------------
In the ordinary course of business, the Corporation utilizes off-balance-sheet financial derivatives as part of its overall interest rate risk management process. Such instruments primarily consist of interest rate swaps, interest rate caps, futures, and forward contracts which are used to manage interest rate risk. Financial derivatives involve, to varying degrees, interest rate and credit risk in excess of the amount recognized in the balance sheet. The Corporation manages overall interest rate risk, including that related to financial derivatives, as part of its asset/liability management process. Financial derivative transactions are also subject to the Corporation's credit policies and procedures. Interest rate swaps are agreements to exchange fixed and floating interest rate payments that are calculated on a notional principal amount. The floating rate is based on a money market index, primarily short-term LIBOR indices. The Corporation uses interest rate swaps to convert fixed rate assets or liabilities to floating rate instruments or convert floating rate assets or liabilities to fixed rate instruments. The Corporation's swaps do not contain leverage or any similar features. Substantially all receive-fixed swaps are index amortizing and are primarily associated with commercial loans and deposits. The Corporation receives payments based on fixed interest rates and makes payments based on floating money market indices, primarily 1-month and 3-month LIBOR. The notional values of the receive-fixed swaps amortize on predetermined dates and in predetermined amounts based on market movements of the designated index, which are primarily 3-year U.S. Treasury constant maturities and 3-month LIBOR. Approximately $5.0 billion of the Corporation's pay-fixed interest rate swaps are associated with collateralized mortgage and U.S. Treasury obligations in the investment securities portfolio. The Corporation receives payments based on floating money market indices, primarily 3-month LIBOR, and pays fixed interest rates. In March 1995, the Corporation entered into forward start, pay-fixed interest rate swap contracts with a $2.0 billion notional value to alter the repricing characteristics of overnight borrowings. The Corporation paid 6.20 percent and received the average Federal funds rate over the term of the contracts. The contracts were effective April 3, 1995 and matured June 30, 1995. The Corporation's basis swap modifies the interest rate characteristics of one-year bank notes. The bank notes bear interest based on the 6-month Treasury bill index. Under this swap the Corporation receives payments based on the 6-month Treasury bill index and makes payments based on 1-month LIBOR. 17 18 l CORPORATE FINANCIAL REVIEW l Interest rate caps 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 a defined cap rate, up to a contractually specified limit, applied to a notional amount. The Corporation entered into interest rate caps to reduce exposure to higher interest rates. In November 1994, the Corporation paid a $129.6 million premium for interest rate caps with a notional value of $5.5 billion. The effect of these caps is to modify the interest rate characteristics of certain fixed-rate collateralized mortgage obligations to be variable within certain ranges. The caps require the counterparty to pay the Corporation the excess of 3-month LIBOR over a specified cap rate, currently 6.00 percent, computed quarterly based on the notional value of the contracts. At June 30, 1995, 3-month LIBOR was 6.01 percent. The cap rate adjusts to 6.50 percent during the fourth quarter of 1995 and the contracts expire during the fourth quarter of 1997. The agreements limit the amount payable to the Corporation to 150 basis points over the cap rate. Futures contracts are agreements to purchase or sell a financial instrument at a specified future date, quantity and price or yield. Futures contracts have standardized contractual terms and are traded on organized exchanges. The futures contracts hedged interest rate risk associated with the anticipated reissuance of approximately $2.5 billion of short-term borrowings that matured in June 1995. Forward contracts provide for the delivery of financial instruments at a specified future date and at a specified price or yield. The Corporation uses forward contracts to manage interest rate risk associated with its mortgage banking activities. Commitments to purchase and sell forward contracts totaled $327 million and $828 million, respectively, at June 30, 1995. Substantially all contracts mature within 90 days. During the first six months of 1995, interest rate swaps and caps negatively affected net interest income by $90.8 million compared with a benefit of $96.1 million in 1994. Based on its base case scenario, and as reflected in the results of the simulation model, management expects interest rate swaps and caps will continue to adversely impact net interest income in 1995. FINANCIAL DERIVATIVES ACTIVITY
Notional value January 1 Maturities/ June 30 In millions 1995 Additions Amortization Terminations 1995 ---------------------------------------------------------------------------------------------------------------------------- Interest rate swaps Receive-fixed $11,494 $ 489 $(1,915) $10,068 Pay-fixed 5,718 2,200 (2,260) $(40) 5,618 Basis swaps 465 465 Interest rate caps 5,500 5,500 Eurodollar futures 2,500 (2,500) -------------------------------------------------------------------------------- Total $22,712 $5,654 $(6,675) $(40) $21,651 ----------------------------------------------------------------------------------------------------------------------------
In connection with the management of its overall asset and liability position, the Corporation continues to evaluate various alternatives regarding financial derivatives, including termination of certain contracts. The fair values of financial derivatives are estimates of amounts that would be received or paid upon termination of the related contracts. Such fair values are not recorded in the Corporation's financial statements. If interest rate swaps are terminated, the net loss would be deferred and amortized over the shorter of the remaining original life of the agreements or the designated instrument. If the underlying designated instrument is terminated or matures, the net loss would be recognized immediately. Subsequent to June 30, 1995, the Corporation terminated $2.0 billion of pay-fixed interest rate swaps. The terminations resulted in a loss of $99.3 million, which will be deferred and amortized as an adjustment to interest income or expense of the designated instruments, ratably over 2 years and 9 months. Based upon a preliminary review of Midlantic's asset and liability management position, the Corporation anticipates terminating its interest rate cap position concurrent with, or shortly after, consummation of the merger, which is expected by year-end 1995. Upon termination, the Corporation expects to record a pretax loss of approximately $60 million, measured 18 19 l CORPORATE FINANCIAL REVIEW l by the difference between the unamortized premium and the estimated fair value. The weighted average expected maturity of receive-fixed interest rate swap contracts shortened to 8 months at June 30, 1995 compared with 2 years and 10 months at year-end 1994, reflecting expected amortization of index-amortizing swaps as a result of lower interest rates. Should interest rates increase, the maturity of such swaps would extend. Substantially all index-amortizing swaps contractually mature by the end of 1998. The following table sets forth the expected maturity distribution of the notional value of interest rate swaps and the associated weighted average interest rates on the instruments maturing in the respective year, assuming management's base case interest rate scenario. Variable rates paid or received are subject to change as the underlying index floats with changes in the market. For purposes of the following table, $2.0 billion of pay-fixed interest rate swaps terminated subsequent to June 30, 1995, are included in the 1995 amount. EXPECTED MATURITY DISTRIBUTION OF INTEREST RATE SWAPS
1999 and Dollars in millions 1995 1996 1997 1998 beyond Total ------------------------------------------------------------------------------------------------------------------------------ Receive-fixed Notional value $3,828 $5,545 $695 $10,068 Weighted average fixed interest rate received 5.71% 5.35% 5.24% 5.48% Weighted average variable interest rate paid 5.56 5.40 5.38 5.46 Pay-fixed Notional value $2,060 $365 $1,040 $2,050 $103 $5,618 Weighted average variable interest rate received 5.97% 5.43% 5.55% 5.61% 5.67% 5.72% Weighted average fixed interest rate paid 7.93 6.86 7.90 7.94 9.37 7.88 ------------------------------------------------------------------------------------------------------------------------------
For interest rate swaps and caps, interest payments and with respect to caps, the premium, respectively, are exchanged; therefore, cash requirements and exposure to credit risk are significantly less than the notional principal amount. The Corporation seeks to minimize the credit risk associated with its interest rate swaps and cap activities primarily by entering into transactions with only a select number of high-quality institutions, establishing credit limits with counterparties and, where applicable, requiring segregated collateral or bilateral-netting agreements. CREDIT RISK l Credit risk represents the possibility that a customer or counterparty may not perform in accordance with contractual terms. Credit risk is inherent in the lending business and results from extending credit to customers, purchasing securities, and entering into certain off-balance-sheet financial instruments. The Corporation seeks to manage credit risk through diversification, utilizing exposure limits to any single industry or customer, requiring collateral and selling participations to third parties. 19 20 l CORPORATE FINANCIAL REVIEW l NONPERFORMING ASSETS
June 30 December 31 Dollars in millions 1995 1994 ------------------------------------------------------------- Nonaccrual loans Commercial $110 $143 Real estate project 95 70 Real estate mortgage Commercial 44 44 Residential 52 53 -------------------------- Total nonaccrual loans 301 310 Restructured loans 7 9 -------------------------- Total nonperforming loans 308 319 Foreclosed assets Real estate project 88 77 Real estate mortgage Commercial 4 5 Residential 25 21 Other 21 24 -------------------------- Total foreclosed assets 138 127 -------------------------- Total $446 $446 -------------------------- Nonperforming loans to loans .84% .90% Nonperforming assets to loans and foreclosed assets 1.21 1.25 Nonperforming assets to assets .71 .69 -------------------------------------------------------------
The following table sets forth changes in nonperforming assets during the first six months of 1995. CHANGE IN NONPERFORMING ASSETS
In millions 1995 ---------------------------------------------------------- Balance at January 1 $446 Transferred from accrual 153 Acquisitions 1 Returned to performing (15) Principal reductions (83) Sales (23) Charge-offs and valuation adjustments (33) -------- Balance at June 30 $446 ----------------------------------------------------------
Accruing loans contractually past due 90 days or more as to the payment of principal or interest totaled $151 million at June 30, 1995 compared with $148 million at December 31, 1994. Residential mortgages and student loans totaling $59 million and $33 million, respectively, were included in the total at June 30, 1995 compared with $50 million and $36 million, respectively, at year-end 1994. In determining the adequacy of the allowance for credit losses, the Corporation allocates reserves to specific problem loans based on a collectibility review and pools of watchlist and non-watchlist loans for various credit risk factors. Effective January 1, 1995, the Corporation adopted SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," as amended by SFAS No. 118. Under this Standard, the Corporation estimates credit losses on impaired loans based on the present value of expected cash flows or the fair value of the underlying collateral if the loan repayment is expected to come from the sale or operation of such collateral. The allowance for credit losses totaled $961 million at June 30, 1995 compared with $1.0 billion at December 31, 1994. The allowance as a percentage of period-end loans and nonperforming loans was 2.62 percent and 311.5 percent, respectively, at June 30, 1995. The comparable year-end 1994 amounts were 2.83 percent and 314.2 percent, respectively. CHARGE-OFFS AND RECOVERIES
Percent of Dollars in Net Average millions Charge-offs Recoveries Charge-offs Loans ------------------------------------------------------------------ Six months ended June 30, 1995 Commercial $26 $13 $13 .21% Real estate project 1 1 Real estate mortgage Commercial 2 2 .33 Residential 6 1 5 .10 Consumer 39 17 22 .49 --------------------------------- Total $74 $32 $42 .23% ------------------------------------------- Six months ended June 30, 1994 Commercial $28 $12 $16 .28% Real estate project 9 1 8 .93 Real estate mortgage Commercial 2 1 1 .20 Residential 10 1 9 .23 Consumer 32 15 17 .40 --------------------------------- Total $81 $30 $51 .32% -------------------------------------------------------------
20 21 l CORPORATE FINANCIAL REVIEW l LIQUIDITY RISK l Liquidity represents an institution's ability to generate cash or otherwise obtain funds at reasonable rates to satisfy commitments to borrowers and demands of depositors and debtholders, and invest in other strategic initiatives. Liquidity risk represents the inability to generate cash or otherwise obtain funds at reasonable rates to satisfy commitments to borrowers, as well as the obligations to depositors and debtholders. Liquidity is managed through the coordination of the relative maturities of assets, liabilities and off-balance-sheet positions and is enhanced by the ability to raise funds in capital markets. Liquid assets consist of cash and due from banks, short-term investments, loans held for sale and securities available for sale. At June 30, 1995, such assets totaled $6.3 billion. Liquidity is also provided by residential mortgages which may be used as collateral for funds obtained through the Federal Home Loan Bank system and by mortgage-related securities available as collateral for securities sold under agreements to repurchase. At June 30, 1995, approximately $5.5 billion of residential mortgages were available as collateral for borrowings from the Federal Home Loan Bank system. Mortgage-related securities available as collateral for securities sold under agreements to repurchase totaled $5.3 billion at June 30, 1995. The planned reduction in the securities portfolio and related wholesale funding sources is not expected to affect materially overall liquidity. Liquidity for the parent company and its affiliates is also generated through the issuance of securities in public or private markets, lines of credit and dividends from subsidiaries. Under effective shelf registration statements at June 30, 1995, the Corporation had available $140 million of debt, $300 million of preferred stock and $350 million of securities that may be issued as either debt or preferred stock. In addition, the Corporation had a $300 million unused committed line of credit. Funds obtained from any of these sources can be used for both bank and nonbank activities. In addition to current parent company funds, the funding for pending or potential acquisitions may include the issuance of instruments that qualify as regulatory capital, such as preferred stock or subordinated debt. Management believes the Corporation has sufficient liquidity to meet its current obligations to customers, debtholders and others. The impact of replacing maturing liabilities is reflected in the income simulation model used in the Corporation's overall asset/liability management process. At June 30, 1995, the model assumed short term rates and the cost of replacement funding would decline modestly. 21 22 l CORPORATE FINANCIAL REVIEW l second quarter 1995 versus second quarter 1994 --------------------------------------------------------------- Net income for the second quarter of 1995 was $137.0 million, or $.59 per fully diluted common share, compared with $187.8 million, or $.79 per share, in the comparable quarter of 1994. Return on average assets and return on average common shareholders' equity were .89 percent and 12.59 percent, respectively, in the second quarter of 1995. The corresponding returns in 1994 were 1.26 percent and 17.70 percent. On a fully taxable-equivalent basis, net interest income for the second quarter of 1995 was $370.6 million, a decrease of $130.8 million, or 26.1 percent, from the comparable year-earlier period. The decline in net interest income reflects the impact of interest rate swaps and caps and actions taken to reduce investment and wholesale funding activities. The Corporation did not record a provision for credit losses in the second quarter of 1995. The provision for credit losses was $25.0 million in the second quarter of 1994. Continuing improvement in economic conditions combined with management's ongoing efforts to improve asset quality resulted in lower nonperforming assets and charge-offs, and a higher reserve coverage of nonperforming loans. Excluding the results of securities transactions, noninterest income increased $29.0 million, or 12.7 percent, to $257.3 million during the second quarter of 1995. Investment management and trust increased $24.0 million to $97.5 million. The BlackRock acquisition contributed approximately $18 million to the increase. Service charges, fees and commissions decreased $3.2 million to $89.0 million reflecting the impact of the Corporation's credit card alliance, which was effective May 1, 1995. Mortgage banking income increased to $50.7 million, or 18.8 percent, compared with $42.7 million in 1994. Gains from originated mortgage servicing rights totaling $12.1 million in the second quarter of 1995 more than offset a modest decline in servicing revenue and lower gains on sales of servicing. Net securities gains totaled $7.8 million in the second quarter of 1995 compared with net losses of $85 thousand a year ago. Noninterest expense increased to $426.4 million, compared with $418.3 million a year ago, primarily due to acquisitions. Excluding acquisitions, noninterest expense decreased 5.5 percent when compared with the second quarter of 1994. 22 23 l CONSOLIDATED BALANCE SHEET l
December JUNE 30 31 Dollars in millions, except par values 1995 1994 --------------------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 2,612 $ 2,592 Short-term investments 502 809 Loans held for sale 773 487 Securities available for sale 2,447 3,457 Investment securities, fair value of $16,434 and $16,233 16,658 17,464 Loans, net of unearned income of $226 and $240 36,690 35,407 Allowance for credit losses (961) (1,002) ---------------------------- Net loans 35,729 34,405 Other 4,042 4,931 ---------------------------- Total assets $62,763 $64,145 ---------------------------- LIABILITIES Deposits Noninterest-bearing $ 6,660 $ 6,992 Interest-bearing 28,630 28,019 ---------------------------- Total deposits 35,290 35,011 Borrowed funds Federal funds purchased 2,154 2,181 Repurchase agreements 5,793 3,785 Commercial paper 576 1,226 Other 3,863 4,416 ---------------------------- Total borrowed funds 12,386 11,608 Notes and debentures 8,995 11,754 Other 1,656 1,378 ---------------------------- Total liabilities 58,327 59,751 ---------------------------- SHAREHOLDERS' EQUITY Preferred stock - $1 par value Authorized: 17,562,360 and 17,601,524 shares Issued and outstanding: 881,802 and 920,966 shares Aggregate liquidation value: $18 and $19 1 1 Common stock - $5 par value Authorized: 450,000,000 shares Issued: 236,486,596 and 236,063,418 shares 1,182 1,180 Capital surplus 461 462 Retained earnings 3,119 3,018 Deferred ESOP benefit expense (83) (83) Net unrealized securities losses (41) (119) Common stock held in treasury at cost: 8,425,134 and 2,814,910 shares (203) (65) ---------------------------- Total shareholders' equity 4,436 4,394 ---------------------------- Total liabilities and shareholders' equity $62,763 $64,145 ---------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements. 23 24 l CONSOLIDATED STATEMENT OF INCOME l
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 ------------------------------------------------------------ In thousands, except per share data 1995 1994 1995 1994 ---------------------------------------------------------------------------------------------------------------------------- INTEREST INCOME Loans and fees on loans $ 737,967 $594,011 $1,445,006 $1,166,847 Securities 283,364 316,647 578,787 612,455 Other 21,308 24,336 42,929 50,796 ------------------------------------------------------------ Total interest income 1,042,639 934,994 2,066,722 1,830,098 INTEREST EXPENSE Deposits 320,284 217,512 612,618 417,516 Borrowed funds 214,908 110,574 418,867 207,311 Notes and debentures 145,119 113,949 288,935 214,971 ------------------------------------------------------------ Total interest expense 680,311 442,035 1,320,420 839,798 ------------------------------------------------------------ Net interest income 362,328 492,959 746,302 990,300 Provision for credit losses 25,030 50,045 ------------------------------------------------------------ Net interest income less provision for credit losses 362,328 467,929 746,302 940,255 NONINTEREST INCOME Investment management and trust 97,509 73,494 176,649 146,461 Service charges, fees and commissions 88,984 92,205 180,408 180,041 Mortgage banking 50,670 42,658 95,320 80,363 Net securities gains (losses) 7,782 (85) 9,036 30,307 Other 20,089 19,968 40,734 49,619 ------------------------------------------------------------ Total noninterest income 265,034 228,240 502,147 486,791 NONINTEREST EXPENSE Staff expense 204,590 203,972 406,448 410,871 Net occupancy and equipment 67,909 66,860 136,759 132,142 Other 153,904 147,463 320,575 302,128 ------------------------------------------------------------ Total noninterest expense 426,403 418,295 863,782 845,141 ------------------------------------------------------------ Income before income taxes 200,959 277,874 384,667 581,905 Applicable income taxes 63,971 90,029 122,028 188,371 ------------------------------------------------------------ Net income $ 136,988 $187,845 $ 262,639 $ 393,534 ------------------------------------------------------------ EARNINGS PER COMMON SHARE Primary $.59 $.79 $1.13 $1.66 Fully diluted .59 .79 1.13 1.65 CASH DIVIDENDS DECLARED PER COMMON SHARE .35 .32 .70 .64 AVERAGE COMMON SHARES OUTSTANDING Primary 230,178 237,241 231,388 236,974 Fully diluted 231,960 239,086 233,412 238,887 ----------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements. 24 25 l CONSOLIDATED STATEMENT OF CASH FLOWS l
Six months ended June 30 In millions 1995 1994 --------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $ 263 $ 394 Adjustments to reconcile net income to net cash provided by operating activities Provision for credit losses 50 Depreciation, amortization and accretion 112 126 Deferred income taxes 41 (3) Net securities gains (9) (30) Net gain on sales of assets (26) (54) Valuation adjustments on assets, net of gains on sales (1) (11) Changes in Loans held for sale (286) 642 Other 14 (311) ------------------------------ Net cash provided by operating activities 108 803 INVESTING ACTIVITIES Net change in loans (1,143) (600) Repayment Securities available for sale 199 1,630 Investment securities 831 1,901 Sales Securities available for sale 960 7,325 Loans 153 561 Foreclosed assets 25 54 Purchases Securities available for sale (398) (7,329) Investment securities (19) (4,922) Loans (247) (17) Net cash paid for acquisitions (68) (462) Other 1,977 392 ------------------------------ Net cash provided (used) by investing activities 2,270 (1,467) FINANCING ACTIVITIES Net change in Noninterest-bearing deposits (364) (1,128) Interest-bearing deposits 460 (1,396) Federal funds purchased (31) 53 Sale/issuance Repurchase agreements 42,773 72,192 Commercial paper 2,683 2,152 Other borrowed funds 54,876 50,964 Notes and debentures 4,833 3,948 Common stock 23 20 Redemption/maturity Repurchase agreements (40,765) (72,640) Commercial paper (3,333) (1,504) Other borrowed funds (55,435) (49,477) Notes and debentures (7,761) (2,190) Net acquisition of treasury stock (154) (6) Cash dividends paid to shareholders (163) (152) ------------------------------ Net cash provided (used) by financing activities (2,358) 836 ------------------------------ INCREASE IN CASH AND DUE FROM BANKS 20 172 Cash and due from banks at beginning of year 2,592 1,817 ------------------------------ Cash and due from banks at end of period $ 2,612 $ 1,989 ---------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements. 25 26 l NOTES TO CONSOLIDATED FINANCIAL STATEMENTS l accounting policies --------------------------------------------------------------- BUSINESS l PNC Bank Corp. provides a broad range of banking and related financial services through its subsidiaries to consumers, small businesses and corporate customers and is subject to intense competition from other financial services companies with respect to these services and customers. PNC Bank Corp. is also subject to the regulations of certain federal and state agencies and undergoes periodic examinations by such regulatory authorities. BASIS OF FINANCIAL STATEMENT PRESENTATION l The unaudited consolidated interim financial statements have been prepared in accordance with generally accepted accounting principles and include the accounts of PNC Bank Corp. and its subsidiaries ("Corporation"), substantially all of which are wholly owned. In the opinion of management, the financial statements reflect all adjustments, which are of a normal recurring nature, necessary for a fair statement of the results for the interim periods presented. In preparing the unaudited consolidated interim financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ from such estimates. The notes included herein should be read in conjunction with the audited consolidated financial statements included in the Corporation's 1994 Annual Report. ALLOWANCE FOR CREDIT LOSSES l Effective January 1, 1995, the Corporation adopted Statement of Financial Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan," as amended by SFAS No. 118. Under this Standard, the Corporation estimates credit losses on impaired loans based on the present value of expected cash flows or the fair value of the underlying collateral if the loan repayment is expected to come from the sale or operation of such collateral. For purposes of this Standard, nonaccrual and restructured commercial, real estate project and commercial real estate loans are considered to be impaired. Prior to 1995, the credit losses related to these loans were estimated based on undiscounted cash flows or the fair value of the underlying collateral. The allowance is maintained at a level believed by management to be sufficient to absorb estimated potential credit losses. Management's determination of the adequacy of the allowance is based on periodic evaluations of the credit portfolio and other relevant factors. This evaluation is inherently subjective as it requires material estimates, including the amounts and timing of expected future cash flows on impaired loans, which may be susceptible to significant change. The allowance for credit losses on impaired loans pursuant to SFAS No. 114 is one component of the methodology for determining the allowance for credit losses. The remaining components of the allowance for credit losses provide for estimated losses on consumer loans and residential real estate mortgages, and general amounts for historical loss experience, uncertainties in estimating losses and inherent risks in the various credit portfolios. NONPERFORMING ASSETS l Foreclosed assets are comprised of property acquired through a foreclosure proceeding or acceptance of a deed-in-lieu of foreclosure and loans where the Corporation has possession of the underlying collateral. Foreclosed assets are recorded as other assets in the consolidated balance sheet. The interest collected on impaired loans is recognized on the cash basis or cost recovery method depending on the collectibility of the loans. EARNINGS PER COMMON SHARE l Primary earnings per common share is calculated by dividing net income adjusted for preferred stock dividends declared by the sum of the weighted average number of shares of common stock outstanding and the number of shares of common stock which would be issued assuming the exercise of stock options during each period. Fully diluted earnings per common share is based on net income adjusted for interest expense, net of tax, on outstanding convertible debentures and dividends declared on nonconvertible preferred stock. The weighted average number of shares of common stock outstanding is increased by the assumed conversion of outstanding convertible preferred stock and convertible debentures from the beginning of the year or date of issuance, if later, and the number of shares of common stock which would be issued assuming the exercise of stock 26 27 l NOTES TO CONSOLIDATED FINANCIAL STATEMENTS l options. Such adjustments to net income and the weighted average number of shares of common stock outstanding are made only when such adjustments dilute earnings per common share. FINANCIAL DERIVATIVES l The Corporation uses off-balance-sheet financial derivatives as part of its overall asset/liability management process. Substantially all such instruments are used to manage interest rate risk and consist of interest rate swaps, interest rate caps, and futures and forward contracts. Futures contracts are used to hedge interest rate risk. To qualify for hedge accounting, the futures contract must be designated as a hedge of an asset, liability, firm commitment or anticipated transaction exposing the Corporation to interest rate risk and the futures contract must reduce such risk. Under hedge accounting, gains and losses on futures contracts are deferred and included in the carrying value of related assets and liabilities. The deferred gains and losses are amortized as a yield adjustment over the expected life of the hedged instrument. If the hedged instruments are disposed of, the unamortized deferred gains or losses are included in the determination of the gain/loss on the disposition of such instruments. change in accounting principle --------------------------------------------------------------- In the second quarter, the Corporation adopted SFAS No. 122, "Accounting for Mortgage Servicing Rights" which amended SFAS No. 65, "Accounting for Certain Mortgage Banking Activities". This Standard provides for the recognition of originated mortgage servicing rights ("OMSR") retained for loans sold by allocating total costs incurred between the loan and the servicing rights based on their relative fair values. Under SFAS No. 65, the costs of OMSR were not recognized as assets when the related loan was sold. Mortgage servicing rights are amortized in proportion to, and over the period of, estimated net servicing income. SFAS No. 122 also requires that all capitalized mortgage servicing rights be evaluated for impairment based on the excess of the carrying amount of the mortgage servicing rights over their estimated fair value. The fair value of mortgage servicing rights is evaluated on a disaggregated method based on predominant risk characteristics of the portfolio. At June 30, 1995 no reserve for impairment was required. SFAS No. 122 requires prospective adoption with respect to OMSR recognition. The adoption of SFAS No. 122 increased net income and fully diluted earnings per share by $7.9 million and $.03, respectively, for the three months and six months ended June 30, 1995. mergers and acquisitions --------------------------------------------------------------- In July 1995, the Corporation entered into a definitive merger agreement with Midlantic Corporation ("Midlantic"), a regional bank holding company headquartered in Edison, New Jersey. At June 30, 1995, Midlantic had assets and deposits of $13.7 billion and $10.9 billion, respectively. Under terms of the agreement, the Corporation will exchange 2.05 shares of its common stock for each share of Midlantic common stock. Based on share data as of June 30, 1995 the Corporation expects to issue 110.8 million shares of its common stock to consummate the merger. In addition, the Corporation and Midlantic have granted each other options to purchase up to 19.9 percent of each other's outstanding common stock, under certain circumstances. The transaction is valued at approximately $3 billion and will be accounted for as a pooling of interests. The merger is targeted to be completed by year-end 1995, pending approval by shareholders of both companies and various regulatory agencies. In March 1995, the Corporation announced a definitive agreement to acquire Chemical Holdings, Inc., and its wholly-owned subsidiary Chemical Bank New Jersey ("Chemical"). The transaction includes approximately $3.2 billion of assets and $2.7 billion of retail deposits and 82 branches in southern and central New Jersey. The total purchase price will approximate $490 million and the transaction will be accounted for under the purchase method. The Corporation expects to complete this transaction in the fourth quarter of 1995. In February 1995, the Corporation completed the acquisition of BlackRock Financial Management L.P., a New York-based, fixed-income investment management firm with approximately $25 billion in assets under management at closing. The transaction was accounted for under the purchase method and the Corporation paid $71 million in cash and issued $169 million of unsecured notes. In connection with this acquisition, the Corporation recorded $239 million of intangible assets. 27 28 l NOTES TO CONSOLIDATED FINANCIAL STATEMENTS l In the first quarter of 1995, the Corporation acquired Indian River Federal Savings Bank, Vero Beach, Florida, and Brentwood Financial Corporation, Cincinnati, Ohio, for $33 million in cash. The acquisitions added assets and deposits of approximately $175 million and $140 million, respectively. During 1994, the Corporation completed the acquisitions of United Federal Bancorp, Inc., State College, Pennsylvania, and First Eastern Corp., Wilkes-Barre, Pennsylvania. The acquisitions added assets and deposits of $2.8 billion and $2.4 billion, respectively. In addition, in June 1994, the Corporation purchased a $10 billion residential mortgage servicing portfolio from the Associates Corporation of North America. cash flows --------------------------------------------------------------- For purposes of the statement of cash flows, the Corporation defines cash and due from banks as cash and cash equivalents. During the first six months of 1995 and 1994, interest paid on deposits and other contractual debt obligations was $1.3 billion and $816.5 million, respectively. Income taxes paid were $5.0 and $258.8 million, respectively. Loans transferred to foreclosed assets aggregated $34.3 million in 1995 and $18.2 million in the first six months of 1994. The table below sets forth information pertaining to acquisitions which affect the statement of cash flows for the six months ended June 30, 1995 and 1994.
Six months ended June 30 In millions 1995 1994 ---------------------------------------------------------- Assets acquired $517 $3,197 Liabilities assumed 410 2,619 Cash paid 107 578 Cash and due from banks received 39 116 ----------------------------------------------------------
In addition, the Corporation issued $169 million of unsecured notes in connection with the BlackRock acquisition. 28 29 l NOTES TO CONSOLIDATED FINANCIAL STATEMENTS l securities ---------------------------------------- The following table sets forth the amortized cost, unrealized gains and losses, and the estimated fair value of the securities portfolio. SECURITIES
JUNE 30, 1995 December 31, 1994 ------------------------------------------ ------------------------------------------- Unrealized Unrealized Amortized ------------------ Amortized ------------------ In millions COST GAINS LOSSES FAIR VALUE Cost Gains Losses Fair Value ------------------------------------------------------------------------------------------------------------------------------ Investment securities Debt securities U.S. Treasury $ 1,796 $29 $ 1,825 $ 1,794 $ 93 $ 1,701 U.S. Government agencies and corporations Mortgage-related 10,354 13 $286 10,081 10,920 1,025 9,895 Other 1,000 1 1,001 1,000 28 972 State and municipal 337 21 1 357 348 $12 2 358 Asset-backed private placements 1,597 12 1,609 1,597 33 1,564 Other debt Mortgage-related 677 1 13 665 726 43 683 Other 591 2 589 769 20 749 Other 306 1 307 310 1 311 ------------------------------------------------------------------------------------------ Total $16,658 $78 $302 $16,434 $17,464 $13 $1,244 $16,233 ------------------------------------------------------------------------------------------ Securities available for sale Debt securities U.S. Treasury $ 94 $1 $ 95 $ 401 $ 8 $ 393 U.S. Government agencies and corporations Mortgage-related 1,437 20 $10 1,447 2,161 69 2,092 Other 25 2 23 25 4 21 Other debt Mortgage-related 670 1 2 669 749 17 732 Other 108 1 109 117 $2 119 Corporate stocks and other 104 2 2 104 105 1 6 100 ------------------------------------------------------------------------------------------ Total $2,438 $25 $16 $2,447 $3,558 $3 $104 $3,457 ------------------------------------------------------------------------------------------------------------------------------
29 30 l NOTES TO CONSOLIDATED FINANCIAL STATEMENTS l nonperforming assets --------------------------------------------------------------- Nonperforming assets are comprised of nonaccrual and restructured loans, and foreclosed assets. These assets were as follows:
JUNE 30 December 31 In millions 1995 1994 ----------------------------------------------------------- Nonaccrual loans $301 $310 Restructured loans 7 9 ------------------------ Total nonperforming loans 308 319 Foreclosed assets 138 127 ------------------------ Total nonperforming assets $446 $446 --------------------------------------------------------
Information with respect to impaired loans and the related allowance determined in accordance with SFAS No. 114 is set forth below.
JUNE 30 In thousands 1995 ------------------------------------------------------ Impaired loans With a related allowance for credit losses $140,680 Without a related allowance for credit losses 110,447 ------- Total impaired loans $251,127 ------- Allowance for credit losses $ 22,318 Average impaired loans 244,221 ------------------------------------------------------
During the first six months of 1995, interest income recognized on impaired loans was $933 thousand. allowance for credit losses --------------------------------------------------------------- The following table presents changes in the allowance for credit losses:
In millions 1995 1994 ------------------------------------------------------------ Balance at January 1 $1,002 $ 972 Charge-offs (74) (81) Recoveries 32 30 ---------------------- Net charge-offs (42) (51) Provision for credit losses 50 Acquisitions 1 65 ---------------------- Balance at June 30 $ 961 $1,036 ------------------------------------------------------------
30 31 l NOTES TO CONSOLIDATED FINANCIAL STATEMENTS l notes and debentures --------------------------------------------------------------- Notes and debentures consisted of the following:
JUNE 30 DECEMBER 31 In millions 1995 1994 ------------------------------------------------------------- BANKING SUBSIDIARIES Bank notes $5,132 $ 8,825 Federal Home Loan Bank 1,826 1,384 Subordinated notes 345 Student Loan Marketing Association 300 500 Other 527 ------------------------------ Total banking subsidiaries 8,130 10,709 OTHER SUBSIDIARIES Senior notes 13 164 Subordinated notes 747 746 ESOP borrowing 101 110 Other 4 25 ------------------------------ Total other subsidiaries 865 1,045 ------------------------------ Total $8,995 $11,754 -------------------------------------------------------------
Notes and debentures have scheduled repayments for the years 1995 through 1999 and thereafter of $4.9 billion, $2.3 billion, $68 million, $153 million, and $1.6 billion, respectively. In April 1995, the Corporation issued $350 million of 7.875 percent unsecured subordinated notes due in 2005. financial derivatives --------------------------------------------------------------- The notional value of financial derivatives and the related fair values were comprised of the following: [CAPTION] Positive Negative Total In millions Notional Fair Notional Fair Notional Value Value Value Value Value ------------------------------------------------------------------------- June 30, 1995 Interest rate swaps Receive-fixed $ 589 $11 $ 9,479 $ (142) $10,068 Pay-fixed 10 5,608 (293) 5,618 Basis swap 465 8 465 ------------------------------------------------------- Total swaps 1,064 19 15,087 (435) 16,151 Interest rate caps 5,500 27 5,500 ------------------------------------------------------- Total $6,564 $46 $15,087 $ (435) $21,651 ------------------------------------------------------- December 31, 1994 Interest rate swaps Receive-fixed $ 119 $ 4 $11,375 $ (772) $11,494 Pay-fixed 5,060 26 658 (19) 5,718 ------------------------------------------------------ Total swaps 5,179 30 12,033 (791) 17,212 Interest rate caps 5,500 132 5,500 ------------------------------------------------------ Total $10,679 $162 $12,033 $ (791) $22,712 ------------------------------------------------------------------------
Subsequent to June 30, 1995 the Corporation terminated $2.0 billion of pay-fixed interest rate swaps. The terminations resulted in a loss of $99.3 million, which will be deferred and amortized as an adjustment to interest income or expense of the designated instrument ratably over 2 years and 9 months. 31 32 l STATISTICAL INFORMATION l average consolidated balance sheet and net interest analysis
Six months ended June 30 ------------------------------------------------------------------------------------- 1995 1994 Taxable-equivalent basis ---------------------------------------------------------------------------------- Average balances in millions, interest in AVERAGE AVERAGE Average Average thousands BALANCES INTEREST YIELDS/RATES Balances Interest Yields/Rates ---------------------------------------------------------------------------------------------------------------------------------- ASSETS Interest-earning assets Short-term investments $ 695 $ 23,188 6.73% $ 860 $ 19,886 4.66% Mortgages held for sale 456 18,225 7.99 824 28,922 7.02 Securities U.S. Treasury 2,120 40,839 3.88 3,844 91,511 4.80 U.S. Government agencies and corporations 13,721 386,160 5.63 15,363 454,198 5.91 State and municipal 344 17,680 10.27 374 19,349 10.34 Other debt 3,881 130,189 6.69 1,685 46,070 5.47 Corporate stocks and others 312 9,784 6.32 284 8,180 5.76 --------------------- --------------------- Total securities 20,378 584,652 5.74 21,550 619,308 5.75 Loans, net of unearned income Commercial 12,305 492,263 7.96 11,714 417,899 7.19 Real estate project 1,642 78,689 9.53 1,729 65,594 7.65 Real estate mortgage 11,134 417,777 7.50 9,018 308,794 6.85 Consumer 9,014 411,218 9.20 8,534 345,726 8.17 Other 1,660 55,565 6.72 1,283 38,785 6.07 --------------------- --------------------- Total loans, net of unearned income 35,755 1,455,512 8.14 32,278 1,176,798 7.34 Other interest-earning assets 49 1,582 6.53 113 2,051 3.68 --------------------- --------------------- Total interest-earning assets/interest income 57,333 2,083,159 7.27 55,625 1,846,965 6.67 Noninterest-earning assets Allowance for credit losses (988) (992) Cash and due from banks 2,281 2,128 Other assets 3,180 2,536 ------- ------- Total assets $61,806 $59,297 --------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing liabilities Interest-bearing deposits Demand and money market $ 9,065 141,136 3.14 $ 9,872 84,335 1.72 Savings 2,219 28,892 2.63 2,386 10,721 .91 Other time 13,896 381,190 5.52 13,110 311,456 4.79 Deposits in foreign offices 2,003 61,400 6.10 555 11,004 4.00 --------------------- --------------------- Total interest-bearing deposits 27,183 612,618 4.53 25,923 417,516 3.25 Borrowed funds Federal funds purchased 2,381 72,184 6.11 2,539 46,760 3.71 Repurchase agreements 6,778 208,048 6.11 5,468 100,069 3.69 Commercial paper 848 25,063 5.96 714 13,776 3.89 Other 3,295 113,572 6.90 2,532 46,706 3.72 --------------------- --------------------- Total borrowed funds 13,302 418,867 6.29 11,253 207,311 3.72 Notes and debentures 9,475 288,935 6.11 10,589 214,971 4.07 --------------------- --------------------- Total interest-bearing liabilities/interest expense 49,960 1,320,420 5.30 47,765 839,798 3.54 Noninterest-bearing liabilities and shareholders' equity Demand and other noninterest-bearing deposits 6,239 6,073 Accrued expenses and other liabilities 1,244 1,160 Shareholders' equity 4,363 4,299 ------- ------- Total liabilities and shareholders' equity $61,806 $59,297 ----------------------------------------------------------------------------------- Interest rate spread including interest rate swaps and caps 1.97 3.13 Impact of noninterest-bearing liabilities .68 .50 ------------------------------------------------------------------------------------ Net interest income/margin on earning assets $ 762,739 2.65% $1,007,167 3.63% ----------------------------------------------------------------------------------------------------------------------------------
Nonaccrual loans are included in loans, net of unearned income. The impact of interest rate swaps and caps is included in the interest income/expense and average yields/rates for commercial loans, U.S. Government agencies and corporations securities, all interest-bearing deposits, other borrowed funds and notes and debentures. 32 33 l STATISTICAL INFORMATION l
1995 ------------------------------------------------------------------------- 1994 Second Quarter First Quarter Second Quarter ------------------------------------------------------------------------------------------------------------------------- Average Average Average Average Average Average Balances Interest Yields/Rates Balances Interest Yields/Rates Balances Interest Yields/Rates ------------------------------------------------------------------------------------------------------------------------- $ 620 $ 10,777 6.97% $ 771 $ 12,411 6.53% $ 855 $ 10,666 5.00% 500 9,756 7.80 412 8,469 8.23 724 12,681 7.01 2,065 20,029 3.89 2,176 20,810 3.88 4,244 51,997 4.91 13,335 187,538 5.63 14,110 198,622 5.63 15,206 229,640 6.04 342 8,816 10.31 347 8,864 10.23 369 9,566 10.36 3,806 64,993 6.80 3,955 65,196 6.59 1,746 24,823 5.69 310 4,928 6.38 315 4,856 6.25 294 3,996 5.44 ---------------------- -------------------- -------------------- 19,858 286,304 5.76 20,903 298,348 5.72 21,859 320,022 5.86 12,479 250,410 7.94 12,129 241,853 7.98 12,075 213,853 7.10 1,665 39,799 9.46 1,619 38,305 9.46 1,736 33,767 7.80 11,383 214,293 7.53 10,882 204,069 7.50 8,981 156,806 6.98 9,005 210,863 9.39 9,023 200,355 9.01 8,617 175,131 8.15 1,659 27,839 6.72 1,662 27,726 6.72 1,122 19,448 6.94 ---------------------- -------------------- -------------------- 36,191 743,204 8.19 35,315 712,308 8.10 32,531 599,005 7.38 51 841 6.66 47 741 6.38 93 1,024 4.39 ---------------------- -------------------- -------------------- 57,220 1,050,882 7.33 57,448 1,032,277 7.21 56,062 943,398 6.74 (977) (1,000) (997) 2,413 2,147 2,029 3,262 3,098 2,531 ------- ------- ------- $61,918 $61,693 $59,625 ----------------------------------------------------------------------------------------------------------------------- $ 8,799 70,241 3.20 $ 9,335 70,895 3.08 $ 9,875 45,765 1.86 2,154 14,352 2.67 2,284 14,540 2.58 2,381 6,851 1.15 14,171 199,782 5.65 13,616 181,407 5.39 12,988 155,764 4.76 2,301 35,909 6.17 1,702 25,492 5.99 884 9,132 4.14 ---------------------- -------------------- -------------------- 27,425 320,284 4.68 26,937 292,334 4.39 26,128 217,512 3.34 2,628 40,802 6.23 2,132 31,382 5.97 2,821 28,434 4.04 6,698 105,010 6.20 6,859 103,037 6.01 4,879 48,241 3.97 621 9,423 6.08 1,078 15,639 5.88 925 9,681 4.20 3,334 59,673 7.12 3,259 54,063 6.68 2,342 24,218 4.15 ---------------------- -------------------- -------------------- 13,281 214,908 6.43 13,328 204,121 6.16 10,967 110,574 4.04 9,213 145,119 6.28 9,736 143,654 5.94 11,030 113,949 4.14 ---------------------- -------------------- -------------------- 49,919 680,311 5.44 50,001 640,109 5.16 48,125 442,035 3.68 6,362 6,115 6,124 1,268 1,220 1,108 4,369 4,357 4,268 ------- ------- ------- $61,918 $61,693 $59,625 ----------------------------------------------------------------------------------------------------------------------- 1.89 2.05 3.06 .69 .67 .52 ----------------------------------------------------------------------------------------------------------------------- $ 370,571 2.58% $392,168 2.72% $501,363 3.58% -----------------------------------------------------------------------------------------------------------------------
33 34 l CORPORATE INFORMATION l CORPORATE HEADQUARTERS l PNC Bank Corp. One PNC Plaza Fifth Avenue and Wood Street Pittsburgh, Pennsylvania 15265 STOCK LISTING l PNC Bank Corp. common stock is traded on the New York Stock Exchange (NYSE) under the symbol PNC. REGISTRAR AND TRANSFER AGENT l Chemical Bank J.A.F. Building P. O. Box 3068 New York, New York 10116-3068 800-982-7652 INQUIRIES l Individual shareholders should contact: Shareholder Relations at 800-843-2206 or the PNC Bank Hotline at 800-982-7652 Analysts and institutional investors should contact: William H. Callihan, Vice President, Investor Relations, at 412-762-8257 News media representatives and others seeking general information should contact: Jonathan Williams, Vice President, Media Relations, at 412-762-4550 FORM 10-Q l The Quarterly Report on Form 10-Q is filed with the Securities and Exchange Commission. This report, excluding certain exhibits, may be obtained without charge upon written or oral request to Glenn Davies, Vice President, Financial Reporting, at corporate headquarters. Telephone requests may be directed to (412) 762-1553. COMMON STOCK PRICES/DIVIDENDS DECLARED l The table below sets forth by quarter the range of high and low sale prices for PNC Bank Corp. common stock and the cash dividends declared per common share.
Cash Dividends 1995 Quarter High Low Declared --------------------------------------------------------------- First $25.750 $21.125 $ .35 Second 28.125 24.250 .35 ----------------------------------- Total $ .70 --------------------------------------------------------------- 1994 Quarter --------------------------------------------------------------- First $29.875 $25.250 $ .32 Second 31.625 26.125 .32 Third 30.000 25.625 .32 Fourth 26.375 20.000 .35 ----------------------------------- Total $1.31 ---------------------------------------------------------------
DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN l 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. 34 EX-99.2 7 PNC BANK 1 EXHIBIT 99.2 SUMMARY OF VOTES CAST(1)
Aggregate Aggregate Votes Nominee Votes For Against/Withheld ------- --------- ---------------- Robert N. Clay 191,658,400 2,433,706 William G. Copeland 191,688,733 2,405,373 George A. Davidson, Jr. 191,767,896 2,324,210 Dianna L. Green 191,577,834 2,514,272 Carl G. Grefenstette 191,776,561 2,315,545 W. Craig McClelland 190,287,668 3,804,438 Thomas Marshall 191,675,790 2,416,316 Donald I. Moritz 191,697,174 2,394,932 Thomas H. O'Brien 191,575,023 2,517,083 Jackson H. Randolph 191,775,077 2,317,029 James E. Rohr 191,694,819 2,397,287 Roderic H. Ross 191,733,581 2,358,525 Vincent A. Sarni 191,556,401 2,535,705 Richard P. Simmons 191,765,624 2,326,482 Thomas J. Usher 191,708,264 2,383,842 Milton A. Washington 191,733,559 2,358,547 Helge H. Wehmeier 188,672,553 5,419,553
(1) Holders of the Corporation's common stock and preferred stock voted together as a single class. The following table sets forth as of the March 6, 1995 record date the number of shares of each class of stock that was issued and outstanding and entitled to vote, the voting power per share and the aggregate voting power of each class:
Number of Shares Aggregate Title of Class Voting Rights Entitled to Vote Voting Power -------------- ------------- ---------------- ------------ Common Stock 1 vote per share 230,464,954 230,464,954 $1.80 Cumulative Convertible Preferred Stock - Series A 8 votes per share 18,750 150,000 $1.80 Cumulative Convertible Preferred Stock - Series B 8 votes per share 7,095 56,760 $1.60 Cumulative Convertible Preferred Stock - Series C 4 votes per 2.4 shares 390,591 650,985 $1.80 Cumulative Convertible Preferred Stock - Series D 4 votes per 2.4 shares 499,840 833,066 ------------ TOTAL POSSIBLE VOTES 232,155,765* -------------
* Represents greatest number of votes possible. Actual aggregate voting power was less since each holder of suhc preferred stock is entitled to a number of votes equal to the number of full shares of common stock into which such holder's preferred stock is convertible. 11 EX-99.3 8 PNC BANK 1 EXHIBIT 99.3 PRO FORMA CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED) The unaudited pro forma consolidated financial information gives effect to the Merger to be accounted for as a pooling of interests. The consolidated financial information on the following pages presents (i) the historical consolidated balance sheets of both the Corporation and Midlantic at June 30, 1995, and the pro forma consolidated balance sheet as of June 30, 1995, giving effect to the Merger as if it had occurred on that date; and (ii) the historical consolidated statements of income of both the Corporation and Midlantic for the six months ended June 30, 1995 and 1994, and the pro forma consolidated statements of income for the six months ended June 30, 1995 and 1994, giving effect to the Merger as if it had been effected for all periods presented. Certain reclassifications have been made to the historical financial information to conform presentation. Intercompany transactions between the Corporation and Midlantic are immaterial and, accordingly, have not been eliminated. The pro forma consolidated balance sheet gives effect to anticipated expenses and nonrecurring charges related to the Merger and assumes each of the outstanding shares of Midlantic common stock is converted into 2.05 shares of the Corporation's common stock. In addition, the pro forma consolidated balance sheet assumes that all Midlantic stock options are exchanged for the Corporation's common stock, in accordance with the terms of the agreement. However, pro forma consolidated financial information excludes the estimated effect of revenue enhancements and expense savings associated with the consolidation of the operations of the Corporation and Midlantic. During 1995 and 1994, the Corporation and Midlantic completed or have pending, various other acquisitions which individually and in the aggregate are not "significant subsidiaries" in relation to the Corporation. Accordingly, pro forma financial information with respect to those acquisitions is not included herein. The pro forma consolidated financial information is intended for informational purposes and may not be indicative of the financial position or results that actually would have occurred had the transaction been consummated on the dates indicated, or which will be attained in the future. The pro forma consolidated financial information should be read in conjunction with the 1994 Annual Reports on Form 10-K and the Quarterly Reports on Form 10-Q for the quarterly period ended June 30, 1995 of the Corporation and Midlantic. 12 2 PNC BANK CORP. Pro Forma Consolidated Balance Sheet (Unaudited) June 30, 1995
PNC MIDLANTIC PRO FORMA In millions BANK CORP. CORPORATION ADJUSTMENTS PRO FORMA ______________________________________________________________________________________________________________ ASSETS Cash and due from banks $ 2,612 $ 834 $ 38 (A,B) $ 3,484 Short-term investments 502 593 1,095 Loans held for sale 733 733 Securities available for sale 2,447 814 3,261 Investment securities 16,658 2,478 19,136 Loans, net of unearned income 36,690 8,657 45,347 Allowance for credit losses (961) (339) (1,300) -------------------------------------------------------------- Net loans 35,729 8,318 44,046 Other 4,042 697 13 (A,B,C) 4,752 -------------------------------------------------------------- Total assets $ 62,763 $ 13,734 $ 51 $ 76,548 ============================================================== LIABILITIES Deposits Noninterest-bearing $ 6,660 $ 2,798 $ 9,458 Interest-bearing 28,630 8,089 36,719 -------------------------------------------------------------- Total deposits 35,290 10,887 46,177 -------------------------------------------------------------- Borrowed funds Federal funds purchased 2,154 68 2,222 Repurchase agreements 5,793 785 6,578 Commercial paper 576 576 Other 3,863 30 3,893 -------------------------------------------------------------- Total borrowed funds 12,386 883 13,269 Notes and debentures 8,995 373 9,368 Accrued expenses and other liabilities 1,656 194 $ 130 (C) 1,980 -------------------------------------------------------------- Total liabilities 58,327 12,337 130 70,794 -------------------------------------------------------------- SHAREHOLDERS' EQUITY Preferred stock 1 1 Common stock 1,182 158 $(158)(A) 1,736 554 (A) Capital surplus 461 620 (620)(A) 707 246 (A) Retained earnings 3,119 638 (124)(B,C) 3,633 Deferred ESOP benefit expense (83) (83) Net unrealized securities (losses) (41) 4 (37) Common stock held in treasury at cost (203) (23) 23 (A) (203) -------------------------------------------------------------- Total shareholders' equity 4,436 1,397 (79) 5,754 -------------------------------------------------------------- Total liabilities and shareholders' equity $ 62,763 $ 13,734 $ 51 $ 76,548 ==============================================================================================================
See accompanying Notes to Pro Forma Consolidated Financial Information. 13 3 PNC BANK CORP. Pro Forma Consolidated Statement of Income (Unaudited) Six months ended June 30, 1995
PNC MIDLANTIC In thousands, except per share data BANK CORP. CORPORATION PRO FORMA (D) ___________________________________________________________________________________________ INTEREST INCOME Loans and fees on loans $1,445,006 $ 361,703 $ 1,806,709 Securities 578,787 104,374 683,161 Other 42,929 23,121 66,050 -------------------------------------------- Total interest income 2,066,722 489,198 2,555,920 INTEREST EXPENSE -------------------------------------------- Deposits 612,618 135,857 748,475 Borrowed funds 418,867 20,371 439,238 Notes and debentures 288,935 17,170 306,105 -------------------------------------------- Total interest expense 1,320,420 173,398 1,493,818 -------------------------------------------- Net interest income 746,302 315,800 1,062,102 Provision for credit losses 3,000 3,000 -------------------------------------------- Net interest income less provision for credit losses 746,302 312,800 1,059,102 -------------------------------------------- NONINTEREST INCOME Investment management and trust 176,649 22,870 199,519 Service charges, fees and commissions 180,408 38,375 218,783 Mortgage banking 95,320 95,320 Net securities gains 9,036 184 9,220 Other 40,734 35,231 75,965 -------------------------------------------- Total noninterest income 502,147 96,660 598,807 -------------------------------------------- NONINTEREST EXPENSE Staff expense 406,448 124,129 530,577 Net occupancy 69,712 21,720 91,432 Equipment 67,047 12,792 79,839 Amortization of intangibles 43,186 4,004 47,190 Federal deposit insurance 36,649 11,888 48,537 Other 240,740 59,460 300,200 -------------------------------------------- Total noninterest expense 863,782 233,993 1,097,775 -------------------------------------------- Income before income taxes 384,667 175,467 560,134 Applicable income taxes 122,028 65,751 187,779 -------------------------------------------- Net income $ 262,639 $109,716 $ 372,355 =========================================================================================== EARNINGS PER COMMON SHARE Primary $1.13 $2.04 $1.09 Fully diluted 1.13 2.02 1.08 AVERAGE COMMON SHARES OUTSTANDING Primary 231,388 52,790 339,608 Fully diluted 233,412 54,461 345,056 ===========================================================================================
See accompanying Notes to Pro Forma Consolidated Financial Information. 14 4 PNC BANK CORP. Pro Forma Consolidated Statement of Income (Unaudited) Six months ended June 30, 1994
PNC MIDLANTIC In thousands, except per share data BANK CORP. CORPORATION PRO FORMA (D) _________________________________________________________________________________________ INTEREST INCOME Loans and fees on loans $1,166,847 $ 331,021 $1,497,868 Securities 612,455 53,786 666,241 Other 50,796 32,189 82,985 ------------------------------------------ Total interest income 1,830,098 416,996 2,247,094 ------------------------------------------ INTEREST EXPENSE Deposits 417,516 107,395 524,911 Borrowed funds 207,311 10,822 218,133 Notes and debentures 214,971 17,279 232,250 ------------------------------------------ Total interest expense 839,798 135,496 975,294 ------------------------------------------ Net interest income 990,300 281,500 1,271,800 Provision for credit losses 50,045 18,983 69,028 ------------------------------------------ Net interest income less provision for credit losses 940,255 262,517 1,202,772 ------------------------------------------ NONINTEREST INCOME Investment management and trust 146,461 20,642 167,103 Service charges, fees and commissions 180,041 37,966 218,007 Mortgage banking 80,363 80,363 Net securities gains (losses) 30,307 (3,374) 26,933 Other 49,619 62,324 111,943 ------------------------------------------ Total noninterest income 486,791 117,558 604,349 ------------------------------------------ NONINTEREST EXPENSE Staff expense 410,871 114,115 524,986 Net occupancy 66,562 23,055 89,617 Equipment 65,580 12,915 78,495 Amortization of intangibles 37,830 3,225 41,055 Federal deposit insurance 36,339 14,381 50,720 Other 227,959 72,256 300,215 ------------------------------------------ Total noninterest expense 845,141 239,947 1,085,088 ------------------------------------------ Income before income taxes 581,905 140,128 722,033 Applicable income taxes 188,371 14,496 202,867 ------------------------------------------ Income before cumulative effect of change in accounting principle $ 393,534 $ 125,632 $ 519,166 ========================================================================================= EARNINGS PER COMMON SHARE BEFORE CUMMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE Primary $1.66 $2.34 $1.50 Fully diluted 1.65 2.31 1.48 AVERAGE COMMON SHARES OUTSTANDING Primary 236,974 52,868 345,353 Fully diluted 238,887 54,445 350,498 _________________________________________________________________________________________
See accompanying Notes to Pro Forma Consolidated Financial Information. 15 5 NOTES TO PRO FORMA CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED) (A) The pro forma balance sheet gives effect to the proposed Merger of the Corporation and Midlantic by combining the respective balance sheets of the two companies at June 30, 1995 on a pooling-of-interests basis. Cash and other assets have been adjusted to reflect the exercise of Midlantic stock options for $13 million in cash and a related current tax benefit of $32 million related to the exchange of the Corporation's common stock for outstanding Midlantic options. The capital accounts have been adjusted to reflect the issuance of 110.8 million shares of common stock of the Corporation in exchange for all the outstanding shares of Midlantic (common stock held in treasury was assumed to be canceled) and the assumed exchange of the Corporation's Common Stock for all outstanding Midlantic stock options. Midlantic's debentures, which approximated $73 million, are convertible into Midlantic common stock at a conversion price of $48 per share. For purposes of this pro forma consolidated balance sheet, conversion of these debentures has not been assumed. (B) Based upon a preliminary review of Midlantic's asset and liability management position, the Corporation anticipates terminating its interest rate cap position concurrent with or shortly after consummation of the Merger. Upon termination, any losses, measured by the difference between the unamortized premium and the estimated fair value, would be recognized immediately in the results of operations. An adjustment of $60 million (unamortized premium of $85 million net of estimated fair value payment of $25 million) has been recorded in the pro forma balance sheet to reflect the anticipated loss. This adjustment resulted in a $39 million after-tax charge to retained earnings in the pro forma balance sheet. The Corporation is continuing this review of Midlantic's asset and liability management position and is considering various other actions to maintain its existing interest rate risk position. As a result of further analysis, certain reclassifications or sales of investment securities currently classified in the held to maturity portfolio may occur. Reclassifications, if any, will be accounted for at fair value with any unrealized gain or loss, net of taxes, at the date of transfer recognized as a separate component of shareholders' equity. If any such securities are sold, gains or losses from such transactions would be reflected in results of operations. At June 30, 1995, securities held to maturity, on a pro forma basis, had a total net unrealized pretax loss of $274 million. Additionally, certain interest rate swaps are associated with investment securities which are currently classified in the held to maturity portfolio. If, as a result of the aforementioned review, such securities are reclassified to the available for sale portfolio or sold, the fair value, or the gain or loss on sale of such securities, will also reflect the fair value of the related interest rate swaps, if any. At June 30, 1995, interest rate swaps designated to held to maturity securities, on a pro forma basis, had a total net unrealized pretax loss of $249 million. No adjustments have been made in the accompanying pro forma balance sheet to reflect the potential reclassification of investment securities, including the effect, if any, of the related interest rate swaps, as the Corporation's management has not made a determination with respect to such matters. 16 6 (C) A liability of $130 million has been recorded in the pro forma balance sheet to reflect management's estimate of anticipated expenses and nonrecurring charges related to the Merger. This liability resulted in an $85 million after-tax adjustment to retained earnings in the pro forma balance sheet. It is anticipated that substantially all of these charges will be recognized during 1995 upon consummation of the Merger and paid in 1995 and 1996. the following table provides details of the estimated charges by type:
Pre-Tax Amount Type of Cost (In Millions) ------------ -------------- Operations and Facilities $ 56 Personnel Related 40 Other 34 ---- $130 ====
Operations and facilities charges consist of lease termination costs and other related costs resulting from the consolidation of overlapping branches and elimination of redundant operational facilities as well as write-offs of computer hardware and software, signage and telecommunication equipment due to incompatibility or duplication. Personnel related costs consist primarily of charges related to employee severance, termination of certain employee benefit plans and employee outplacement assistance. (D) The pro forma consolidated statements of income give effect to the proposed Merger of the Corporation and Midlantic by combining the respective statements of income of the two companies for the six month periods ended June 30, 1995 and 1994. The pro forma statements of income do not give effect to anticipated expenses and nonrecurring charges related to the Merger and the estimated effect of revenue enhancements and expense savings associated with the consolidation of the operations of the Corporation and Midlantic. Earnings per common share amounts for the Corporation and Midlantic are based on the historical fully diluted weighted average number of common shares outstanding for each company during the period. With respect to the pro forma earnings per share computation, shares of Midlantic have been adjusted to the equivalent shares of the Corporation for each period. 17