THE PNC FINANCIAL SERVICES GROUP, INC.
Quarterly Report on Form 10-Q/A, Amendment No. 1
For the quarterly period ended March 31, 2001
Pages 1 and 2 represent a portion of the first quarter 2001 Financial Review
which is not required by the Form 10-Q/A report and is not "filed" as part of
the Form 10-Q/A.
The Form 10-Q/A and cross reference index is on page 39.
FINANCIAL REVIEW
THE PNC FINANCIAL SERVICES GROUP, INC.
By filing this amendment ("Amendment No. 1"), the registrant, The PNC Financial
Services Group, Inc., hereby amends its Quarterly Report on Form 10-Q for the
quarter ended March 31, 2001 ("March 2001 Form 10-Q") primarily to reflect the
correction of an error related to the accounting for the January 2001 sale of
the registrant's residential mortgage banking business.
By this Amendment No. 1, the registrant is amending and restating its entire
March 2001 Form 10-Q.
March 31 March 31 For the three months ended - dollars in millions, except
per share data 2001 2000
---------------------------------------------------------------------------------------------------------------------
FINANCIAL PERFORMANCE
Revenue
Net interest income (taxable-equivalent basis) $559 $560
Noninterest income 701 728
-------------------------
Total revenue 1,260 1,288
Income from continuing operations 265 302
Discontinued operations 5 6
-------------------------
Income before cumulative effect of accounting change 270 308
Cumulative effect of accounting change (5)
-------------------------
Net income $265 $308
=========================
Per common share
DILUTED EARNINGS
Continuing operations $.89 $1.01
Discontinued operations .02 .02
-------------------------
Before cumulative effect of accounting change .91 1.03
Cumulative effect of accounting change (.02)
-------------------------
Net income $ .89 $1.03
=========================
Cash dividends declared $.48 $.45
---------------------------------------------------------------------------------------------------------------------
SELECTED RATIOS
FROM CONTINUING OPERATIONS
Return on
Average common shareholders' equity 16.59% 21.29%
Average assets 1.49 1.77
Net interest margin 3.62 3.68
Noninterest income to total revenue 55.63 56.52
Efficiency (a) 57.91 57.85
FROM NET INCOME
Return on
Average common shareholders' equity 16.59% 21.71%
Average assets 1.43 1.66
Net interest margin 3.53 3.46
Noninterest income to total revenue 55.92 58.27
Efficiency (b) 57.74 57.36
=====================================================================================================================
(a) Excludes amortization and distributions on capital securities.
(b) Excludes amortization, distributions on capital securities and residential
mortgage banking risk management activities.
1
March 31 December 31 March 31
Dollars in millions, except per share data 2001 2000 2000
--------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
Assets $70,966 $69,844 $68,474
Earning assets 60,548 59,373 59,986
Loans, net of unearned income 45,626 50,601 50,259
Securities available for sale 11,976 5,902 5,906
Loans held for sale 1,765 1,655 2,799
Investment in discontinued operations 356 274
Deposits 47,189 47,664 45,767
Borrowed funds 12,279 11,718 13,362
Shareholders' equity 6,781 6,656 6,039
Common shareholders' equity 6,470 6,344 5,726
Book value per common share 22.39 21.88 19.68
Loans to deposits 97% 106% 110%
CAPITAL RATIOS
Leverage 7.8% 8.0% 6.7%
Common shareholders' equity to total assets 9.12 9.08 8.36
ASSET QUALITY RATIOS
Nonperforming assets to total loans,
loans held for sale and foreclosed assets .81% .71% .65%
Allowance for credit losses to total loans 1.48 1.33 1.34
Allowance for credit losses to nonperforming loans 200.89 208.98 224.67
Net charge-offs to average loans .65 .32 .25
====================================================================================================================
2
FINANCIAL REVIEW
THE PNC FINANCIAL SERVICES GROUP, INC.
This Financial Review should be read in conjunction with The PNC Financial
Services Group, Inc. ("Corporation" or "PNC") unaudited Consolidated Financial
Statements and Statistical Information included herein and the Financial Review
and audited Consolidated Financial Statements included in the Corporation's 2000
Annual Report. For information regarding business risks, see the Risk Management
and Risk Factors sections in this Financial Review. Also, see the
Forward-Looking Statements section in this Financial Review for other factors
that could cause actual results to differ materially from forward-looking
statements or historical performance.
The amounts contained in this Amendment No. 1 include the restatement of the
results for the first quarter 2001 to reflect the correction of an error related
to the accounting for the sale of the residential mortgage banking business.
This restatement reduced income from discontinued operations and net income for
the three months ended March 31, 2001 by $35 million, or $.12 per diluted share.
The consolidated balance sheet was not affected by this restatement as the
impact of the error had been reflected in retained earnings at March 31, 2001.
OVERVIEW
THE PNC FINANCIAL SERVICES GROUP, INC.
The Corporation is one of the largest diversified financial services companies
in the United States, operating businesses engaged in community banking,
corporate banking, real estate finance, asset-based lending, wealth management,
asset management and global fund services. The Corporation provides certain
products and services nationally and others in PNC's primary geographic markets
in Pennsylvania, New Jersey, Delaware, Ohio and Kentucky. The Corporation also
provides certain asset management and processing products and services
internationally.
Financial services organizations today are challenged to demonstrate that they
can generate high-quality earnings growth in an increasingly competitive and
weakening economic environment. As a result, PNC has been aggressively pursuing
strategies to create a more diverse and valuable business mix by increasing the
contribution from more highly-valued businesses such as asset management,
processing and treasury management and by decreasing the contribution from
lending- based traditional banking businesses. Earnings from asset management
and processing businesses increased to nearly 30% of total business earnings for
the first three months of 2001 and noninterest income was approximately 60% of
total revenue. At the same time, PNC sold its residential mortgage banking
business and has been downsizing certain institutional lending portfolios
resulting in a reduction of the loan to deposit ratio to below 100%.
On January 31, 2001, PNC closed the sale of its residential mortgage banking
business. The net loss on sale and income from operations for the first three
months of 2001 resulted in income from discontinued operations of $5 million or
$.02 per diluted share. Certain closing date adjustments are currently in
dispute between PNC and the buyer, Washington Mutual Bank, FA. The ultimate
financial impact of the sale will not be determined until the disputed matters
are finally resolved.
Return on average common shareholders' equity was 16.59% and return on average
assets was 1.43% for the first three months of 2001 compared with 21.71% and
1.66%, respectively, for the first three months of 2000. Returns during the
first three months of 2001 reflect PNC's stronger capital position that resulted
from balance sheet downsizing initiatives.
SUMMARY FINANCIAL RESULTS
Consolidated net income for the first three months of 2001 was $265 million or
$.89 per diluted share. Excluding the effect of adopting the new accounting
standard for financial derivatives, net income was $270 million or $.91 per
diluted share compared with $308 million or $1.03 per diluted share for the
first three months of 2000. These results include the negative impact of a $27
million or $.09 per diluted share net loss from venture capital activities.
Excluding this loss and the effect of the accounting change, results for the
first three months of 2001 were $297 million or $1.00 per diluted share.
The residential mortgage banking business, which was sold in January 2001, is
reflected in discontinued operations throughout the Corporation's consolidated
financial statements. Accordingly, the income and net assets of the
residential mortgage banking business are shown separately on one line in the
income statement and balance sheet, respectively, for all periods presented. The
remainder of the discussion and information in this Financial Review reflects
continuing operations, unless otherwise noted.
Income from continuing operations for the first three months of 2001 was $265
million or $.89 per diluted share. Excluding the $27 million net loss from
venture capital activities and a $32 million charge related to loans designated
for exit or downsizing and severance costs, income from continuing operations
was $324 million or $1.09 per diluted share for the first three months of 2001.
Income from continuing operations was $302 million or $1.01 per diluted share
during the same period a year ago.
Taxable-equivalent net interest income of $559 million for the first three
months of 2001 remained relatively unchanged compared with the first three
months of 2000. The net interest margin was 3.62% for the first three months of
2001 compared with 3.68% for the first three months of 2000. The narrowing of
the net interest margin was primarily due to a higher proportion of securities
available for sale in the mix of earning assets.
3
The provision for credit losses was $80 million for the first three months of
2001 and net charge-offs were $80 million or .65% of average loans. The
provision for credit losses was $31 million and net charge-offs were $31 million
or .25% of average loans for the same period in 2000. The increases were
primarily due to $41 million of provision for credit losses related to
charge-offs of loans in the communications and energy, metals and mining
portfolios that PNC has designated for exit or downsizing. Excluding this
amount, net charge-offs were $39 million or .32% of average loans for the first
three months of 2001.
Noninterest income was $701 million for the first three months of 2001 and
included $39 million of equity management losses from venture capital
activities. Excluding equity management gains and losses from both years,
noninterest income increased 15% compared with the first three months of 2000
primarily due to growth in asset management and processing revenue.
Noninterest expense was $775 million for the first three months of 2001 compared
with $792 million for the first three months of 2000 and the efficiency ratio
remained flat at 58% during both periods.
Total assets were $71.0 billion at March 31, 2001 compared with $69.8 billion at
December 31, 2000. Average interest-earning assets were $61.5 billion for the
first three months of 2001 compared with $60.5 billion for the first three
months of 2000. The increase was primarily due to a higher level of securities
available for sale that resulted from balance sheet and interest rate risk
management activities.
Shareholders' equity totaled $6.8 billion at March 31, 2001. The regulatory
capital ratios were 7.8% for leverage, 8.7% for tier I risk-based and 12.6% for
total risk-based capital. During the first three months of 2001, PNC repurchased
2.3 million shares of common stock.
The ratio of nonperforming assets to total loans, loans held for sale and
foreclosed assets was .81% at March 31, 2001 compared with .71% at December 31,
2000 and .65% at March 31, 2000. The increase primarily resulted from a decrease
in loans. Nonperforming assets were $386 million at March 31, 2001 compared with
$372 million and $344 million at December 31, 2000 and March 31, 2000,
respectively.
The allowance for credit losses was $675 million and represented 1.48% of total
loans and 201% of nonperforming loans at March 31, 2001. The comparable ratios
were 1.33% and 209%, respectively, at December 31, 2000 and 1.34% and 225%,
respectively, at March 31, 2000.
4
FINANCIAL REVIEW
THE PNC FINANCIAL SERVICES GROUP, INC.
REVIEW OF BUSINESSES
PNC operates seven major businesses engaged in community banking, corporate
banking, real estate finance, asset-based lending, wealth management, asset
management and global fund services.
Business results are presented based on PNC's management accounting practices
and the Corporation's management structure. There is no comprehensive,
authoritative body of guidance for management accounting equivalent to generally
accepted accounting principles; therefore, PNC's business results are not
necessarily comparable with similar information for any other financial services
institution. Financial results are presented, to the extent practicable, as if
each business operated on a stand-alone basis.
The management accounting process uses various balance sheet and income
statement assignments and transfers to measure performance of the businesses.
Methodologies change from time to time as management accounting practices are
enhanced and businesses change. Securities available for sale or borrowings and
related net interest income are assigned based on the net asset or liability
position of each business. Capital is assigned based on management's assessment
of inherent risks and equity levels at independent companies providing similar
products and services. The allowance for credit losses is allocated based on
management's assessment of risk inherent in the loan portfolios. Support areas
not directly aligned with the businesses are allocated primarily based on the
utilization of services.
Total business financial results differ from consolidated results from
continuing operations primarily due to differences between management accounting
practices and generally accepted accounting principles, loan portfolios and
businesses that have been divested or designated for exit during 2000 or
earlier, equity management activities, minority interests, residual asset and
liability management activities, eliminations and unassigned items, the impact
of which is reflected in the "Other" category. The operating results and
financial impact of the disposition of the residential mortgage banking
business, previously PNC Mortgage, are included in discontinued operations.
RESULTS OF BUSINESSES
Revenue Return on
Earnings (taxable-equivalent basis) Assigned Capital Average Assets
Three months ended March 31 ---------------------------------------------------------------------------------------
Dollars in millions 2001 2000 2001 2000 2001 2000 2001 2000
------------------------------------------------------------------------------------------------------------------------------------
PNC Bank
Community Banking $162 $129 $542 $477 24% 20% $40,617 $37,866
Corporate Banking 24 64 192 214 8 22 16,939 15,950
------------------------------------------------------------------------------------ --------------------
Total PNC Bank 186 193 734 691 19 21 57,556 53,816
------------------------------------------------------------------------------------ --------------------
Secured Finance
PNC Real Estate Finance 20 13 53 46 21 14 5,378 5,382
PNC Business Credit 16 13 38 28 41 38 2,377 2,084
------------------------------------------------------------------------------------ --------------------
Total Secured Finance 36 26 91 74 26 20 7,755 7,466
------------------------------------------------------------------------------------ --------------------
Total Banking 222 219 825 765 20 21 65,311 61,282
Asset Management and Processing
PNC Advisors 44 41 199 204 32 30 3,505 3,598
BlackRock 25 19 134 108 26 26 500 388
PFPC 17 6 184 161 33 12 1,735 1,603
------------------------------------------------------------------------------------ --------------------
Total Asset Management and
Processing 86 66 517 473 30 25 5,740 5,589
------------------------------------------------------------------------------------ --------------------
Total business results 308 285 1,342 1,238 22 22 71,051 66,871
Other (43) 17 (82) 50 734 1,473
------------------------------------------------------------------------------------ --------------------
Results from continuing operations 265 302 1,260 1,288 17 21 71,785 68,344
Discontinued operations 5 6 207 412
Cumulative effect of accounting change (5)
------------------------------------------------------------------------------------ --------------------
Total Consolidated $265 $308 $1,260 $1,288 17 22 $71,992 $68,756
===================================================================================================================================
5
COMMUNITY BANKING
Three months ended March 31
Dollars in millions 2001 2000
-----------------------------------------------------------------
INCOME STATEMENT
Net interest income $354 $344
Other noninterest income 161 137
Net securities gains (losses) 27 (4)
-----------------------------------------------------------------
Total revenue 542 477
Provision for credit losses 10 12
Noninterest expense 279 264
-----------------------------------------------------------------
Pretax earnings 253 201
Income taxes 91 72
-----------------------------------------------------------------
Earnings $162 $129
-----------------------------------------------------------------
AVERAGE BALANCE SHEET
Loans
Consumer
Home equity $5,932 $5,252
Indirect 943 1,435
Education 135 97
Other consumer 917 786
-----------------------------------------------------------------
Total consumer 7,927 7,570
Commercial 3,611 3,725
Residential mortgage 11,701 11,603
Leasing 1,703 1,179
Other 140 141
-----------------------------------------------------------------
Total loans 25,082 24,218
Securities available for sale 7,551 5,676
Loans held for sale 1,324 1,429
Assigned assets and other assets 6,660 6,543
-----------------------------------------------------------------
Total assets $40,617 $37,866
-----------------------------------------------------------------
Deposits
Noninterest-bearing demand $4,476 $4,594
Interest-bearing demand 5,506 5,274
Money market 11,769 9,482
Savings 1,860 2,077
Certificates 13,256 13,611
-----------------------------------------------------------------
Total deposits 36,867 35,038
Other liabilities 1,010 274
Assigned capital 2,740 2,554
-----------------------------------------------------------------
Total funds $40,617 $37,866
-----------------------------------------------------------------
PERFORMANCE RATIOS
Return on assigned capital 24% 20%
Noninterest income to total revenue 35 28
Efficiency 50 53
=================================================================
Community Banking provides deposit, branch-based brokerage, electronic banking
and credit products and services to retail customers as well as deposit, credit,
treasury management and capital markets products and services to small
businesses primarily within PNC's geographic region.
Community Banking's strategic focus is on driving sustainable revenue growth,
aggressively managing the revenue/expense relationship and improving the
risk/return dynamic of this business. Community Banking utilizes knowledge-based
marketing capabilities to analyze customer demographic information, transaction
patterns and delivery preferences to develop customized banking packages focused
on improving customer satisfaction and profitability.
Community Banking has also invested heavily in building a sales culture and
infrastructure while improving efficiency. Capital investments have been
strategically directed towards the expansion of multi-channel distribution,
consistent with customer preferences, as well as the delivery of relevant
customer information to all distribution channels.
Community Banking contributed 53% of total business earnings for the first three
months of 2001 compared with 45% for the first three months of 2000. Earnings
increased $33 million or 26% to $162 million for the first three months of 2001
primarily due to net securities gains and strong business growth. Excluding net
securities gains from the first three months of 2001 and net securities losses
from the first three months of 2000, earnings increased 11% primarily driven by
higher noninterest income, deposit growth and improved efficiency.
Total revenue was $542 million for the first three months of 2001 compared with
$477 million for the first three months of 2000. The increase was primarily due
to net securities gains and higher consumer transaction activity in 2001.
Excluding net securities gains and losses from both periods, revenue increased
7% in the period-to-period comparison.
The provision for credit losses for the first three months of 2001 decreased $2
million compared with the same period in 2000 primarily due to lower net
charge-offs in indirect lending.
Total loans increased in the comparison as higher home equity loans and leases
that resulted from strategic acquisitions were partially offset by the continued
downsizing of the indirect automobile lending portfolio. Total deposits grew 5%
in the comparison driven by a $2.3 billion increase in money market deposits.
The increase in money market deposits resulted from targeted consumer marketing
initiatives to add new accounts and retain existing customers as funds shifted
from savings and certificates of deposit.
6
FINANCIAL REVIEW
THE PNC FINANCIAL SERVICES GROUP, INC.
CORPORATE BANKING
Three months ended March 31
Dollars in millions 2001 2000
-----------------------------------------------------------------
INCOME STATEMENT
Credit-related revenue $104 $99
Noncredit revenue 88 115
-----------------------------------------------------------------
Total revenue 192 214
Provision for credit losses 57 15
Noninterest expense 101 101
-----------------------------------------------------------------
Pretax earnings 34 98
Income taxes 10 34
-----------------------------------------------------------------
Earnings $24 $64
-----------------------------------------------------------------
AVERAGE BALANCE SHEET
Loans
Middle market $5,969 $6,067
Large corporate 3,199 3,032
Energy, metals and mining 1,383 1,360
Communications 1,262 1,449
Leasing 2,185 1,719
Other 326 382
-----------------------------------------------------------------
Total loans 14,324 14,009
Other assets 2,615 1,941
-----------------------------------------------------------------
Total assets $16,939 $15,950
-----------------------------------------------------------------
Deposits $4,901 $4,526
Assigned funds and other liabilities 10,768 10,228
Assigned capital 1,270 1,196
-----------------------------------------------------------------
Total funds $16,939 $15,950
-----------------------------------------------------------------
PERFORMANCE RATIOS
Return on assigned capital 8% 22%
Noncredit revenue to total revenue 46 54
Efficiency 52 47
=================================================================
Corporate Banking provides credit, equipment leasing, treasury management and
capital markets products and services to large and mid-sized corporations,
institutions and government entities primarily within PNC's geographic region.
The strategic focus for Corporate Banking is to emphasize higher-margin
noncredit products and services, especially treasury management and capital
markets, and to extend credit to customers as a complement to sales of noncredit
products and services. Approximately 40% of the loan portfolio represents
syndicated loans. These credits are generally large commitments that are shared
by a number of financial institutions to reduce exposure to any one client.
During the first quarter of 2001, the Corporation announced the decision to exit
the communications lending sector and to reduce portions of the energy, metals
and mining and large corporate lending sectors. The designated loans are
reported in Corporate Banking business results in both periods presented.
Management continues to evaluate opportunities to reduce lending exposure and
improve the risk/return characteristics of this business.
Corporate Banking contributed 8% of total business earnings for the first three
months of 2001 compared with 22% for the first three months of 2000. Earnings
declined to $24 million for the first three months of 2001 compared with $64
million for the first three months of 2000 primarily due to $41 million of
provision for credit losses in 2001 related to charge-offs in the communications
and energy, metals and mining portfolios that PNC has designated for exit or
downsizing.
Total revenue of $192 million for the first three months of 2001 decreased $22
million compared with the same period in 2000. Average loans and credit-related
revenue increased in the period-to-period comparison primarily driven by loans
to large corporate customers that utilize higher-margin noncredit products and
services and the expansion of equipment leasing. Middle market loans declined in
the period-to-period comparison primarily due to strategies to improve the risk
profile of this portfolio. Noncredit revenue includes noninterest income and the
benefit of compensating balances received in lieu of fees. Noncredit revenue
decreased $27 million compared with the first three months of 2000 primarily due
to lower capital markets fees and valuation losses associated with equity
investments. The decreases were primarily due to weak equity market conditions.
The provision for credit losses was $57 million for the first three months of
2001 compared with $15 million for the first three months of 2000. The higher
provision was primarily due to $41 million of charge-offs in the communications
and energy, metals and mining portfolios that PNC has designated for exit or
downsizing. A sustained or further weakening of the economy, or other factors
that adversely affect asset quality, could result in an increase in the number
of delinquencies, bankruptcies or defaults, and a higher level of nonperforming
assets, net charge-offs and provision for credit losses in future periods. See
Credit Risk in the Risk Management section of this Financial Review for
additional information regarding credit risk.
Treasury management and capital markets products offered through Corporate
Banking are sold by several businesses across the Corporation and related
profitability is included in the results of those businesses. Consolidated
revenue from treasury management increased to $88 million for the first three
months of 2001 compared with $85 million in the first three months of 2000. The
increase was driven by a 7% increase in product revenue that was partially
offset by lower income earned on customers' deposit balances resulting from the
lower interest rate environment in 2001. Consolidated revenue from capital
markets was $23 million for the first three months of 2001, an $11 million
decrease compared with the first three months of 2000. The decrease was
primarily due to weak equity market conditions as well as the impact of exiting
certain lending sectors.
7
PNC REAL ESTATE FINANCE
Three months ended March 31
Dollars in millions 2001 2000
-----------------------------------------------------------------
INCOME STATEMENT
Net interest income $29 $27
Noninterest income
Commercial mortgage banking 17 12
Other 7 7
-----------------------------------------------------------------
Total noninterest income 24 19
-----------------------------------------------------------------
Total revenue 53 46
Provision for credit losses
Noninterest expense 36 35
-----------------------------------------------------------------
Pretax earnings 17 11
Income tax benefit (3) (2)
-----------------------------------------------------------------
Earnings $20 $13
-----------------------------------------------------------------
AVERAGE BALANCE SHEET
Loans
Commercial - real estate related $1,852 $2,019
Commercial real estate 2,325 2,438
-----------------------------------------------------------------
Total loans 4,177 4,457
Commercial mortgages held for sale 236 99
Other assets 965 826
-----------------------------------------------------------------
Total assets $5,378 $5,382
-----------------------------------------------------------------
Deposits $338 $226
Assigned funds and other liabilities 4,646 4,770
Assigned capital 394 386
-----------------------------------------------------------------
Total funds $5,378 $5,382
-----------------------------------------------------------------
PERFORMANCE RATIOS
Return on assigned capital 21% 14%
Noninterest income to total revenue 45 41
Efficiency 54 61
=================================================================
PNC Real Estate Finance provides credit, capital markets, treasury management,
commercial mortgage loan servicing and other products and services to
developers, owners and investors in commercial real estate. PNC's commercial
real estate financial services platform includes Midland Loan Services, Inc.
("Midland"), one of the largest national servicers of commercial mortgage loans,
and Columbia Housing Partners, LP, a national syndicator of affordable housing
equity, among other businesses.
On October 27, 2000, Midland acquired Univest Financial Group LLC, a privately
held provider of technology and data management services to the commercial real
estate finance industry. The combined company created one of the nation's
leading providers of Web-enabled loan servicing and asset administration
solutions for commercial real estate portfolio lenders, financial institutions
and commercial mortgage-backed securities.
Over the past three years, PNC Real Estate Finance has been strategically
shifting to a more balanced and valuable revenue stream by focusing on real
estate processing businesses, including commercial loan servicing. During the
first three months of 2001, 45% of total revenue was generated by fee-based
activities compared with 41% for the first three months of 2000. Also,
management continues to evaluate opportunities to reduce lending exposure and
improve the risk/return characteristics of this business.
PNC Real Estate Finance contributed 6% of total business earnings for the first
three months of 2001 compared with 5% for the first three months of 2000.
Earnings increased $7 million or 54% in the period-to-period comparison
primarily due to growth in commercial mortgage servicing fees and the affordable
housing business. The efficiency ratio improved to 54% for the first three
months of 2001 compared with 61% during the same period in 2000. Average loans
decreased 6% reflecting management's ongoing strategy to reduce balance sheet
leverage.
Total revenue was $53 million for the first three months of 2001 compared with
$46 million for the first three months of 2000. The increase of $7 million or
15% was primarily due to higher commercial mortgage servicing fees reflecting a
larger servicing portfolio. The commercial mortgage servicing portfolio grew 26%
in the comparison to $58 billion at March 31, 2001 primarily due to purchased
servicing associated with loan securitizations.
COMMERCIAL MORTGAGE SERVICING PORTFOLIO
In billions 2001 2000
-----------------------------------------------------------------
January 1 $54 $45
Acquisitions/additions 6 3
Repayments/transfers (2) (2)
-----------------------------------------------------------------
March 31 $58 $46
=================================================================
There was no provision for credit losses in either period presented.
8
FINANCIAL REVIEW
THE PNC FINANCIAL SERVICES GROUP, INC.
PNC BUSINESS CREDIT
Three months ended March 31
Dollars in millions 2001 2000
-----------------------------------------------------------------
INCOME STATEMENT
Net interest income $24 $24
Noninterest income 14 4
-----------------------------------------------------------------
Total revenue 38 28
Provision for credit losses 5
Noninterest expense 8 7
-----------------------------------------------------------------
Pretax earnings 25 21
Income taxes 9 8
-----------------------------------------------------------------
Earnings $16 $13
-----------------------------------------------------------------
AVERAGE BALANCE SHEET
Loans $2,255 $1,999
Other assets 122 85
-----------------------------------------------------------------
Total assets $2,377 $2,084
-----------------------------------------------------------------
Deposits $77 $44
Assigned funds and other liabilities 2,142 1,902
Assigned capital 158 138
-----------------------------------------------------------------
Total funds $2,377 $2,084
-----------------------------------------------------------------
PERFORMANCE RATIOS
Return on assigned capital 41% 38%
Noninterest income to total revenue 37 14
Efficiency 18 21
=================================================================
PNC Business Credit provides asset-based lending, capital markets and treasury
management products and services to middle market customers nationally. PNC
Business Credit's lending services include loans secured by accounts receivable,
inventory, machinery and equipment, and other collateral, and its customers
include manufacturing, wholesale, distribution, retailing and service industry
companies.
PNC Business Credit's strategic focus is to build scale through expansion of
existing offices as well as the addition of new marketing locations. The loan
portfolio grew 13% to $2.4 billion at March 31, 2001 primarily as a result of
this expansion. PNC Business Credit currently operates 15 offices in 13 states
with a centralized back office to provide consistency to the control environment
as well as cost efficiencies.
PNC Business Credit contributed 5% of total business earnings for the first
three months of both 2001 and 2000. Earnings increased $3 million or 23% in the
period-to-period comparison to $16 million for the first three months of 2001 as
higher revenue was partially offset by a $5 million provision for credit losses.
Revenue was $38 million for the first three months of 2001, a $10 million or 36%
increase compared with the first three months of 2000 primarily due to higher
noninterest income. The increase in noninterest income primarily resulted from
gains on equity interests received as compensation in conjunction with lending
relationships.
Noninterest expense was $8 million and the efficiency ratio improved to 18% for
the first three months of 2001 compared with $7 million and 21%, respectively,
for the first three months of 2000. The efficiency ratio improved in the
comparison primarily due to higher noninterest income and economies of scale.
The return on assigned capital improved to 41% for the first three months of
2001 due to higher revenue and improved efficiency.
The provision for credit losses for the first three months of 2001 was $5
million and increased primarily due to one credit. PNC Business Credit loans are
secured loans to borrowers with a weaker financial condition. These loans are
more susceptible to changes in economic conditions and losses may result from
insufficient proceeds from sale of collateral supporting the loans. As a result,
the provision for credit losses may be affected by the impact on borrowers of a
weak economy and loan portfolio growth, among other factors. See Credit Risk in
the Risk Management section of this Financial Review for additional information
regarding credit risk.
9
PNC ADVISORS
Three months ended March 31
Dollars in millions 2001 2000
-----------------------------------------------------------------
INCOME STATEMENT
Net interest income $32 $35
Noninterest income
Investment management and trust 111 100
Brokerage 36 50
Other 20 19
-----------------------------------------------------------------
Total noninterest income 167 169
-----------------------------------------------------------------
Total revenue 199 204
Provision for credit losses 3
Noninterest expense 128 135
-----------------------------------------------------------------
Pretax earnings 71 66
Income taxes 27 25
-----------------------------------------------------------------
Earnings $44 $41
-----------------------------------------------------------------
AVERAGE BALANCE SHEET
Loans
Consumer $1,106 $954
Residential mortgage 930 978
Commercial 564 658
Other 422 552
-----------------------------------------------------------------
Total loans 3,022 3,142
Other assets 483 456
-----------------------------------------------------------------
Total assets $3,505 $3,598
-----------------------------------------------------------------
Deposits $1,981 $2,084
Assigned funds and other liabilities 968 967
Assigned capital 556 547
-----------------------------------------------------------------
Total funds $3,505 $3,598
-----------------------------------------------------------------
PERFORMANCE RATIOS
Return on assigned capital 32% 30%
Noninterest income to total revenue 84 83
Efficiency 63 65
=================================================================
PNC Advisors provides a full range of tailored investment products and services
to affluent individuals and families including full-service brokerage through
J.J.B. Hilliard, W.L. Lyons, Inc. ("Hilliard Lyons") and investment advisory
services to the ultra-affluent through Hawthorn. PNC Advisors also serves as
investment manager and trustee for employee benefit plans and charitable and
endowment assets. PNC Advisors is focused on expanding Hilliard Lyons and
Hawthorn, increasing market share in PNC's geographic region and leveraging its
comprehensive distribution platform.
PNC Advisors contributed 14% of total business earnings for the first three
months of both 2001 and 2000. Earnings of $44 million for the first three months
of 2001 increased $3 million or 7% compared with the first three months of 2000.
Revenue decreased $5 million in the period-to-period comparison due to lower
levels of retail investor trading activity and weak equity markets, the impact
of which was partially offset by investment management and trust revenue accrual
adjustments of $14 million. Management expects that revenue will continue to be
lower than the prior year until market conditions improve.
Noninterest expense decreased 5% in the period-to-period comparison primarily
due to lower production-based compensation and effective expense management
initiatives that resulted in improved operating efficiency.
ASSETS UNDER MANAGEMENT (a)
March 31 - in billions 2001 2000
-----------------------------------------------------------------
Personal investment management and trust $47 $51
Institutional trust 14 15
-----------------------------------------------------------------
Total $61 $66
=================================================================
(a) Assets under management do not include brokerage assets administered.
Personal investment management and trust assets under management decreased by
approximately $5 billion primarily due to a decline in the value of the equity
component of customers' portfolios that resulted from weak equity markets. See
Asset Management Performance in the Risk Factors section of this Financial
Review for additional information regarding asset management performance.
Brokerage assets administered by PNC Advisors were $27 billion at March 31,
2001, compared with $28 billion at March 31, 2000 and also declined due to weak
equity market conditions.
10
FINANCIAL REVIEW
THE PNC FINANCIAL SERVICES GROUP, INC.
BLACKROCK
Three months ended March 31
Dollars in millions 2001 2000
-----------------------------------------------------------------
INCOME STATEMENT
Investment advisory and administrative fees $125 $102
Other income 9 6
-----------------------------------------------------------------
Total revenue 134 108
Operating expense 72 54
Fund administration
and servicing costs - affiliates 17 20
Amortization 3 2
-----------------------------------------------------------------
Total expense 92 76
Operating income 42 32
Nonoperating income 2 1
-----------------------------------------------------------------
Pretax earnings 44 33
Income taxes 19 14
-----------------------------------------------------------------
Earnings $25 $19
-----------------------------------------------------------------
PERIOD-END BALANCE SHEET
Intangible assets $190 $192
Other assets 310 196
-----------------------------------------------------------------
Total assets $500 $388
-----------------------------------------------------------------
Other liabilities $98 $88
Stockholders' equity 402 300
-----------------------------------------------------------------
Total liabilities and stockholders' equity $500 $388
-----------------------------------------------------------------
PERFORMANCE DATA
Return on equity 26% 26%
Operating margin (a) 36 36
Diluted earnings per share $.39 $.30
=================================================================
(a) Excludes the impact of fund administration and servicing costs - affiliates.
BlackRock is one of the largest publicly traded investment management firms in
the United States with $202 billion of assets under management at March 31,
2001. BlackRock manages assets on behalf of institutions and individuals through
a variety of fixed income, liquidity, equity and alternative investment separate
accounts and mutual funds, including its flagship fund families, BlackRock Funds
and BlackRock Provident Institutional Funds. In addition, BlackRock provides
risk management and technology services to a growing number of institutional
investors under the BlackRock Solutions name.
BlackRock continues to focus on its objective of delivering superior investment
performance to its clients while pursuing strategies to build on its core
strengths and to selectively expand the firm's expertise and breadth of
distribution.
BlackRock contributed 8% of total business earnings for the first three months
of 2001 compared with 7% for the first three months of 2000. Earnings increased
33% in the period-to-period comparison primarily due to a 17% increase in assets
under management. New client mandates and additional funding from existing
clients was $26 billion or 87% of the increase in assets under management. Total
revenue for the first three months of 2001 increased $26 million or 24% compared
with the first three months of 2000 primarily due to new business and strong
fixed-income performance. The increase in operating expense in the
period-to-period comparison supported revenue growth and business expansion.
ASSETS UNDER MANAGEMENT
March 31 - in billions 2001 2000
-----------------------------------------------------------------
Separate accounts
Fixed income $107 $78
Liquidity 6 8
Liquidity - securities lending 8 11
Equity 8 6
Alternative investment products 4 2
-----------------------------------------------------------------
Total separate accounts 133 105
-----------------------------------------------------------------
Mutual funds
Fixed income 14 14
Liquidity 44 37
Equity 11 16
-----------------------------------------------------------------
Total mutual funds 69 67
-----------------------------------------------------------------
Total assets under management $202 $172
-----------------------------------------------------------------
Proprietary mutual funds
BlackRock Funds $24 $29
BlackRock Provident Institutional Funds 37 26
-----------------------------------------------------------------
Total proprietary mutual funds $61 $55
=================================================================
BlackRock, Inc. is approximately 70% owned by PNC and is listed on the New York
Stock Exchange under the symbol BLK. Additional information about BlackRock is
available in its filings with the Securities and Exchange Commission ("SEC") and
may be obtained electronically at the SEC's home page at www.sec.gov.
11
PFPC
Three months ended March 31
Dollars in millions 2001 2000
-----------------------------------------------------------------
INCOME STATEMENT
Fund servicing revenue $184 $161
Operating expense 131 128
Amortization 6 7
-----------------------------------------------------------------
Operating income 47 26
Nonoperating income 5 8
Debt financing 24 24
-----------------------------------------------------------------
Pretax earnings 28 10
Income taxes 11 4
-----------------------------------------------------------------
Earnings $17 $6
-----------------------------------------------------------------
AVERAGE BALANCE SHEET
Intangible assets $1,086 $1,113
Other assets 649 490
-----------------------------------------------------------------
Total assets $1,735 $1,603
-----------------------------------------------------------------
Assigned funds and other liabilities $1,527 $1,397
Assigned capital 208 206
-----------------------------------------------------------------
Total funds $1,735 $1,603
-----------------------------------------------------------------
PERFORMANCE RATIOS
Operating margin 26% 16%
Return on assigned capital 33 12
=================================================================
PFPC is the largest full-service mutual fund transfer agent and second largest
provider of mutual fund accounting and administration services in the United
States, providing a wide range of global fund services to the investment
management industry. As an extension of its domestic services, PFPC also
provides customized processing services to the international marketplace through
its Dublin, Ireland and Luxembourg operations.
To meet the growing needs of the European marketplace, PFPC continues its
pursuit of offshore expansion. PFPC is also focusing technological resources on
targeted Web-based initiatives and exploring strategic alliances.
PFPC contributed 6% of total business earnings for the first three months of
2001 and 2% for the first three months of 2000. Earnings increased $11 million,
nearly tripling, in the period-to-period comparison and performance ratios
improved significantly. The increase was primarily due to strong growth in
transfer agency services that resulted from an increase in mutual fund
shareholder accounts serviced.
Revenue of $184 million for the first three months of 2001 increased $23 million
or 14% compared with the first three months of 2000, primarily driven by
existing client growth and new business. See Fund Servicing in the Risk Factors
section of this Financial Review for additional information regarding fund
servicing.
Operating expense increased a modest 2% in the period-to-period comparison, as
the prior-year quarter included one-time costs related to the integration of
Investor Services Group.
SERVICING STATISTICS
March 31 2001 2000
-----------------------------------------------------------------
Accounting/administration
assets ($ in billions) (a) $472 $448
Custody assets ($ in billions) 435 425
Shareholder accounts (in millions) 44 39
=================================================================
(a) Includes approximately $11 billion and $7 billion of international assets at
March 31, 2001 and March 31, 2000, respectively.
12
FINANCIAL REVIEW
THE PNC FINANCIAL SERVICES GROUP, INC.
CONSOLIDATED INCOME STATEMENT REVIEW
NET INTEREST INCOME ANALYSIS
Taxable-equivalent basis Average Balances Interest Income/Expense Average Yields/Rates
Three months ended March 31 ------------------------------ -------------------------- -----------------------------
Dollars in millions 2001 2000 Change 2001 2000 Change 2001 2000 Change
------------------------------------------------------------------------ -------------------------- -----------------------------
Interest-earning assets
Loans held for sale $2,005 $3,319 $(1,314) $37 $64 $(27) 7.31% 7.64% (33)bp
Securities available for sale 8,061 6,128 1,933 122 95 27 6.08 6.22 (14)
Loans, net of unearned income
Consumer 9,085 9,247 (162) 194 192 2 8.70 8.35 35
Residential mortgage 12,673 12,584 89 232 222 10 7.32 7.08 24
Commercial 20,882 21,791 (909) 422 447 (25) 8.09 8.12 (3)
Commercial real estate 2,580 2,698 (118) 55 59 (4) 8.44 8.60 (16)
Lease financing 3,897 2,958 939 71 54 17 7.32 7.33 (1)
Other 520 688 (168) 11 14 (3) 7.98 8.09 (11)
------------------------------------------------------------------------ --------------------------
Total loans, net of unearned
income 49,637 49,966 (329) 985 988 (3) 7.96 7.88 8
Other 1,831 1,113 718 33 19 14 7.20 6.92 28
------------------------------------------------------------------------ --------------------------
Total interest-earning assets/
interest income 61,534 60,526 1,008 1,177 1,166 11 7.67 7.68 (1)
Noninterest-earning assets 10,251 7,818 2,433
Investment in discontinued operations 207 412 (205)
------------------------------------------------------------------------
Total assets $71,992 $68,756 $3,236
========================================================================
Interest-bearing liabilities
Deposits
Demand and money market $20,468 $17,700 $2,768 162 138 24 3.20 3.14 6
Savings 1,919 2,138 (219) 6 9 (3) 1.31 1.64 (33)
Retail certificates of deposit 13,724 14,591 (867) 199 191 8 5.90 5.25 65
Other time 565 637 (72) 10 10 6.67 6.36 31
Deposits in foreign offices 1,402 1,489 (87) 20 21 (1) 5.75 5.63 12
------------------------------------------------------------------------ --------------------------
Total interest-bearing deposits 38,078 36,555 1,523 397 369 28 4.22 4.05 17
Borrowed funds 14,375 15,333 (958) 221 237 (16) 6.15 6.14 1
------------------------------------------------------------------------ --------------------------
Total interest-bearing liabilities/
interest expense 52,453 51,888 565 618 606 12 4.75 4.67 8
-------------------------- -----------------------------
Noninterest-bearing liabilities,
capital securities and shareholders'
equity 19,539 16,868 2,671
------------------------------------------------------------------------
Total liabilities, capital
securities and shareholders'
equity $71,992 $68,756 $3,236
========================================================================
Interest rate spread 2.92 3.01 (9)
Impact of noninterest-bearing sources .70 .67 3
-----------------------------
Net interest income/margin $559 $560 $(1) 3.62% 3.68% (6)bp
====================================================================================================================================
NET INTEREST INCOME
Changes in net interest income and margin result from the interaction between
the volume and composition of earning assets, related yields and associated
funding costs. Accordingly, portfolio size, composition and yields earned and
funding costs can have a significant impact on net interest income and margin.
Taxable-equivalent net interest income of $559 million for the first three
months of 2001 remained relatively unchanged compared with the first three
months of 2000 as the impact of a higher level of interest-earning assets was
offset by a narrower net interest margin. The net interest margin was 3.62% for
the first three months of 2001 compared with 3.68% for the first three months of
2000. The narrowing of the net interest margin was primarily due to a higher
proportion of securities available for sale in the mix of earning assets.
Loans represented 81% of average earning assets for the first three months of
2001 compared with 83% for the first three months of 2000. The decrease was
primarily due to the ongoing downsizing of certain credit-related businesses and
the securitization of residential mortgage loans during the first three months
of 2001. Average loans held for sale decreased $1.3 billion in the
period-to-period comparison due to a reduction in commercial loans held for sale
that were designated for exit in 1999. Securities available for sale represented
13% of average earning assets for the first three months of 2001 compared with
10% for the first three months of 2000. The increase was primarily due to the
purchase of U.S. agencies and asset-backed securities and the securitization of
residential mortgage loans as part of balance sheet and interest rate risk
management activities.
13
Funding cost is affected by the volume and composition of funding sources as
well as related rates paid thereon. Average deposits comprised 64% of total
sources of funds for the first three months of both 2001 and 2000, with the
remainder primarily comprised of wholesale funding obtained at prevailing market
rates.
Average demand and money market deposits increased $2.8 billion or 16% compared
with the first three months of 2000, primarily reflecting the impact of
strategic marketing initiatives to grow more valuable transaction accounts,
while all other interest-bearing deposit categories decreased in the
period-to-period comparison. Average borrowed funds for the first three months
of 2001 decreased $1.0 billion compared with the first three months of 2000 as
lower bank notes and Federal Home Loan Bank borrowings were partially offset by
increases in federal funds purchased and repurchase agreements. The overall
decrease in average borrowed funds was primarily due to deposit growth.
PROVISION FOR CREDIT LOSSES
The provision for credit losses was $80 million for the first three months of
2001 compared with $31 million for the first three months of 2000. Net
charge-offs were $80 million or .65% of average loans for the first three months
of 2001 compared with $31 million or .25%, respectively, for the first three
months of 2000. The increases were primarily due to $41 million of provision for
credit losses related to charge-offs in the communications and energy, metals
and mining portfolios that PNC has designated for exit or downsizing. Excluding
this amount, net charge-offs were $39 million or .32% of average loans for the
first three months of 2001. See Credit Risk in the Risk Management section of
this Financial Review for additional information regarding credit risk.
NONINTEREST INCOME
Noninterest income was $701 million for the first three months of 2001 and
included $39 million of equity management losses. Excluding equity management
gains and losses in both years, noninterest income increased 15% compared with
the first three months of 2000 primarily due to growth in asset management and
processing revenue.
Asset management fees of $223 million for the first three months of 2001
increased $37 million or 20% primarily driven by new business. Assets under
management were $248 billion at March 31, 2001, a 13% increase compared with
March 31, 2000. Fund servicing fees were $181 million for the first three months
of 2001, a $26 million or 17% increase compared with the first three months of
2000 primarily driven by existing client growth and new business.
Brokerage fees were $54 million for the first three months of 2001 compared with
$71 million for the first three months of 2000. The decrease was primarily due
to a decline in equity markets activity. Consumer services revenue of $55
million for the first three months of 2001 increased $8 million or 17% compared
with the first three months of 2000 primarily due to an increase in retail
transaction volume.
Corporate services revenue was $76 million for the first three months of 2001
compared with $82 million for the first three months of 2000. The decrease was
primarily due to lower capital markets revenue and other asset write-downs.
Equity management, which includes venture capital investment gains and losses,
reflected a net loss of $39 million for the first three months of 2001 compared
with $87 million of income for the first three months of 2000. The decrease
primarily resulted from a decline in the estimated fair value of partnership and
direct investments. Equity management investments totaling $678 million had net
unrealized appreciation of $74 million at March 31, 2001. These valuations are
subject to market conditions and may be volatile.
Net securities gains were $29 million for the first three months of 2001 and
were mostly offset by write-downs of other assets and e-commerce investments
totaling $22 million that are reflected in corporate services and other income.
Other noninterest income was $72 million for the first three months of 2001
compared with $53 million for the first three months of 2000. The increase was
primarily due to residential mortgage loan securitizations and student loan
sales.
NONINTEREST EXPENSE
Noninterest expense was $775 million for the first three months of 2001 compared
with $792 million for the first three months of 2000. The efficiency ratio was
58% for the first three months of both 2001 and 2000. Average full-time
equivalent employees totaled approximately 24,800 and 23,900 for the first three
months of 2001 and 2000, respectively. The increase was primarily in asset
management and processing businesses.
14
FINANCIAL REVIEW
THE PNC FINANCIAL SERVICES GROUP, INC.
CONSOLIDATED BALANCE SHEET REVIEW
LOANS
Loans were $45.6 billion at March 31, 2001, a $5 billion decrease from year-end
2000 primarily due to residential mortgage loan securitizations. Most loan
categories declined as a result of efforts to reduce balance sheet leverage.
DETAILS OF LOANS
March 31 December 31
In millions 2001 2000 (a)
-----------------------------------------------------------------
Consumer
Home equity $6,592 $6,228
Automobile 1,045 1,166
Other 1,412 1,739
-----------------------------------------------------------------
Total consumer 9,049 9,133
-----------------------------------------------------------------
Residential mortgage 8,806 13,264
Commercial
Manufacturing 5,446 5,581
Retail/wholesale 4,478 4,413
Service providers 2,835 2,944
Real estate related 1,762 1,783
Communications 1,019 1,296
Health care 688 722
Financial services 1,692 1,726
Other 2,756 2,742
-----------------------------------------------------------------
Total commercial 20,676 21,207
-----------------------------------------------------------------
Commercial real estate
Mortgage 655 673
Real estate project 1,935 1,910
-----------------------------------------------------------------
Total commercial real estate 2,590 2,583
-----------------------------------------------------------------
Lease financing 5,080 4,845
Other 487 568
Unearned income (1,062) (999)
-----------------------------------------------------------------
Total, net of unearned income $45,626 $50,601
=================================================================
(a) Certain amounts have been reclassified to conform to the current year
presentation.
During 1999, total outstandings and exposure designated for exit totaled $3.7
billion and $10.5 billion, respectively. At March 31, 2001, remaining
outstandings associated with this initiative were $800 million, of which $648
million were classified as loans with the remainder included in loans held for
sale. Total remaining exposure related to this initiative was $2.5 billion at
March 31, 2001.
In addition, outstandings and exposure totaling approximately $2.5 billion and
$7.0 billion, respectively, were designated for exit or downsizing during the
first quarter of 2001, primarily consisting of the communications portfolio and
certain portions of the energy, metals and mining and large corporate portfolios
in Corporate Banking.
Loan portfolio composition continued to be geographically diversified among
numerous industries and types of businesses.
NET UNFUNDED COMMITMENTS (a)
March 31 December 31
In millions 2001 2000
-----------------------------------------------------------------
Consumer $4,580 $4,414
Commercial 18,669 24,253
Commercial real estate 1,013 1,039
Lease financing 164 123
Other 182 173
-----------------------------------------------------------------
Total $24,608 $30,002
=================================================================
(a) Excludes unfunded commitments related to loans designated for exit in 1999
and 2001.
Commitments to extend credit represent arrangements to lend funds subject to
specified contractual conditions. Commercial commitments are reported net of
participations, assignments and syndications, primarily to financial
institutions, totaling $7.2 billion at both March 31, 2001 and December 31,
2000.
Net outstanding letters of credit totaled $4.0 billion at both March 31, 2001
and December 31, 2000 and consisted primarily of standby letters of credit that
commit the Corporation to make payments on behalf of customers if certain
specified future events occur. Unfunded commitments and letters of credit
related to loans designated for exit in 2001 and 1999 totaled $6.2 billion at
March 31, 2001 and $1.7 billion at December 31, 2000.
SECURITIES AVAILABLE FOR SALE
The fair value of securities available for sale at March 31, 2001 was $12.0
billion compared with $5.9 billion at December 31, 2000. Securities represented
17% of total assets at March 31, 2001 compared with 8% at December 31, 2000. The
increase was primarily due to $3.8 billion of residential mortgage loan
securitizations and purchases of U.S. agencies and asset-backed securities
during the first three months of 2001. The expected weighted-average life of
securities available for sale was 3 years and 11 months at March 31, 2001
compared with 4 years and 5 months at December 31, 2000.
At March 31, 2001, the securities available for sale balance included a net
unrealized loss of $6 million, which represented the difference between fair
value and amortized cost. The comparable amount at December 31, 2000 was a net
unrealized loss of $54 million. Net unrealized gains and losses in the
securities available for sale portfolio are included in accumulated other
comprehensive income or loss, net of tax or, for the portion attributable to
changes in a hedged risk as part of a fair value hedge strategy, in net income.
15
DETAILS OF SECURITIES AVAILABLE FOR SALE
Amortized Fair
In millions Cost Value
-----------------------------------------------------------------
MARCH 31, 2001
Debt securities
U.S. Treasury and government agencies $1,519 $1,522
Mortgage-backed 8,707 8,705
Asset-backed 1,358 1,361
State and municipal 80 83
Other debt 70 71
Corporate stocks and other 248 234
-----------------------------------------------------------------
Total securities available for sale $11,982 $11,976
=================================================================
DECEMBER 31, 2000
Debt securities
U.S. Treasury and government agencies $313 $313
Mortgage-backed 4,037 4,002
Asset-backed 902 893
State and municipal 94 96
Other debt 73 73
Corporate stocks and other 537 525
-----------------------------------------------------------------
Total securities available for sale $5,956 $5,902
=================================================================
FUNDING SOURCES
Total funding sources were $59.5 billion at March 31, 2001 and were essentially
flat compared with December 31, 2000 as a decrease in deposits was offset by an
increase in borrowed funds. Retail certificates of deposit decreased due to the
lower rate environment in 2001, however, money market deposits increased due to
ongoing strategic marketing efforts to retain customers and increase these
balances. The change in the composition of borrowed funds reflected the impact
of closing the sale of the residential mortgage banking business as well as a
shift within categories to manage overall funding costs.
DETAILS OF FUNDING SOURCES
March 31 December 31
In millions 2001 2000
-----------------------------------------------------------------
Deposits
Demand, savings and money market $31,294 $30,686
Retail certificates of deposit 13,278 14,175
Other time 563 567
Deposits in foreign offices 2,054 2,236
-----------------------------------------------------------------
Total deposits 47,189 47,664
-----------------------------------------------------------------
Borrowed funds
Federal funds purchased 785 1,445
Repurchase agreements 830 607
Bank notes and senior debt 5,362 6,110
Federal Home Loan Bank borrowings 2,623 500
Subordinated debt 2,379 2,407
Other borrowed funds 300 649
-----------------------------------------------------------------
Total borrowed funds 12,279 11,718
-----------------------------------------------------------------
Total $59,468 $59,382
=================================================================
CAPITAL
The access to and cost of funding new business initiatives including
acquisitions, the ability to engage in expanded business activities, the ability
to pay dividends, deposit insurance costs, and the level and nature of
regulatory oversight depend, in large part, on a financial institution's capital
strength. At March 31, 2001, the Corporation and each bank subsidiary were
considered well capitalized based on regulatory capital ratio requirements.
RISK-BASED CAPITAL
March 31 December 31
Dollars in millions 2001 2000
-----------------------------------------------------------------
Capital components
Shareholders' equity
Common $6,470 6,344
Preferred 311 312
Trust preferred capital securities 848 848
Goodwill and other (2,189) (2,214)
Net unrealized securities losses 2 77
-----------------------------------------------------------------
Tier I risk-based capital 5,442 5,367
Subordinated debt 1,786 1,811
Eligible allowance for credit losses 675 667
-----------------------------------------------------------------
Total risk-based capital $7,903 $7,845
=================================================================
Assets
Risk-weighted assets and
off-balance-sheet instruments $62,563 $62,430
Average tangible assets 69,750 66,809
=================================================================
Capital ratios
Tier I risk-based 8.7% 8.6%
Total risk-based 12.6 12.6
Leverage 7.8 8.0
=================================================================
The capital position is managed through balance sheet size and composition,
issuance of debt and equity instruments, treasury stock activities, dividend
policies and retention of earnings.
During the first three months of 2001, PNC repurchased 2.3 million shares of its
common stock. On February 15, 2001, the Board of Directors authorized the
Corporation to purchase up to 15 million shares of its common stock through
February 28, 2002. This new program replaces the prior program that was
rescinded.
On March 6, 2001, the Corporation commenced a cash tender offer for its
nonconvertible Series F preferred stock at a price of $50.35 per share plus
accrued and unpaid dividends. Approximately 1.9 million shares of a total of 6
million shares outstanding were tendered through this offer and were purchased
by the Corporation on April 5, 2001.
16
FINANCIAL REVIEW
THE PNC FINANCIAL SERVICES GROUP, INC.
RISK FACTORS
The Corporation is subject to a number of risk factors including, among others,
those described below and in the Risk Management and Forward-Looking Statements
sections of this Financial Review. These factors and others could impact the
Corporation's business, financial condition and results of operations.
BUSINESS AND ECONOMIC CONDITIONS
The Corporation's business and results of operations are sensitive to general
business and economic conditions in the United States. These conditions include
the level and movement of interest rates, inflation, monetary supply,
fluctuations in both debt and equity capital markets, and the strength of the
U.S. economy, in general, and the regional economies in which the Corporation
conducts business. An economic downturn or higher interest rates could decrease
the demand for loans and other products and services offered by the Corporation,
increase usage of unfunded commitments or increase the number of customers and
counterparties who become delinquent, file for protection under bankruptcy laws
or default on their loans or other obligations to the Corporation. An increase
in the number of delinquencies, bankruptcies or defaults could result in a
higher provision for credit losses and a higher level of net charge-offs.
Changes in interest rates could affect the value of certain on-balance-sheet and
off-balance-sheet financial instruments of the Corporation. Higher interest
rates would also increase the Corporation's cost to borrow funds and may
increase the rate paid on deposits. Also, changes in equity markets could affect
the value of equity investments and the net asset value of assets under
management and administration. A decline in the equity markets could negatively
affect noninterest revenues.
MONETARY AND OTHER POLICIES
The financial services industry is subject to various monetary and other
policies and regulations of the United States government and its agencies, which
include the Federal Reserve Board, the Office of the Comptroller of Currency and
the Federal Deposit Insurance Corporation as well as state regulators. The
Corporation is particularly affected by the policies of the Federal Reserve
Board, which regulates the supply of money and credit in the United States. The
Federal Reserve Board's policies influence the rates of interest that PNC
charges on loans and pays on interest-bearing deposits and can also affect the
value of on-balance-sheet and off-balance-sheet financial instruments. Those
policies also influence, to a significant extent, the cost of funding for the
Corporation.
COMPETITION
The Corporation operates in a highly competitive environment, both in terms of
the products and services offered and the geographic markets in which PNC
conducts business. This environment could become even more competitive in the
future. The Corporation competes with local, regional and national banks,
thrifts, credit unions and non-bank financial institutions, such as investment
banking firms, investment advisory firms, brokerage firms, investment companies,
venture capital firms, mutual fund complexes and insurance companies, as well as
other entities that offer financial services, and through alternative delivery
channels such as the World Wide Web. Technological advances and new legislation,
among other changes, have lowered barriers to entry and have made it possible
for non-bank institutions to offer products and services that traditionally have
been provided by banks. Many of the Corporation's competitors benefit from fewer
regulatory constraints and lower cost structures, allowing for more competitive
pricing of products and services.
The Gramm-Leach-Bliley Act ("the Act"), which was enacted on November 12, 1999,
permits affiliations among banks, securities firms and insurance companies. The
Act significantly changes the competitive environment in which the Corporation
conducts business. This environment could result in a loss of customers and
related revenue.
DISINTERMEDIATION
Disintermediation is the process of eliminating the role of the intermediary in
completing a transaction. For the financial services industry, this means
eliminating or significantly reducing the role of banks and other depository
institutions in completing transactions that have traditionally involved banks.
Disintermediation could result in, among others, the loss of customer deposits
and decreases in transactions that generate fee income.
ASSET MANAGEMENT PERFORMANCE
Asset management revenue is primarily based on a percentage of the value of
assets under management and performance fees expressed as a percentage of the
returns realized on assets under management. A decline in the prices of debt and
equity instruments, among other things, could cause asset management revenue to
decline.
Investment performance is an important factor for the level of assets under
management. Poor investment performance could impair revenue and growth as
existing clients might withdraw funds in favor of better performing products.
Also, performance fees could be lower or nonexistent. Additionally, the ability
to attract funds from existing and new clients might diminish.
17
FUND SERVICING
Fund servicing fees are primarily based on the market value of the assets and
the number of shareholder accounts administered by the Corporation for its
clients. A rise in interest rates or a decline in the debt and equity markets
could influence an investor's decision to invest or maintain an investment in a
mutual fund. As a result, fluctuations may occur in the level or value of assets
that the Corporation has under administration. A significant investor migration
from mutual fund investments could have a negative impact on the Corporation's
revenues by reducing the assets and the number of shareholder accounts it
administers. There has been and continues to be merger, acquisition and
consolidation activity in the financial services industry. Mergers or
consolidations of financial institutions in the future could reduce the number
of existing or potential fund servicing clients.
ACQUISITIONS
The Corporation expands its business from time to time by acquiring other
financial services companies. Factors pertaining to acquisitions that could
adversely affect the Corporation's business and earnings include, among others:
o anticipated cost savings or potential revenue enhancements that may not
be fully realized or realized within the expected time frame;
o customer loss or revenue loss following an acquisition that may be
greater than expected; and
o costs or difficulties related to the integration of businesses that may
be greater than expected.
RISK MANAGEMENT
In the normal course of business, the Corporation assumes various types of risk,
which include, among others, credit risk, interest rate risk, liquidity risk,
and risk associated with trading activities and financial derivatives. PNC has
risk management processes designed to provide for risk identification,
measurement and monitoring.
CREDIT RISK
Credit risk represents the possibility that a borrower, counterparty or insurer
may not perform in accordance with contractual terms. Credit risk is inherent in
the financial services business and results from extending credit to customers,
purchasing securities and entering into off-balance-sheet financial derivative
transactions. The Corporation seeks to manage credit risk through, among other
things, diversification, limiting exposure to any single industry or customer,
requiring collateral, selling participations to third parties, and purchasing
credit-related derivatives.
NONPERFORMING ASSETS BY TYPE
March 31 December 31
Dollars in millions 2001 2000
-----------------------------------------------------------------
Nonaccrual loans
Commercial $296 $312
Commercial real estate 21 3
Residential mortgage 4 4
Consumer 3 2
Lease financing 6 2
-----------------------------------------------------------------
Total nonaccrual loans 330 323
Troubled debt restructured loan 6
-----------------------------------------------------------------
Total nonperforming loans 336 323
Foreclosed and other assets
Commercial real estate 2 3
Residential mortgage 7 8
Other 41 38
-----------------------------------------------------------------
Total foreclosed and other assets 50 49
-----------------------------------------------------------------
Total nonperforming assets $386 $372
=================================================================
Nonperforming loans to total loans .74% .64%
Nonperforming assets to total loans,
loans held for sale and foreclosed
assets .81 .71
Nonperforming assets to total assets .54 .53
=================================================================
The above table excludes $24 million and $18 million of equity management assets
carried at estimated fair value at March 31, 2001 and December 31, 2000,
respectively. The amount of nonperforming loans that were current as to
principal and interest was $65 million at March 31, 2001 and $67 million at
December 31, 2000. Approximately one-third of nonperforming assets were from
portfolios or loans that were designated for exit or downsizing at March 31,
2001.
A sustained or further weakening of the economy, or other factors that adversely
affect asset quality, could result in an increase in the number of
delinquencies, bankruptcies or defaults, and a higher level of nonperforming
assets, net charge-offs and provision for credit losses in future periods. See
the Forward-Looking Statements section of this Financial Review for additional
factors that could cause actual results to differ materially from
forward-looking statements or historical performance.
18
FINANCIAL REVIEW
THE PNC FINANCIAL SERVICES GROUP, INC.
CHANGE IN NONPERFORMING ASSETS
In millions 2001 2000
-----------------------------------------------------------------
January 1 $372 $325
Transferred from accrual 171 114
Returned to performing (13) (2)
Principal reductions (38) (45)
Sales (17) (5)
Charge-offs and other (89) (43)
-----------------------------------------------------------------
March 31 $386 $344
=================================================================
ACCRUING LOANS PAST DUE 90 DAYS OR MORE
Amount Percent of Loans
------------------------------------------------------
March 31 December 31 March 31 December 31
Dollars in millions 2001 2000 2001 2000
---------------------------------------------------------------------------
Commercial $14 $46 .07% .22%
Commercial real estate 5 6 .19 .23
Residential mortgage 39 36 .44 .27
Consumer 21 24 .23 .26
Lease financing 1 1 .02 .03
-----------------------------------------------
Total $80 $113 .18 .22
===========================================================================
Loans not included in nonaccrual or past due categories, but where information
about possible credit problems causes management to be uncertain about the
borrower's ability to comply with existing repayment terms over the next six
months totaled $261 million at March 31, 2001.
ALLOWANCE FOR CREDIT LOSSES
In determining the adequacy of the allowance for credit losses, the Corporation
makes specific allocations to impaired loans and to pools of watchlist and
nonwatchlist loans for various credit risk factors. Allocations to loan pools
are developed by business segment and risk rating and are based on historical
loss trends and management's judgment concerning those trends and other relevant
factors. Those factors may include, among other things, actual versus estimated
losses, regional and national economic conditions, business segment and
portfolio concentrations, industry competition and consolidation, and the impact
of government regulations. Consumer and residential mortgage loan allocations
are made at a total portfolio level based on historical loss experience adjusted
for portfolio activity and economic conditions.
While PNC's pool reserve methodologies strive to reflect all risk factors, there
continues to be a certain element of risk associated with, but not limited to,
potential estimation or judgmental errors. Unallocated reserves are designed to
provide coverage for such risks. While allocations are made to specific loans
and pools of loans, the total reserve is available for all credit losses.
Senior management's Reserve Adequacy Committee provides oversight for the
allowance evaluation process, including quarterly evaluations and methodology
and estimation changes. The results of the evaluations are reported to the
Credit Committee of the Board of Directors.
The provision for credit losses for the first three months of 2001 and the
evaluation of the allowance for credit losses as of March 31, 2001 reflected
changes in loan portfolio composition and changes in asset quality. The
unallocated portion of the allowance for credit losses represented 20% of the
total allowance and .30% of total loans at March 31, 2001 compared with 20% and
..26%, respectively, at December 31, 2000.
ROLLFORWARD OF ALLOWANCE FOR CREDIT LOSSES
In millions 2001 2000
-----------------------------------------------------------------
January 1 $675 $674
Charge-offs (91) (45)
Recoveries 11 14
-----------------------------------------------------------------
Net charge-offs (80) (31)
Provision for credit losses 80 31
-----------------------------------------------------------------
March 31 $675 $674
=================================================================
The allowance as a percent of nonaccrual loans and total loans was 201% and
1.48%, respectively, at March 31, 2001. The comparable year-end 2000 percentages
were 209% and 1.33%, respectively.
CHARGE-OFFS AND RECOVERIES
Percent of
Three months ended March 31 Net Average
Dollars in millions Charge-offs Recoveries Charge-offs Loans
-------------------------------------------------------------------------------
2001
Commercial $78 $6 $72 1.40%
Commercial real estate
Residential mortgage
Consumer 10 5 5 .22
Lease financing 3 3 .31
-----------------------------------------------------------------
Total $91 $11 $80 .65
-------------------------------------------------------------------------------
2000
Commercial $29 $7 $22 .41%
Commercial real estate
Residential mortgage 2 2 .06
Consumer 12 6 6 .26
Lease financing 2 1 1 .14
-----------------------------------------------------------------
Total $45 $14 $31 .25
===============================================================================
CREDIT-RELATED INSTRUMENTS
Credit default swaps provide, for a fee, an assumption of a portion of the
credit risk associated with the underlying financial instruments. The
Corporation primarily uses such contracts to mitigate credit risk and lower the
required regulatory capital associated with commercial lending activities. At
March 31, 2001, credit default swaps of $4.6 billion in notional value were used
by the Corporation to hedge credit risk associated with commercial lending
activities.
19
INTEREST RATE RISK
Interest rate risk arises primarily through the Corporation's traditional
business activities of extending loans and accepting deposits. Many factors,
including economic and financial conditions, movements in interest rates and
consumer preferences affect the spread between interest earned on assets and
interest paid on liabilities. In managing interest rate risk, the Corporation
seeks to minimize its reliance on a particular interest rate scenario as a
source of earnings while maximizing net interest income and net interest margin.
To further these objectives, the Corporation uses securities purchases and
sales, short-term and long-term funding, financial derivatives and other capital
markets instruments.
Interest rate risk is centrally managed by Asset and Liability Management. The
Corporation actively measures and monitors components of interest rate risk
including term structure or repricing risk, yield curve or nonparallel rate
shift risk, basis risk and options risk. The Corporation measures and manages
both the short-term and long-term effects of changing interest rates. An income
simulation model is designed to measure the sensitivity of net interest income
to changing interest rates over the next twenty-four month period. An economic
value of equity model is designed to measure the sensitivity of the value of
existing on-balance-sheet and off-balance-sheet positions to changing interest
rates.
The income simulation model is the primary tool used to measure the direction
and magnitude of changes in net interest income resulting from changes in
interest rates. Forecasting net interest income and its sensitivity to changes
in interest rates requires that the Corporation make assumptions about the
volume and characteristics of new business and the behavior of existing
positions. These business assumptions are based on the Corporation's experience,
business plans and published industry experience. Key assumptions employed in
the model include prepayment speeds on mortgage-related assets and consumer
loans, loan volumes and pricing, deposit volumes and pricing, the expected life
and repricing characteristics of nonmaturity loans and deposits, and
management's financial and capital plans.
Because these assumptions are inherently uncertain, the model cannot precisely
estimate net interest income or precisely predict the effect of higher or lower
interest rates on net interest income. Actual results will differ from simulated
results due to the timing, magnitude and frequency of interest rate changes, the
difference between actual experience and the assumed volume and characteristics
of new business and behavior of existing positions, and changes in market
conditions and management strategies, among other factors.
The Corporation's interest rate risk management policies provide that net
interest income should not decrease by more than 3% if interest rates gradually
increase or decrease from current rates by 100 basis points over a twelve-month
period. At March 31, 2001, if interest rates were to gradually increase by 100
basis points over the next twelve months, the model indicated that net interest
income would decrease by .7%. If interest rates were to gradually decrease by
100 basis points over the next twelve months, the model indicated that net
interest income would increase by .1%.
The Corporation models additional interest rate scenarios covering a wider range
of rate movements to identify yield curve, term structure and basis risk
exposures. These scenarios are developed based on historical rate relationships
or management's expectations regarding the future direction and level of
interest rates. Depending on market conditions and other factors, these
scenarios may be modeled more or less frequently. Such analyses are used to
identify inherent risk and develop strategies.
An economic value of equity model is used by the Corporation to value all
current on-balance-sheet and off-balance-sheet positions under a range of
instantaneous interest rate changes. The resulting change in the value of equity
is a measure of overall long-term interest rate risk inherent in the
Corporation's existing on-balance-sheet and off-balance-sheet positions. The
Corporation uses the economic value of equity model to complement the net
interest income simulation modeling process.
The Corporation's interest rate risk management policies provide that the change
in economic value of equity should not decline by more than 1.5% of the book
value of assets for a 200 basis point instantaneous increase or decrease in
interest rates. Based on the results of the economic value of equity model at
March 31, 2001, if interest rates were to instantaneously increase by 200 basis
points, the model indicated that the economic value of existing on-balance-sheet
and off-balance-sheet positions would decline by 1.1% of assets. If interest
rates were to instantaneously decrease by 200 basis points, the model indicated
that the economic value of existing on-balance-sheet and off-balance-sheet
positions would increase by .1% of assets.
20
FINANCIAL REVIEW
THE PNC FINANCIAL SERVICES GROUP, INC.
LIQUIDITY RISK
Liquidity represents the Corporation's ability to obtain cost-effective funding
to meet the needs of customers as well as the Corporation's financial
obligations. Liquidity is centrally managed by Asset and Liability Management,
with oversight provided by the Corporate Asset and Liability Committee and the
Finance Committee of the Board of Directors.
Access to capital markets funding sources is a key factor affecting liquidity
management. Access to such markets is in part based on the Corporation's credit
ratings, which are influenced by a number of factors including capital ratios,
credit quality and earnings. Additional factors that impact liquidity include
the maturity structure of existing assets, liabilities, and off-balance-sheet
positions, the level of liquid securities and loans available for sale, and the
Corporation's ability to securitize and sell various types of loans.
Liquidity can also be provided through the sale of liquid assets, which consist
of short-term investments, loans held for sale and securities available for
sale. At March 31, 2001, such assets totaled $14.6 billion, with $4.6 billion
pledged as collateral for borrowings, trust and other commitments. Liquidity can
also be obtained through secured advances from the Federal Home Loan Bank, of
which PNC Bank, N.A., PNC's largest bank subsidiary, is a member. These
borrowings are generally secured by residential mortgages and mortgage-backed
securities. At March 31, 2001, approximately $7.7 billion of residential
mortgages were available as collateral for borrowings from the Federal Home Loan
Bank. Funding can also be obtained through alternative forms of borrowing,
including federal funds purchased, repurchase agreements and short-term and
long-term debt issuances.
Liquidity for the parent company and subsidiaries is also generated through the
issuance of securities in public or private markets and lines of credit. At
March 31, 2001, the Corporation had unused capacity under effective shelf
registration statements of approximately $1.4 billion of debt and equity
securities and $400 million of trust preferred capital securities. In addition,
the Corporation had an unused line of credit of $485 million.
The principal source of parent company revenue and cash flow is dividends from
subsidiary banks. PNC Bancorp, Inc. is a wholly-owned subsidiary of the parent
company and is the holding company for all bank subsidiaries. There are legal
limitations on the ability of bank subsidiaries to pay dividends and make other
distributions to PNC Bancorp, Inc. and in turn to the parent company. Without
regulatory approval, the amount available for dividend payments to PNC Bancorp,
Inc. by all bank subsidiaries was $302 million at March 31, 2001. Dividends may
also be impacted by capital needs, regulatory requirements, corporate policies,
contractual restrictions and other factors.
Management believes the Corporation has sufficient liquidity to meet current
obligations to borrowers, depositors, debt holders and others. The impact of
replacing maturing liabilities is reflected in the income simulation model in
the overall asset and liability management process.
TRADING ACTIVITIES
Most of PNC's trading activities are designed to provide capital markets
services to customers and not to position the Corporation's portfolio for gains
from market movements. PNC participates in derivatives and foreign exchange
trading as well as "market making" in equity securities as an accommodation to
customers. PNC also engages in trading activities as part of risk management
strategies.
Risk associated with trading, capital markets and foreign exchange activities is
managed using a value-at-risk approach that combines interest rate risk, foreign
exchange rate risk, spread risk and volatility risk. Using this approach,
exposure is measured as the potential loss due to a two standard deviation,
one-day move in interest rates. The combined period-end value-at-risk of all
trading operations using this measurement was estimated as less than $500
thousand at March 31, 2001.
21
FINANCIAL DERIVATIVES
The Corporation uses a variety of financial derivatives as part of the overall
asset and liability risk management process to manage interest rate, market and
credit risk inherent in the Corporation's business activities. Substantially all
such instruments are used to manage risk related to changes in interest rates.
Interest rate and total rate of return swaps, purchased interest rate caps and
floors and interest rate futures contracts are the primary instruments used by
the Corporation for interest rate risk management.
Interest rate swaps are agreements with a counterparty to exchange periodic
fixed and floating interest rate payments calculated on a notional amount. The
floating rate is based on a money market index, primarily short-term LIBOR.
Total rate of return swaps are agreements with a counterparty to exchange an
interest rate payment for the total rate of return on a specified reference
index calculated on a notional amount. Purchased interest rate caps and floors
are agreements where, for a fee, the counterparty agrees to pay the Corporation
the amount, if any, by which a specified market interest rate exceeds or is less
than a defined rate applied to a notional amount, respectively. Interest rate
futures contracts are exchange-traded agreements to make or take delivery of a
financial instrument at an agreed upon price and are settled in cash daily.
Financial derivatives involve, to varying degrees, interest rate, market and
credit risk. For interest rate and total rate of return swaps, caps and floors
and futures contracts, only periodic cash payments and, with respect to caps and
floors, premiums, are exchanged. Therefore, cash requirements and exposure to
credit risk are significantly less than the notional value.
Not all elements of interest rate, market and credit risk are addressed through
the use of financial or other derivatives, and such instruments may be
ineffective for their intended purposes due to unanticipated market
characteristics among other reasons.
The following table sets forth changes, during the first three months of 2001,
in the notional value of financial derivatives used for risk management and
designated as accounting hedges under SFAS No. 133.
FINANCIAL DERIVATIVES ACTIVITY
Weighted-
December 31 Adjust- January 1 Addi- Maturi- Termi- March 31 Average
Dollars in millions 2000 ments(1) 2001 tions ties nations 2001 Maturity
-----------------------------------------------------------------------------------------------------------------------------------
Interest rate risk management
Interest rate swaps
Receive fixed $4,756 $180 $4,936 $2,700 $(500) $(68) $7,068 2 yrs. 9 mos.
Pay fixed 1 248 249 20 (102) 167 4 yrs. 3 mos.
Basis swaps 2,230 (1,773) 457 (250) 207 2 yrs.11 mos.
Interest rate caps 308 (243) 65 11 (40) 36 2 yrs. 1 mo.
Interest rate floors 3,238 (238) 3,000 22 (3,000) 22 2 yrs. 2 mos.
Futures contracts 116 116 10 mos.
------------------------------------------------------------------------------------------------------------------
Total interest rate risk
management 10,533 (1,826) 8,707 2,869 (500) (3,460) 7,616
------------------------------------------------------------------------------------------------------------------
Commercial mortgage banking risk
management
Interest rate swaps 311 311 354 (461) 204 9 yrs. 4 mos.
Total rate of return swaps 75 75 75 (75) 75 5 mos.
------------------------------------------------------------------------------------------------------------------
Total commercial mortgage
banking risk management 386 386 429 (75) (461) 279
Student lending activities -
Forward contracts 347 (347)
Credit-related activities -
Credit default swaps 4,391 (4,391)
------------------------------------------------------------------------------------------------------------------
Total $15,657 $(6,564) $9,093 $3,298 $(575) $(3,921) $7,895
===================================================================================================================================
(1) Primarily consists of derivatives that are not designated as accounting
hedges under SFAS No. 133 and instruments no longer considered
financial derivatives under SFAS No. 133.
22
FINANCIAL REVIEW
THE PNC FINANCIAL SERVICES GROUP, INC.
The following table sets forth the notional value and the fair value of
financial derivatives used for risk management and designated as accounting
hedges under SFAS No. 133. Weighted-average interest rates presented are based
on the implied forward yield curve at March 31, 2001.
FINANCIAL DERIVATIVES
Weighted-Average Interest Rates
Notional -------------------------------
March 31, 2001 - dollars in millions Value Fair Value Paid Received
-------------------------------------------------------------------------------------------------------------------------------
Interest rate risk management
Asset rate conversion
Interest rate swaps (1)
Receive fixed designated to loans $5,687 $61 4.80% 5.41%
Pay fixed designated to loans 167 (6) 6.14 5.21
Basis swaps designated to loans 207 5.00 5.05
Interest rate caps designated to loans (2) 36 NM NM
Interest rate floors designated to loans (3) 22 NM NM
Futures contracts designated to loans 116 NM NM
-----------------------------------------------------------------------------------------------
Total asset rate conversion 6,235 55
-----------------------------------------------------------------------------------------------
Liability rate conversion
Interest rate swaps (1)
Receive fixed designated to borrowed funds 1,381 94 5.57 6.60
-----------------------------------------------------------------------------------------------
Total liability rate conversion 1,381 94
-----------------------------------------------------------------------------------------------
Total interest rate risk management 7,616 149
-----------------------------------------------------------------------------------------------
Commercial mortgage banking risk management
Pay fixed interest rate swaps designated to
securities (1) 42 (4) 6.87 5.83
Pay fixed interest rate swaps designated to loans (1) 162 5.75 5.78
Pay total rate of return swaps designated to loans (1) 75 (1) 6.45 4.08
-----------------------------------------------------------------------------------------------
Total commercial mortgage banking risk management 279 (5)
-----------------------------------------------------------------------------------------------
Total financial derivatives $7,895 $144
===============================================================================================================================
(1) The floating rate portion of interest rate contracts is based on
money-market indices. As a percent of notional value, 75% were based on
1-month LIBOR, 23% on 3-month LIBOR and the remainder on other short-term
indices.
(2) Interest rate caps with notional values of $26 million require the
counterparty to pay the Corporation the excess, if any, of 3-month LIBOR
over a weighted-average strike of 6.61%. At March 31, 2001, 3-month LIBOR
was 4.88%.
(3) Interest rate floors with notional values of $20 million require the
counterparty to pay the excess, if any, weighted-average strike of 4.75%
over 3-month LIBOR. At March 31, 2001, 3-month LIBOR was 4.88%.
The following table sets forth the notional value and the estimated fair value
of financial derivatives used for risk management. Weighted-average interest
rates presented are based on the implied forward yield curve at December 31,
2000.
FINANCIAL DERIVATIVES
Weighted-Average Interest Rates
Notional -------------------------------
December 31, 2000 - dollars in millions Value Fair Value Paid Received
-------------------------------------------------------------------------------------------------------------------------------
Interest rate risk management
Asset rate conversion
Interest rate swaps (1)
Receive fixed designated to loans $3,250 $27 5.96% 5.56%
Basis swaps designated to other earning assets 226 3 5.63 5.85
Interest rate caps designated to loans (2) 308 4 NM NM
Interest rate floors designated to loans (3) 3,238 (1) NM NM
-----------------------------------------------------------------------------------------------
Total asset rate conversion 7,022 33
-----------------------------------------------------------------------------------------------
Liability rate conversion
Interest rate swaps (1)
Receive fixed designated to:
Interest-bearing deposits 125 4 5.85 6.73
Borrowed funds 1,381 57 5.96 6.60
Pay fixed designated to borrowed funds 1 5.88 5.78
Basis swaps designated to borrowed funds 2,004 10 5.76 5.79
-----------------------------------------------------------------------------------------------
Total liability rate conversion 3,511 71
-----------------------------------------------------------------------------------------------
Total interest rate risk management 10,533 104
-----------------------------------------------------------------------------------------------
Commercial mortgage banking risk management
Pay fixed interest rate swaps designated to
securities (1) 135 (8) 6.94 6.04
Pay fixed interest rate swaps designated to loans (1) 176 3 5.76 5.99
Pay total rate of return swaps designated to loans (1) 75 (5) 5.76 6.15
-----------------------------------------------------------------------------------------------
Total commercial mortgage banking risk management 386 (10)
-----------------------------------------------------------------------------------------------
Student lending activities - Forward contracts (4) 347 NM NM
Credit-related activities - Credit default swaps (4) 4,391 (2) NM NM
-----------------------------------------------------------------------------------------------
Total financial derivatives $15,657 $92
===============================================================================================================================
(1) The floating rate portion of interest rate contracts is based on
money-market indices. As a percent of notional value, 62% were based on
1-month LIBOR, 36% on 3-month LIBOR and the remainder on other short-term
indices.
(2) Interest rate caps with notional values of $61 million, $95 million and $150
million require the counterparty to pay the Corporation the excess, if any,
of 3-month LIBOR over a weighted-average strike of 6.00%, 1-month LIBOR over
a weighted-average strike of 5.68% and Prime over a weighted-average strike
of 8.76%, respectively. At December 31, 2000, 3-month LIBOR was 6.40%,
1-month LIBOR was 6.56% and Prime was 9.50%.
(3) Interest rate floors with notional values of $3.0 billion, require the
counterparty to pay the excess, if any, of the weighted-average strike of
4.63% over 3-month LIBOR. At December 31, 2000, 3-month LIBOR was 6.40%.
(4) Due to the structure of these contracts, they are no longer considered
financial derivatives under SFAS No. 133.
NM- Not meaningful
23
OTHER DERIVATIVES
To accommodate customer needs, PNC enters into customer-related financial
derivative transactions primarily consisting of interest rate swaps, caps,
floors and foreign exchange contracts. Risk exposure from customer positions is
managed through transactions with other dealers.
Additionally, the Corporation enters into other derivative transactions for risk
management purposes that are not designated as accounting hedges.
OTHER DERIVATIVES
At March 31, 2001
-------------------------------------------------------------------- 2001
Positive Negative Average
Notional Fair Fair Net Asset Fair
In millions Value Value Value (Liability) Value (a)
---------------------------------------------------------------------------------------------------------------------------------
Customer-related
Interest rate
Swaps $14,118 $193 $(203) $(10) $(5)
Caps/floors
Sold 4,787 (19) (19) (19)
Purchased 3,669 18 18 17
Foreign exchange 4,402 96 (74) 22 16
Other 2,794 35 (35) 3
---------------------------------------------------------------------------------------------------------------------------------
Total customer-related 29,770 342 (331) 11 12
Other 4,171 28 (3) 25 20
---------------------------------------------------------------------------------------------------------------------------------
Total other derivatives $33,941 $370 $(334) $36 $32
=================================================================================================================================
(a) Represents average for three months ended March 31, 2001.
FORWARD-LOOKING STATEMENTS
This report and other documents filed by the Corporation with the SEC include
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act with respect to future financial or business performance,
conditions, strategies, expectations and goals. In addition, the Corporation may
also include forward-looking statements in other written or oral statements.
Forward-looking statements are typically identified by words or phrases such as
"believe," "expect," "anticipate," "intend," "estimate," "position," "target,"
"mission," "assume," "achievable," "potential," "strategy," "goal," "objective,"
"plan," "aspiration," "outlook," "outcome," "continue," "remain," "maintain,"
"strive," "trend" and variations of such words and similar expressions, or
future or conditional verbs such as "will," "would," "should," "could," "may" or
similar expressions.
The Corporation cautions that forward-looking statements are subject to numerous
assumptions, risks and uncertainties, which change over time. Actual results
could differ materially from those anticipated in forward-looking statements and
future results could differ materially from historical performance.
Forward-looking statements speak only as of the date they are made, and the
Corporation assumes no duty to update forward-looking statements.
In addition to the factors mentioned elsewhere in this report, the following
factors, among others, could cause actual results to differ materially from
forward-looking statements or historical performance: adjustments to recorded
results of sale of residential mortgage banking business after disputes over
certain closing date adjustments have been resolved; decisions the Corporation
makes with respect to the redeployment of available capital; changes in asset
quality and credit risk; economic conditions; changes in financial and capital
markets; the inability to sustain revenue and earnings growth; changes in
interest rates; inflation; changes in values of assets under management and
assets serviced; relative investment performance of assets under management;
customer acceptance of PNC products and services; customer borrowing,
repayment, investment, and deposit practices; customer disintermediation;
valuation of debt and equity investments; the inability to successfully manage
risks inherent in the Corporation's business; the introduction, withdrawal,
success and timing of business initiatives and strategies; the extent and cost
of any share repurchases; decisions the Corporation makes with respect to
further reduction of balance sheet leverage and potential investments in PNC
businesses; competitive conditions; the inability to realize cost savings or
revenue enhancements, implement integration plans and other consequences
associated with mergers, acquisitions, restructurings and divestitures;
unfavorable resolution of legal proceedings; and the impact, extent and timing
of technological changes, capital management activities, and actions of the
Federal Reserve Board and legislative and regulatory actions and reforms.
Further, an increase in the number of customer or counterparty delinquencies,
bankruptcies, or defaults could result in, among other things, a higher loan
loss provision and reduced profitability.
Some of the above factors are described in more detail in the Risk Factors
section of this Financial Review and factors relating to credit risk, interest
rate risk, liquidity risk, trading activities, and financial and other
derivatives are discussed in the Risk Management section of this Financial
Review. Other factors are described elsewhere in this report.
24
CONSOLIDATED STATEMENT OF INCOME
THE PNC FINANCIAL SERVICES GROUP, INC.
Three months ended March 31 - in millions, except per share data 2001 2000
--------------------------------------------------------------------------------------------------------
INTEREST INCOME
Loans and fees on loans $981 $984
Securities available for sale 122 94
Loans held for sale 37 64
Other 32 19
--------------------------------------------------------------------------------------------------------
Total interest income 1,172 1,161
--------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Deposits 397 369
Borrowed funds 221 237
--------------------------------------------------------------------------------------------------------
Total interest expense 618 606
--------------------------------------------------------------------------------------------------------
Net interest income 554 555
Provision for credit losses 80 31
--------------------------------------------------------------------------------------------------------
Net interest income less provision for credit losses 474 524
--------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Asset management 223 186
Fund servicing 181 155
Service charges on deposits 50 50
Brokerage 54 71
Consumer services 55 47
Corporate services 76 82
Equity management (39) 87
Net securities gains (losses) 29 (3)
Other 72 53
--------------------------------------------------------------------------------------------------------
Total noninterest income 701 728
--------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Staff expense 421 411
Net occupancy 53 53
Equipment 57 56
Amortization 26 28
Marketing 9 13
Distributions on capital securities 17 16
Other 192 215
--------------------------------------------------------------------------------------------------------
Total noninterest expense 775 792
--------------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes 400 460
Income taxes 135 158
--------------------------------------------------------------------------------------------------------
Income from continuing operations 265 302
--------------------------------------------------------------------------------------------------------
Income from discontinued operations (less applicable income
taxes of $0 and $5) 5 6
--------------------------------------------------------------------------------------------------------
Net income before cumulative effect of accounting change 270 308
Cumulative effect of accounting change (less applicable
income taxes of $2) (5)
--------------------------------------------------------------------------------------------------------
Net income $265 $308
--------------------------------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE
Continuing operations
Basic $.90 $1.02
Diluted .89 1.01
Net income
Basic $ .90 $1.04
Diluted .89 1.03
CASH DIVIDENDS DECLARED PER COMMON SHARE $.48 $.45
AVERAGE COMMON SHARES OUTSTANDING
Basic 289.2 291.9
Diluted 292.8 294.1
========================================================================================================
See accompanying Notes to Consolidated Financial Statements.
25
CONSOLIDATED BALANCE SHEET
THE PNC FINANCIAL SERVICES GROUP, INC.
March 31 December 31
In millions, except par value 2001 2000
-----------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $2,998 $3,662
Short-term investments 853 1,151
Loans held for sale 1,765 1,655
Securities available for sale 11,976 5,902
Loans, net of unearned income of $1,062 and $999 45,626 50,601
Allowance for credit losses (675) (675)
-----------------------------------------------------------------------------------------------------------------------
Net loans 44,951 49,926
Goodwill and other amortizable assets 2,437 2,468
Investment in discontinued operations 356
Other 5,986 4,724
-----------------------------------------------------------------------------------------------------------------------
Total assets $70,966 $69,844
=======================================================================================================================
LIABILITIES
Deposits
Noninterest-bearing $8,431 $8,490
Interest-bearing 38,758 39,174
-----------------------------------------------------------------------------------------------------------------------
Total deposits 47,189 47,664
Borrowed funds
Federal funds purchased 785 1,445
Repurchase agreements 830 607
Bank notes and senior debt 5,362 6,110
Federal Home Loan Bank borrowings 2,623 500
Subordinated debt 2,379 2,407
Other borrowed funds 300 649
-----------------------------------------------------------------------------------------------------------------------
Total borrowed funds 12,279 11,718
Other 3,869 2,958
-----------------------------------------------------------------------------------------------------------------------
Total liabilities 63,337 62,340
-----------------------------------------------------------------------------------------------------------------------
Mandatorily redeemable capital securities of subsidiary trusts 848 848
SHAREHOLDERS' EQUITY
Preferred stock 7 7
Common stock - $5 par value
Authorized 450 shares
Issued 353 shares 1,764 1,764
Capital surplus 1,323 1,303
Retained earnings 6,857 6,736
Deferred benefit expense (26) (25)
Accumulated other comprehensive income (loss) from continuing operations 7 (43)
Accumulated other comprehensive loss from discontinued operations (45)
Common stock held in treasury at cost: 64 and 63 shares (3,151) (3,041)
-----------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 6,781 6,656
-----------------------------------------------------------------------------------------------------------------------
Total liabilities, capital securities and shareholders' equity $70,966 $69,844
=======================================================================================================================
See accompanying Notes to Consolidated Financial Statements.
26
CONSOLIDATED STATEMENT OF CASH FLOWS
THE PNC FINANCIAL SERVICES GROUP, INC.
Three months ended March 31 - in millions 2001 2000
---------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $265 $308
Discontinued operations (5) (6)
Cumulative effect of accounting change 5
---------------------------------------------------------------------------------------------------------------
Income from continuing operations 265 302
Adjustments to reconcile income from continuing operations
to net cash provided by operating activities
Provision for credit losses 80 31
Depreciation, amortization and accretion 100 77
Deferred income taxes 114 117
Net securities (gains) losses (28) 3
Valuation adjustments 8 17
Change in
Loans held for sale (124) 661
Other (266) (341)
---------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 149 867
---------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Net change in loans (64) (631)
Repayment of securities available for sale 265 185
Sales
Securities available for sale 4,958 1,427
Loans 1,161
Foreclosed assets 5 7
Purchases
Securities available for sale (7,357) (1,594)
Loans (110)
Net cash received in sale of business 503
Other 71 (70)
----------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (568) (676)
---------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net change in
Noninterest-bearing deposits (59) (142)
Interest-bearing deposits (416) 107
Federal funds purchased (660) (372)
Sales/issuances
Repurchase agreements 65,210 33,151
Bank notes and senior debt 1,050
Federal Home Loan Bank borrowings 2,623 1,500
Subordinated debt 1 99
Other borrowed funds 9,410 10,399
Common stock 80 31
Repayments/maturities
Repurchase agreements (64,987) (33,417)
Bank notes and senior debt (750) (1,025)
Federal Home Loan Bank borrowings (500) (1,700)
Subordinated debt (100)
Other borrowed funds (9,762) (10,528)
Acquisition of treasury stock (191) (116)
Cash dividends paid (144) (136)
---------------------------------------------------------------------------------------------------------------
Net cash used by financing activities (245) (1,099)
---------------------------------------------------------------------------------------------------------------
DECREASE IN CASH AND DUE FROM BANKS (664) (908)
Cash and due from banks at beginning of year 3,662 3,080
---------------------------------------------------------------------------------------------------------------
Cash and due from banks at end of period $2,998 $2,172
===============================================================================================================
CASH PAID FOR
Interest $577 $634
Income taxes 29 90
NON-CASH ITEMS
Transfer of residential mortgage loans to securities available for sale 3,775
Transfer from loans held for sale to loans 6
Transfer from loans to other assets 3 9
===============================================================================================================
See accompanying Notes to Consolidated Financial Statements.
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE PNC FINANCIAL SERVICES GROUP, INC.
BUSINESS
The PNC Financial Services Group, Inc. ("Corporation" or "PNC") is one of the
largest diversified financial services companies in the United States, operating
businesses engaged in community banking, corporate banking, real estate finance,
asset-based lending, wealth management, asset management and global fund
services. The Corporation provides certain products and services nationally
and others in PNC's primary geographic markets in Pennsylvania, New Jersey,
Delaware, Ohio and Kentucky. The Corporation also provides certain asset
management and processing products and services internationally. PNC is subject
to intense competition from other financial services companies and is subject to
regulation by various domestic and international authorities.
ACCOUNTING POLICIES
BASIS OF FINANCIAL STATEMENT PRESENTATION
The unaudited consolidated interim financial statements include the accounts of
PNC and its subsidiaries, most of which are wholly owned. Such statements have
been prepared in accordance with accounting principles generally accepted in the
United States. All significant intercompany accounts and transactions have been
eliminated.
In the opinion of management, the financial statements reflect all adjustments
of a normal recurring nature necessary for a fair statement of results for the
interim periods presented.
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the amounts reported. Actual results
will differ from such estimates and the differences may be material to the
consolidated financial statements.
The consolidated financial statements and notes to consolidated financial
statements reflect the residential mortgage banking business, which was sold on
January 31, 2001, as discontinued operations, unless otherwise noted.
The notes included herein should be read in conjunction with the audited
consolidated financial statements included in The PNC Financial Services Group,
Inc.'s 2000 Annual Report.
FINANCIAL DERIVATIVES
The Corporation uses a variety of financial derivatives as part of the overall
asset and liability risk management process to manage interest rate, market and
credit risk inherent in the Corporation's business activities. Substantially all
such instruments are used to manage risk related to changes in interest rates.
Interest rate and total rate of return swaps, purchased interest rate caps and
floors and futures contracts are the primary instruments used by the Corporation
for interest rate risk management.
Interest rate swaps are agreements with a counterparty to exchange periodic
fixed and floating interest payments calculated on a notional amount. The
floating rate is based on a money market index, primarily short-term LIBOR.
Total rate of return swaps are agreements with a counterparty to exchange an
interest rate payment for the total rate of return on a specified reference
index calculated on a notional amount. Purchased interest rate caps and floors
are agreements where, for a fee, the counterparty agrees to pay the Corporation
the amount, if any, by which a specified market interest rate exceeds or is less
than a defined rate applied to a notional amount, respectively. Interest rate
futures contracts are exchange-traded agreements to make or take delivery of a
financial instrument at an agreed upon price and are settled in cash daily.
Financial derivatives involve, to varying degrees, interest rate, market and
credit risk. The Corporation manages these risks as part of its asset and
liability management process and through credit policies and procedures. The
Corporation seeks to minimize the credit risk by entering into transactions with
only a select number of high-quality institutions, establishing credit limits,
requiring bilateral-netting agreements, and, in certain instances, segregated
collateral.
FAIR VALUE HEDGING STRATEGIES
The Corporation enters into interest rate and total rate of return swaps, caps,
floors and interest rate futures derivative contracts to hedge designated
commercial mortgage loans held for sale, securities available for sale,
commercial loans, bank notes and subordinated debt for changes in fair value
primarily due to changes in interest rates.
CASH FLOW HEDGING STRATEGY
The Corporation enters into interest rate swap contracts to modify the interest
rate characteristics of designated commercial loans from variable to fixed in
order to reduce the impact of interest rate changes on future interest income.
The fair value of the derivative is reported in other assets or other
liabilities and offset in accumulated other comprehensive income for the
effective portion of the derivative. Ineffectiveness of the strategy, as defined
under Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137
and No. 138, if any, is reported in net interest income. Amounts reclassed into
earnings, when the hedged transaction affects earnings, are included in net
interest income.
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE PNC FINANCIAL SERVICES GROUP, INC.
CUSTOMER AND OTHER DERIVATIVES
To accommodate customer needs, PNC also enters into financial derivative
transactions primarily consisting of interest rate swaps, caps, floors and
foreign exchange contracts. Interest rate and foreign exchange risk exposures
from customer positions are managed through transactions with other dealers.
These positions are recorded at estimated fair value and changes in value are
included in noninterest income.
Effective January 1, 2001, the Corporation implemented SFAS No. 133. The
statement requires the Corporation to recognize all derivative instruments as
either assets or liabilities on the balance sheet at fair value. Financial
derivatives are reported at fair value in other assets or other liabilities. The
accounting for changes in the fair value of a derivative instrument depends on
whether it has been designated and qualifies as part of a hedging relationship
and further, on the type of hedging relationship. For those derivative
instruments that are designated and qualify as hedging instruments, the
Corporation must designate the hedging instrument, based on the exposure being
hedged, as either a fair value hedge, a cash flow hedge or a hedge of a net
investment in a foreign operation.
For derivatives that are designated as fair value hedges (i.e., hedging the
exposure to changes in the fair value of an asset or a liability attributable to
a particular risk), the gain or loss on derivatives as well as the loss or gain
on the hedged items are recognized in current earnings. For derivatives
designated as cash flow hedges (i.e., hedging the exposure to variability in
expected future cash flows), the effective portions of the gain or loss on
derivatives are reported as a component of accumulated other comprehensive
income in the same period or periods during which the hedged transaction affects
earnings. The remaining gain or loss on the derivatives in excess of the hedged
future cash flows, if any, is recognized in current earnings. For derivatives
not designated as hedges, the gain or loss is recognized in current earnings.
FINANCIAL DERIVATIVES - PRE-SFAS NO. 133
Prior to January 1, 2001, interest rate swaps, caps and floors that modified the
interest rate characteristics (such as from fixed to variable, variable to
fixed, or one variable index to another) of designated interest-bearing assets
or liabilities were accounted for under the accrual method. The net amount
payable or receivable from the derivative contract was accrued as an adjustment
to interest income or interest expense of the designated instrument. Premiums on
contracts were deferred and amortized over the life of the agreement as an
adjustment to interest income or interest expense of the designated instruments.
Unamortized premiums were included in other assets.
Changes in the fair value of financial derivatives accounted for under the
accrual method were not reflected in results of operations. Realized gains and
losses, except losses on terminated interest rate caps and floors, were deferred
as an adjustment to the carrying amount of the designated instruments and
amortized over the shorter of the remaining original life of the agreements or
the designated instruments. Losses on terminated interest rate caps and floors
were recognized immediately in results of operations. If the designated
instruments were disposed, the fair value of the associated derivative contracts
and any unamortized deferred gains or losses were included in the determination
of gain or loss on the disposition of such instruments. Contracts not qualifying
for accrual accounting were marked to market with gains or losses included in
noninterest income.
Credit default swaps were entered into to mitigate credit risk and lower the
required regulatory capital associated with commercial lending activities. If
the credit default swaps qualified for hedge accounting treatment, the premium
paid to enter into the credit default swaps were recorded in other assets and
deferred and amortized to noninterest expense over the life of the agreement.
Changes in the fair value of credit default swaps qualifying for hedge
accounting treatment were not reflected in the Corporation's financial position
and had no impact on results of operations.
If the credit default swap did not qualify for hedge accounting treatment or if
the Corporation was the seller of credit protection, the credit default swap was
marked to market with gains or losses included in noninterest income.
Due to the particular structure of the Corporation's credit default swaps
discussed in the preceding paragraphs, these instruments are not considered
financial derivatives under the provisions of SFAS No. 133. Commencing January
1, 2001, the premiums paid to enter credit default swaps not considered to be
derivatives are recorded in other assets and amortized to noninterest expense
over the life of the agreement.
29
RESTATEMENTS
The amounts contained in this Amendment No. 1 include the restatement of the
results for the first quarter of 2001 to reflect the correction of an error
related to the accounting for the sale of the residential mortgage banking
business. This restatement reduced income from discontinued operations and net
income for the three months ended March 31, 2001 by $35 million, or $.12 per
diluted share. The consolidated balance sheet was not affected by this
restatement as the impact of the error had been reflected in retained earnings
at March 31, 2001.
DISCONTINUED OPERATIONS
On January 31, 2001, PNC closed the sale of its residential mortgage banking
business. Certain closing date adjustments are currently in dispute between PNC
and the buyer, Washington Mutual Bank, FA. The ultimate financial impact of the
sale will not be determined until the disputed matters are finally resolved.
The income and net assets of the residential mortgage banking business, which
are presented on one line in the income statement and balance sheet,
respectively, are as follows:
INCOME FROM DISCONTINUED OPERATIONS
Three months ended March 31 - in millions 2001 2000
-----------------------------------------------------------------
Total income from operations, after tax $ 15 $6
Net loss on disposal, after tax (a) (10)
-----------------------------------------------------------------
Total income from discontinued
operations $ 5 $6
=================================================================
(a) Includes recognition of $35 million of previously unrealized securities
losses in accumulated other comprehensive income.
INVESTMENT IN DISCONTINUED OPERATIONS
December 31 - in millions 2000
------------------------------------------------------------------
Loans held for sale $3,003
Securities available for sale 3,016
Loans, net of unearned income 739
Goodwill and other amortizable assets 1,925
All other assets 1,168
------------------------------------------------------------------
Total assets 9,851
------------------------------------------------------------------
Deposits 1,150
Borrowed funds 7,601
Other liabilities 744
------------------------------------------------------------------
Total liabilities 9,495
------------------------------------------------------------------
Net assets $356
==================================================================
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" (a replacement of SFAS No. 125) was issued in
September 2000 and replaces SFAS No. 125. Although SFAS No. 140 has changed many
of the rules regarding securitizations, it continues to require an entity to
recognize the financial and servicing assets it controls and the liabilities it
has incurred and to derecognize financial assets when control has been
surrendered in accordance with the criteria provided in the standard. As
required, the Corporation will apply the new rules prospectively to transactions
beginning in the second quarter of 2001. Based on current circumstances,
management believes that the application of the new rules will not have a
material impact on the Corporation's financial condition or results of
operations. SFAS No. 140 requires certain disclosures pertaining to
securitization transactions effective for fiscal years ending after December 15,
2000.
CASH FLOWS
During the first three months of 2001, divestiture activity that affected cash
flows consisted of $383 million of divested net assets and cash receipts of $503
million. The Corporation did not have any acquisition or divestiture activity
that affected cash flows during the first three months of 2000.
TRADING ACTIVITIES
Most of PNC's trading activities are designed to provide capital markets
services to customers and not to position the Corporation's portfolio for gains
from market movements. PNC participates in derivatives and foreign exchange
trading as well as "market making" in equity securities as an accommodation to
customers. PNC also engages in trading activities as part of risk management
strategies.
Net trading income for the first three months of 2001 totaled $38 million
compared with net trading income of $20 million for the prior-year period and
was included in noninterest income as follows:
Three months ended March 31 - in millions 2001 2000
----------------------------------------------------------------
Corporate services $1
Other income
Securities trading 20 $12
Derivatives trading 12 3
Foreign exchange 5 5
----------------------------------------------------------------
Net trading income $38 $20
================================================================
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE PNC FINANCIAL SERVICES GROUP, INC.
SECURITIES AVAILABLE FOR SALE
Unrealized
Amortized ------------------------ Fair
In millions Cost Gains Losses Value
-------------------------------------------------------------------------------------------------------------------------
MARCH 31, 2001
Debt securities
U.S. Treasury and government agencies $1,519 $5 $(2) $1,522
Mortgage-backed 8,707 16 (18) 8,705
Asset-backed 1,358 7 (4) 1,361
State and municipal 80 3 83
Other debt 70 1 71
-------------------------------------------------------------------------------------------------------------------------
Total debt securities 11,734 32 (24) 11,742
Corporate stocks and other 248 52 (66) 234
-------------------------------------------------------------------------------------------------------------------------
Total securities available for sale $11,982 $84 $(90) $11,976
=========================================================================================================================
DECEMBER 31, 2000
Debt securities
U.S. Treasury and government agencies $313 $1 $(1) $313
Mortgage-backed 4,037 13 (48) 4,002
Asset-backed 902 1 (10) 893
State and municipal 94 2 96
Other debt 73 1 (1) 73
-------------------------------------------------------------------------------------------------------------------------
Total debt securities 5,419 18 (60) 5,377
Corporate stocks and other 537 2 (14) 525
-------------------------------------------------------------------------------------------------------------------------
Total securities available for sale $5,956 $20 $(74) $5,902
=========================================================================================================================
The fair value of securities available for sale at March 31, 2001 was $12.0
billion compared with $5.9 billion at December 31, 2000. Securities represented
17% of total assets at March 31, 2001 compared with 8% at December 31, 2000. The
increase was primarily due to $3.8 billion of residential mortgage loan
securitizations and purchases of securities during the first three months of
2001. The expected weighted-average life of securities available for sale was 3
years and 11 months at March 31, 2001 compared with 4 years and 5 months at
December 31, 2000.
At March 31, 2001, the securities available for sale balance included a net
unrealized loss of $6 million, which represented the difference between fair
value and amortized cost. The comparable amount at December 31, 2000 was a net
unrealized loss of $54 million. Net unrealized gains and losses in the
securities available for sale portfolio are included in accumulated other
comprehensive income or loss, net of tax or, for the portion attributable to
changes in a hedged risk as part of a fair value hedge strategy, in net income.
Net securities gains associated with the disposition of securities available for
sale were $29 million for the first three months of 2001 and net losses of $3
million for the first three months of 2000. Net securities losses of $1 million
for the first three months of 2001, related to commercial mortgage banking
activities, were included in corporate services revenue.
31
NONPERFORMING ASSETS
Nonperforming assets were as follows:
March 31 December 31
In millions 2001 2000
--------------------------------------------------------------------
Nonaccrual loans $330 $323
Troubled debt restructured loan 6
Foreclosed and other assets 50 49
--------------------------------------------------------------------
Total nonperforming assets $386 $372
====================================================================
The above table excludes $24 million and $18 million of equity management assets
carried at estimated fair value at March 31, 2001 and December 31, 2000,
respectively.
ALLOWANCE FOR CREDIT LOSSES
Changes in the allowance for credit losses were as follows:
In millions 2001 2000
--------------------------------------------------------------------
Allowance at January 1 $675 $674
Charge-offs
Consumer (10) (12)
Residential mortgage (2)
Commercial (78) (29)
Lease financing (3) (2)
--------------------------------------------------------------------
Total charge-offs (91) (45)
Recoveries
Consumer 5 6
Commercial 6 7
Lease financing 1
--------------------------------------------------------------------
Total recoveries 11 14
--------------------------------------------------------------------
Net charge-offs
Consumer (5) (6)
Residential mortgage (2)
Commercial (72) (22)
Lease financing (3) (1)
--------------------------------------------------------------------
Total net charge-offs (80) (31)
Provision for credit losses 80 31
--------------------------------------------------------------------
Allowance at March 31 $675 $674
====================================================================
FINANCIAL DERIVATIVES
Effective January 1, 2001, the Corporation implemented SFAS No. 133. As a result
of the adoption of this statement, the Corporation recognized, in the first
quarter of 2001, an after-tax loss from the cumulative effect of a change in
accounting principle of $5 million reported in the consolidated income statement
and an after-tax accumulated other comprehensive loss of $4 million. The impact
of the adoption of this standard related to the residential mortgage banking
business that was sold was reflected in the results of discontinued operations.
During the first quarter of 2001, the Corporation recognized a net loss of $1
million related to the ineffective portion of its fair value hedging
instruments. This net loss was reported as an adjustment to net interest income.
Cash flow hedge ineffectiveness was not significant to the results of operations
of the Corporation during the first three months of 2001.
At March 31, 2001, the Corporation expects to reclassify $28 million of net
gains on derivative instruments from accumulated other comprehensive income to
earnings during the next twelve months due to the receipts of variable interest
associated with floating rate commercial loans.
At March 31, 2001 and December 31, 2000, the Corporation's exposure to credit
losses with respect to financial derivatives was not material.
LEGAL PROCEEDINGS
The Corporation and persons to whom the Corporation may have indemnification
obligations, in the normal course of business, are subject to various pending
and threatened legal proceedings in which claims for monetary damages and other
relief are asserted. Management, after consultation with legal counsel, does not
at the present time anticipate the ultimate aggregate liability, if any, arising
out of such legal proceedings will have a material adverse effect on the
Corporation's financial condition. At the present time, management is not in a
position to determine whether any such pending or threatened legal proceedings
will have a material adverse effect on the Corporation's results of operations
in any future reporting period.
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE PNC FINANCIAL SERVICES GROUP, INC.
COMPREHENSIVE INCOME
Comprehensive income from continuing operations was $315 million for the first
quarter of 2001, compared with $294 million for the first quarter of 2000.
The Corporation's other comprehensive income consists of unrealized gains or
losses on securities available for sale and cash flow hedge, foreign currency
translation and minimum pension liability adjustments. The income effects
allocated to each component of other comprehensive income are as follows:
Three months ended March 31, 2001 Pretax Tax Benefit After-tax
In millions Amount (Expense) Amount
-------------------------------------------------------------------------------
Unrealized securities gains $53 $(19) $34
Less: Reclassification
adjustment for gains
realized in net income 6 (2) 4
-------------------------------------------------------------------------------
Net unrealized securities gains 47 (17) 30
-------------------------------------------------------------------------------
SFAS No. 133 transition adjustment (6) 2 (4)
Unrealized gains on cash flow
hedge derivatives 31 (11) 20
Less: Reclassification
adjustment for losses
realized in net income (7) 2 (5)
-------------------------------------------------------------------------------
Net unrealized gains on cash flow
hedge derivatives 32 (11) 21
Foreign currency translation
adjustment (2) 1 (1)
-------------------------------------------------------------------------------
Other comprehensive income
from continuing operations $77 $(27) $50
===============================================================================
Year ended December 31, 2000 Pretax Tax Benefit After-tax
In millions Amount (Expense) Amount
-------------------------------------------------------------------------------
Unrealized securities gains $127 $(41) $86
Less: Reclassification
adjustment for losses
realized in net income (3) 1 (2)
-------------------------------------------------------------------------------
Net unrealized securities gains 130 (42) 88
Minimum pension liability adjustment 2 (1) 1
-------------------------------------------------------------------------------
Other comprehensive income
from continuing operations $132 $(43) $89
===============================================================================
The accumulated balances related to each component of other comprehensive income
(loss) are as follows:
March 31 December 31
In millions 2001 2000
----------------------------------------------------------------------
Net unrealized securities losses $(2) $(32)
Net unrealized gains on cash flow hedge
derivatives 21
Minimum pension liability adjustment (11) (11)
Foreign currency translation adjustment (1)
----------------------------------------------------------------------
Accumulated other comprehensive
income (loss) from continuing
operations $7 $(43)
======================================================================
SHAREHOLDERS' EQUITY
On March 6, 2001, the Corporation commenced a cash tender offer for its
nonconvertible Series F preferred stock at a price of $50.35 per share plus
accrued and unpaid dividends. Approximately 1.9 million shares of the 6 million
shares outstanding were tendered through this offer and were purchased by the
Corporation on April 5, 2001.
33
EARNINGS PER SHARE
The following table sets forth basic and diluted earnings per
share calculations.
Three months ended March 31 - in millions, except share and per share data 2001 2000
------------------------------------------------------------------------------------------------------------------------------
CALCULATION OF BASIC EARNINGS PER COMMON SHARE
Income from continuing operations $265 $302
Less: Preferred dividends declared 5 5
------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations applicable to basic earnings per common share 260 297
Income from discontinued operations applicable to basic earnings per common share 5 6
Cumulative effect of accounting change applicable to basic earnings per common share (5)
------------------------------------------------------------------------------------------------------------------------------
Net income applicable to basic earnings per common share $260 $303
Basic weighted-average common shares outstanding (in thousands) 289,205 291,891
Basic earnings per common share from continuing operations $.90 $1.02
Basic earnings per common share from discontinued operations .02 .02
Basic earnings per common share from cumulative effect of accounting change (.02)
------------------------------------------------------------------------------------------------------------------------------
Basic earnings per common share $ .90 $1.04
==============================================================================================================================
CALCULATION OF DILUTED EARNINGS PER COMMON SHARE
Income from continuing operations $265 $302
Less: Dividends declared on nonconvertible preferred stock Series F 4 5
------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations applicable to diluted earnings per common share 261 297
Income from discontinued operations applicable to diluted earnings per common share 5 6
Cumulative effect of accounting change applicable to diluted earnings per common share (5)
------------------------------------------------------------------------------------------------------------------------------
Net income applicable to diluted earnings per common share $261 $303
Basic weighted-average common shares outstanding (in thousands) 289,205 291,891
Weighted-average common shares to be issued using average market price and assuming:
Conversion of preferred stock Series A and B 111 122
Conversion of preferred stock Series C and D 902 1,028
Conversion of debentures 17 22
Exercise of stock options 2,266 699
Incentive share awards 304 368
------------------------------------------------------------------------------------------------------------------------------
Diluted weighted-average common shares outstanding (in thousands) 292,805 294,130
Diluted earnings per common share from continuing operations $.89 $1.01
Diluted earnings per common share from discontinued operations .02 .02
Diluted earnings per common share from cumulative effect of accounting change (.02)
------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per common share $ .89 $1.03
==============================================================================================================================
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE PNC FINANCIAL SERVICES GROUP, INC.
SEGMENT REPORTING
PNC operates seven major businesses engaged in community banking, corporate
banking, real estate finance, asset-based lending, wealth management, asset
management and global fund services.
Business results are presented based on PNC's management accounting practices
and the Corporation's management structure. There is no comprehensive,
authoritative body of guidance for management accounting equivalent to generally
accepted accounting principles; therefore, PNC's business results are not
necessarily comparable with similar information for any other financial services
institution. Financial results are presented, to the extent practicable, as if
each business operated on a stand-alone basis.
The management accounting process uses various balance sheet and income
statement assignments and transfers to measure performance of the businesses.
Methodologies change from time to time as management accounting practices are
enhanced and businesses change. Securities available for sale or borrowings and
related net interest income are assigned based on the net asset or liability
position of each business. Capital is assigned based on management's assessment
of inherent risks and equity levels at independent companies providing similar
products and services. The allowance for credit losses is allocated based on
management's assessment of risk inherent in the loan portfolios. Support areas
not directly aligned with the businesses are allocated primarily based on the
utilization of services.
Total business financial results differ from consolidated results from
continuing operations primarily due to differences between management accounting
practices and generally accepted accounting principles, businesses and loan
portfolios that have been divested or designated for exit during 2000 or
earlier, equity management activities, minority interests, residual asset and
liability management activities, eliminations and unassigned items, the impact
of which is reflected in the "Other" category.
BUSINESS SEGMENT PRODUCTS AND SERVICES
Community Banking provides deposit, branch-based brokerage, electronic banking
and credit products and services to retail customers as well as deposit, credit,
treasury management and capital markets products and services to small
businesses primarily within PNC's geographic region.
Corporate Banking provides credit, equipment leasing, treasury management and
capital markets products and services to large and mid-sized corporations,
institutions and government entities primarily within PNC's geographic region.
PNC Real Estate Finance provides credit, capital markets, treasury management,
commercial mortgage loan servicing and other products and services to
developers, owners and investors in commercial real estate.
PNC Business Credit provides asset-based lending, capital markets and treasury
management products and services to middle market customers nationally. PNC
Business Credit's lending services include loans secured by accounts receivable,
inventory, machinery and equipment, and other collateral, and its customers
include manufacturing, wholesale, distribution, retailing and service industry
companies.
PNC Advisors provides a full range of tailored investment products and services
to affluent individuals and families including full-service brokerage through
J.J.B. Hilliard, W.L. Lyons, Inc. and investment advisory services to the
ultra-affluent through Hawthorn. PNC Advisors also serves as investment manager
and trustee for employee benefit plans and charitable and endowment assets.
BlackRock is one of the largest publicly traded investment management firms in
the United States with $202 billion of assets under management at March 31,
2001. BlackRock manages assets on behalf of institutions and individuals through
a variety of fixed income, liquidity, equity and alternative investment separate
accounts and mutual funds, including its flagship fund families, BlackRock Funds
and BlackRock Provident Institutional Funds. In addition, BlackRock provides
risk management and technology services to a growing number of institutional
investors under the BlackRock Solutions name.
PFPC is the largest full-service mutual fund transfer agent and second largest
provider of mutual fund accounting and administration services in the United
States, providing a wide range of global fund services to the investment
management industry. As an extension of its domestic services, PFPC also
provides customized processing services to the international marketplace through
its Dublin, Ireland and Luxembourg operations.
35
RESULTS OF BUSINESSES
PNC
Real PNC
Three months ended March 31 Community Corporate Estate Business PNC
In millions Banking Banking Finance Credit Advisors BlackRock PFPC Other Total
-----------------------------------------------------------------------------------------------------------------------------------
2001
INCOME STATEMENT
Net interest income (a) $354 $140 $29 $24 $32 $2 $(15) $(7) $559
Noninterest income 188 52 24 14 167 134 180 (58) 701
-----------------------------------------------------------------------------------------------------------------------------------
Total revenue 542 192 53 38 199 136 165 (65) 1,260
Provision for credit losses 10 57 5 8 80
Depreciation and amortization 21 3 5 1 4 6 10 14 64
Other noninterest expense 258 98 31 7 124 86 127 (20) 711
-----------------------------------------------------------------------------------------------------------------------------------
Pretax earnings 253 34 17 25 71 44 28 (67) 405
Income taxes 91 10 (3) 9 27 19 11 (24) 140
---------------------------------------------------------------------------------------------------------------------------------
Earnings $162 $24 $20 $16 $44 $25 $17 $(43) $265
===================================================================================================================================
Inter-segment revenue $1 $1 $19 $3 $(24)
===================================================================================================================================
AVERAGE ASSETS $40,617 $16,939 $5,378 $2,377 $3,505 $500 $1,735 $734 $71,785
===================================================================================================================================
2000
INCOME STATEMENT
Net interest income (a) $344 $134 $27 $24 $35 $1 $(10) $5 $560
Noninterest income 133 80 19 4 169 108 155 60 728
-----------------------------------------------------------------------------------------------------------------------------------
Total revenue 477 214 46 28 204 109 145 65 1,288
Provision for credit losses 12 15 3 1 31
Depreciation and amortization 21 3 5 1 4 5 13 14 66
Other noninterest expense 243 98 30 6 131 71 122 25 726
-----------------------------------------------------------------------------------------------------------------------------------
Pretax earnings 201 98 11 21 66 33 10 25 465
Income taxes 72 34 (2) 8 25 14 4 8 163
-----------------------------------------------------------------------------------------------------------------------------------
Earnings $129 $64 $13 $13 $41 $19 $6 $17 $302
===================================================================================================================================
Inter-segment revenue $1 $1 $22 $3 $(27)
===================================================================================================================================
AVERAGE ASSETS $37,866 $15,950 $5,382 $2,084 $3,598 $388 $1,603 $1,473 $68,344
===================================================================================================================================
(a) Taxable-equivalent basis
36
STATISTICAL INFORMATION
THE PNC FINANCIAL SERVICES GROUP, INC.
CONSOLIDATED AVERAGE BALANCE SHEET AND NET INTEREST ANALYSIS
----------------------------------------------------------------------
First Quarter 2001 Fourth Quarter 2000
----------------------------------------------------------------------
Average Average
Dollars in millions Average Yields/ Average Yields/
Taxable-equivalent basis Balances Interest Rates Balances Interest Rates
---------------------------------------------------------------------------------------------------------------------------------
ASSETS
Interest-earning assets
Loans held for sale $2,005 $37 7.31% $1,991 $41 8.32%
Securities available for sale
U.S. Treasury and government agencies and corporations 3,933 57 5.84 1,795 27 6.12
Other debt 4,001 63 6.32 3,635 60 6.59
Other 127 2 5.63 498 10 7.55
------------------------------------------------------------------------------------ ----------------------
Total securities available for sale 8,061 122 6.08 5,928 97 6.53
Loans, net of unearned income
Consumer 9,085 194 8.70 9,081 202 8.84
Residential mortgage 12,673 232 7.32 12,838 232 7.23
Commercial 20,882 422 8.09 21,109 455 8.44
Commercial real estate 2,580 55 8.44 2,670 61 8.97
Lease financing 3,897 71 7.32 3,639 68 7.42
Other 520 11 7.98 591 13 8.73
------------------------------------------------------------------------------------ ----------------------
Total loans, net of unearned income 49,637 985 7.96 49,928 1,031 8.16
Other 1,831 33 7.20 1,322 26 7.80
------------------------------------------------------------------------------------ ----------------------
Total interest-earning assets/interest income 61,534 1,177 7.67 59,169 1,195 7.99
Noninterest-earning assets
Investment in discontinued operations 207 570
Allowance for credit losses (683) (678)
Cash and due from banks 2,977 2,877
Other assets 7,957 7,015
------------------------------------------------------------------------ ---------
Total assets $71,992 $68,953
------------------------------------------------------------------------ ---------
LIABILITIES, CAPITAL SECURITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities
Interest-bearing deposits
Demand and money market $20,468 162 3.20 $19,762 186 3.74
Savings 1,919 6 1.31 1,937 8 1.72
Retail certificates of deposit 13,724 199 5.90 14,795 223 6.00
Other time 565 10 6.67 587 10 6.61
Deposits in foreign offices 1,402 20 5.75 1,579 26 6.48
------------------------------------------------------------------------------------ ----------------------
Total interest-bearing deposits 38,078 397 4.22 38,660 453 4.66
Borrowed funds
Federal funds purchased 2,948 44 5.89 1,236 18 5.80
Repurchase agreements 1,145 14 4.83 804 12 5.93
Bank notes and senior debt 5,896 91 6.19 6,109 106 6.76
Federal Home Loan Bank borrowings 1,576 21 5.46 500 9 6.66
Subordinated debt 2,408 44 7.09 2,407 45 7.44
Other borrowed funds 402 7 7.30 682 14 8.26
------------------------------------------------------------------------------------ ----------------------
Total borrowed funds 14,375 221 6.15 11,738 204 6.83
------------------------------------------------------------------------------------ ----------------------
Total interest-bearing liabilities/interest expense 52,453 618 4.75 50,398 657 5.16
Noninterest-bearing liabilities and shareholders' equity
Demand and other noninterest-bearing deposits 8,190 8,304
Accrued expenses and other liabilities 3,830 2,978
Mandatorily redeemable capital securities of subsidiary
trusts 848 848
Shareholders' equity 6,671 6,425
------------------------------------------------------------------------ ---------
Total liabilities, capital securities and shareholders'
equity $71,992 $68,953
---------------------------------------------------------------------------------------------------------------------------------
Interest rate spread 2.92 2.83
Impact of noninterest-bearing sources .70 .77
---------------------------------------------------------------------------------------------------------------------------------
Net interest income/margin $559 3.62% $538 3.60%
---------------------------------------------------------------------------------------------------------------------------------
Nonaccrual loans are included in loans, net of unearned income. The impact of
financial derivatives used in interest rate risk management is included in the
interest income/expense and average yields/rates of the related assets and
liabilities. Average balances of securities available for sale are based on
amortized historical cost (excluding SFAS No. 115 adjustments to fair value).
Loan fees for the three months ended March 31, 2001, December 31, 2000,
September 30, 2000, June 30, 2000 and March 31, 2000 were $29 million, $26
million, $29 million, $31 million and $29 million, respectively.
37
-----------------------------------------------------------------------------------------------------------------------------------
Third Quarter 2000 Second Quarter 2000 First Quarter 2000
-----------------------------------------------------------------------------------------------------------------------------------
Average Average Average
Average Yields/ Average Yields/ Average Yields/
Balances Interest Rates Balances Interest Rates Balances Interest Rates
-----------------------------------------------------------------------------------------------------------------------------------
$2,151 $47 8.77% $2,577 $52 8.11% $3,319 $64 7.64%
1,662 25 5.97 1,648 25 6.11 1,936 28 5.57
3,934 65 6.65 3,742 62 6.58 3,578 57 6.45
583 9 6.08 619 11 7.02 614 10 6.92
------------------------------ -------------------------- -------------------------
6,179 99 6.41 6,009 98 6.50 6,128 95 6.22
9,174 201 8.72 9,209 198 8.63 9,247 192 8.35
12,405 222 7.16 12,571 223 7.09 12,584 222 7.08
21,800 472 8.47 22,042 464 8.33 21,791 447 8.12
2,688 61 8.85 2,682 59 8.74 2,698 59 8.60
3,238 58 7.24 3,049 55 7.19 2,958 54 7.33
646 14 8.64 676 14 8.50 688 14 8.09
------------------------------ -------------------------- -------------------------
49,951 1,028 8.13 50,229 1,013 8.03 49,966 988 7.88
1,445 30 8.05 1,276 22 7.01 1,113 19 6.92
------------------------------ -------------------------- -------------------------
59,726 1,204 7.98 60,091 1,185 7.86 60,526 1,166 7.68
515 448 412
(680) (689) (683)
2,848 2,837 2,306
6,689 6,418 6,195
------------- ----------- ------------
$69,098 $69,105 $68,756
------------- ----------- ------------
$18,914 175 3.68 $18,549 159 3.46 $17,700 138 3.14
2,020 9 1.81 2,107 9 1.75 2,138 9 1.64
14,776 217 5.85 14,403 195 5.45 14,591 191 5.25
619 10 6.55 641 10 6.44 637 10 6.36
1,342 23 6.50 1,483 24 6.25 1,489 21 5.63
------------------------------ -------------------------- -----------------------
37,671 434 4.58 37,183 397 4.30 36,555 369 4.05
1,904 32 6.51 2,162 34 6.28 2,279 33 5.67
846 14 5.84 769 11 5.56 595 8 5.46
6,290 108 6.75 6,762 110 6.40 6,976 108 6.10
1,105 20 7.16 1,514 24 6.35 2,331 33 5.69
2,419 45 7.44 2,420 45 7.45 2,377 44 7.43
954 17 7.18 795 14 6.89 775 11 5.80
------------------------------ -------------------------- -----------------------
13,518 236 6.85 14,422 238 6.54 15,333 237 6.14
------------------------------ -------------------------- -----------------------
51,189 670 5.18 51,605 635 4.92 51,888 606 4.67
8,239 8,357 7,700
2,637 2,290 2,393
848 848 848
6,185 6,005 5,927
---------------- ------------- --------------
$69,098 $69,105 $68,756
-----------------------------------------------------------------------------------------------------------------------------------
2.80 2.94 3.01
.74 .69 .67
-----------------------------------------------------------------------------------------------------------------------------------
$534 3.54% $550 3.63% $560 3.68%
-----------------------------------------------------------------------------------------------------------------------------------
38
QUARTERLY REPORT ON FORM 10-Q/A
AMENDMENT NO. 1
THE PNC FINANCIAL SERVICES GROUP, INC.
Securities and Exchange Commission
Washington, D.C. 20549
Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the quarterly period ended March 31, 2001.
Commission File Number 1-9718
THE PNC FINANCIAL SERVICES GROUP, INC.
Incorporated in the Commonwealth of Pennsylvania
IRS Employer Identification No. 25-1435979
Address: One PNC Plaza
249 Fifth Avenue
Pittsburgh, Pennsylvania 15222-2707
Telephone: (412) 762-2000
By filing this amendment ("Amendment No. 1"), the undersigned registrant hereby
amends its Quarterly Report on Form 10-Q for the quarter ended March 31, 2001
("March 2001 Form 10-Q") primarily to reflect the correction of an error
related to the accounting for the January 2001 sale of the registrant's
residential mortgage banking business.
By this Amendment No. 1, the undersigned registrant is amending and restating
its entire March 2001 Form 10-Q.
As of April 27, 2001 The PNC Financial Services Group, Inc. had 288,884,641
shares of common stock ($5 par value) outstanding.
The PNC Financial Services Group, Inc. (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months and (2) has been subject to such filing requirements for the
past 90 days.
The following sections of the Financial Review set forth in the cross-reference
index are incorporated in the Quarterly Report on Form 10-Q/A, Amendment No. 1.
Cross-reference Page(s)
----------------------------------------------------------------
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Statement of Income for the
three months ended March 31, 2001 and
2000 25
Consolidated Balance Sheet as of March
31, 2001 and December 31, 2000 26
Consolidated Statement of Cash Flows for
the three months ended March 31, 2001
and 2000 27
Notes to Consolidated Financial
Statements 28 - 36
Consolidated Average Balance Sheet and
Net Interest Analysis 37 - 38
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of
Operations 3 - 24
Item 3 Quantitative and Qualitative
Disclosures About Market Risk 17 - 24
----------------------------------------------------------------
PART II OTHER FINANCIAL INFORMATION
ITEM 4. SUBMISSION OF MATTERS FOR A VOTE OF SECURITY HOLDERS
An annual meeting of shareholders of The PNC Financial Services Group, Inc. was
held on April 24, 2001 for the purpose of considering and acting upon the
following:
Fifteen directors were elected and the votes cast for or against/withheld were
as follows:
Aggregate Votes
-------------------------------
Nominee For Against/Withheld
----------------------------------------------------------------
Paul W. Chellgren 253,982,913 1,972,035
Robert N. Clay 253,990,205 1,964,743
George A. Davidson, Jr. 254,021,522 1,933,426
David F. Girard-diCarlo 250,855,373 5,099,575
Walter E. Gregg, Jr. 254,005,421 1,949,527
William R. Johnson 242,111,951 13,842,997
Bruce C. Lindsay 253,990,964 1,963,984
W. Craig McClelland 253,887,437 2,067,511
Thomas H. O'Brien 253,731,377 2,223,571
Jane G. Pepper 253,701,679 2,253,269
James E. Rohr 253,973,181 1,981,767
Lorene K. Steffes 253,694,535 2,260,413
Thomas J. Usher 253,941,317 2,013,631
Milton A. Washington 253,906,913 2,048,035
Helge H. Wehmeier 254,022,187 1,932,761
================================================================
39
Three matters were approved and the votes cast for or against and the
abstentions were as follows:
Aggregate Votes
---------------------------------------
Matter For Against Abstain
--------------------------------------------------------------------------------
An amendment of the Corporation's
Articles of Incorporation to
increase the number of
authorized shares of $5.00 par
value common stock from 450,000,000
shares to 800,000,000 229,323,991 24,469,392 2,160,500
Reapproval of certain elements
of and approval of
amendments to the
Corporation's 1997
Long-Term Incentive Award Plan 204,683,322 48,076,241 3,194,320
Reapproval of certain elements
of and approval of
amendments to the
Corporation's 1996
Executive Incentive Award Plan 230,135,398 22,483,580 3,334,905
================================================================================
There were no broker non-votes.
With respect to the preceding matters, holders of the Corporation's common and
voting preferred stock voted together as a single class. The following table
sets forth, as of the February 28, 2001 record date, the number of shares of
each class or series of stock that were issued and outstanding and entitled to
vote, the voting power per share and the aggregate voting power of each class or
series:
Number of
Voting Shares
Rights Entitled Aggregate
Title of Class or Series Per Share to Vote Voting Power
--------------------------------------------------------------------------------
Common Stock 1 289,606,244 289,606,244
$1.80 Cumulative Convertible
Preferred Stock - Series A 8 10,814 86,512
$1.80 Cumulative Convertible
Preferred Stock - Series B 8 3,024 24,192
$1.60 Cumulative Convertible
Preferred Stock - Series C 4/2.4 222,748 371,247*
$1.80 Cumulative Convertible
Preferred Stock - Series D 4/2.4 314,477 524,128*
------------
Total possible votes 290,612,323*
================================================================================
* Represents greatest number of votes possible. Actual aggregate voting power
was less since each holder of such preferred stock was entitled to a number of
votes equal to the number of full shares of common stock into which such
holder's preferred stock was convertible.
Holders of the Corporation's issued and outstanding shares of Fixed/Adjustable
Rate Noncumulative Preferred Stock-Series F were not entitled to vote with
respect to the matters presented at the meeting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The following exhibit index lists Exhibits filed with this Quarterly Report on
Form 10-Q/A, Amendment No. 1:
*3.1 Articles of Incorporation of the Corporation, as amended and restated
as of April 24, 2001
*12.1 Computation of Ratio of Earnings to Fixed Charges
*12.2 Computation of Ratio of Earnings to Fixed Charges and
Preferred Stock Dividends
================================================================================
* Previously filed with the Corporation's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2001 and incorporated herein by reference.
Copies of these Exhibits may be obtained electronically at the Securities and
Exchange Commission's home page at www.sec.gov. Copies may also be obtained
without charge by writing to Thomas F. Garbe, Director of Financial Accounting,
at corporate headquarters, by calling (412) 762-1553 or via e-mail at
financial.reporting@pnc.com.
The Corporation did not file any Reports on Form 8-K during the quarter ended
March 31, 2001.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Amendment No. 1 to be signed on March 29, 2002,
on its behalf by the undersigned thereunto duly authorized.
THE PNC FINANCIAL SERVICES GROUP, INC.
By: /s/ Robert L. Haunschild
-----------------------------
Robert L. Haunschild
Chief Financial Officer
40
CORPORATE INFORMATION
THE PNC FINANCIAL SERVICES GROUP, INC.
CORPORATE HEADQUARTERS
The PNC Financial Services Group, Inc.
One PNC Plaza
249 Fifth Avenue
Pittsburgh, Pennsylvania 15222-2707
(412) 762-2000
STOCK LISTING
The PNC Financial Services Group, Inc. common stock is listed on the New York
Stock Exchange under the symbol PNC.
INTERNET INFORMATION
The PNC Financial Services Group, Inc.'s financial reports and information about
its products and services are available on the Internet at www.pnc.com.
FINANCIAL INFORMATION
The Annual Report on Form 10-K is filed with the Securities and Exchange
Commission ("SEC"). Copies of this document and other filings, including
Exhibits thereto, may be obtained electronically at the SEC's home page at
www.sec.gov. Copies may also be obtained without charge by writing to Thomas F.
Garbe, Director of Financial Accounting, at corporate headquarters, by calling
(412) 762-1553 or via e-mail at financial.reporting@pnc.com.
INQUIRIES
For financial services call 1-888-PNC-2265. Individual shareholders should
contact Shareholder Relations at (800) 982-7652.
Analysts and institutional investors should contact William H. Callihan, Vice
President, Investor Relations, at (412) 762-8257 or via e-mail at
investor.relations@pnc.com.
News media representatives and others seeking general information should contact
R. Jeep Bryant, Director of Corporate Communications, at (412) 762-8221 or via
e-mail at corporate.communications@pnc.com.
COMMON STOCK PRICES/DIVIDENDS DECLARED
The table below sets forth by quarter the range of high and low sale and
quarter-end closing prices for The PNC Financial Services Group, Inc. common
stock and the cash dividends declared per common share.
Cash
Dividends
High Low Close Declared
-----------------------------------------------------------------------
2001 QUARTER
-----------------------------------------------------------------------
First $75.813 $56.000 $67.750 $.48
=======================================================================
2000 QUARTER
-----------------------------------------------------------------------
First $48.500 $36.000 $45.063 $.45
Second 57.500 41.000 46.875 .45
Third 66.375 47.625 65.000 .45
Fourth 75.000 56.375 73.063 .48
-----------------------------------------------------------------------
Total $1.83
=======================================================================
DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN
The PNC Financial Services Group, Inc. Dividend Reinvestment and Stock Purchase
Plan enables holders of common and preferred stock to purchase additional shares
of common stock conveniently and without paying brokerage commissions or service
charges. A prospectus and enrollment card may be obtained by writing to
Shareholder Relations at corporate headquarters.
REGISTRAR AND TRANSFER AGENT
The Chase Manhattan Bank
85 Challenger Road
Ridgefield Park, New Jersey 07660
(800) 982-7652
41