Exhibit 13
FINANCIAL REVIEW CONTENTS
FINANCIAL REVIEW
35 Selected Consolidated Financial Data
36 Overview
37 Forward-Looking Statements
38 Review of Businesses
39 PNC Bank - Regional Banking
40 PNC Bank - Corporate Banking
41 PNC Secured Finance
42 PNC Mortgage
43 PNC Advisors
44 BlackRock
45 PFPC
46 Consolidated Income Statement Review
48 Consolidated Balance Sheet Review
50 Risk Management
53 Financial Derivatives
56 1998 versus 1997
57 Year 2000
Exhibit 13
FINANCIAL REVIEW
SELECTED CONSOLIDATED FINANCIAL DATA
YEAR ENDED DECEMBER 31
DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS
Interest income ........................................ $4,921 $5,313 $5,051 $4,938 $5,149
Interest expense ....................................... 2,488 2,740 2,556 2,494 3,007
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income ................................... 2,433 2,573 2,495 2,444 2,142
Provision for credit losses ............................ 163 225 70 6
Noninterest income before net securities gains (losses). 2,723 2,286 1,735 1,353 1,198
Net securities gains (losses) .......................... 22 16 40 22 (280)
Noninterest expense .................................... 3,124 2,940 2,582 2,292 2,427
- ---------------------------------------------------------------------------------------------------------------------------
Income before income taxes ............................. 1,891 1,710 1,618 1,527 627
Income taxes ........................................... 627 595 566 535 219
- ---------------------------------------------------------------------------------------------------------------------------
Net income ............................................. $1,264 $1,115 $1,052 $992 $408
- ---------------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE DATA
Earnings
Basic ................................................ $4.19 $3.64 $3.33 $2.91 $1.20
Diluted .............................................. 4.15 3.60 3.28 2.88 1.19
Cash* ................................................ 4.42 3.82 3.45 3.04 1.31
Book value ............................................. 19.23 18.86 16.87 17.13 16.87
Cash dividends declared ................................ 1.68 1.58 1.50 1.42 1.40
*EXCLUDES AMORTIZATION OF GOODWILL.
- ---------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET HIGHLIGHTS (At December 31)
Total assets ........................................... $75,413 $77,207 $75,120 $73,260 $73,404
Earning assets ......................................... 64,671 69,027 66,688 65,439 66,772
Loans, net of unearned income .......................... 50,046 57,650 54,245 51,798 48,653
Securities available for sale .......................... 7,611 7,074 8,522 11,917 15,839
Loans held for sale .................................... 5,798 3,226 2,324 941 659
Deposits ............................................... 46,668 47,496 47,649 45,676 46,899
Borrowed funds.......................................... 19,347 20,946 19,622 19,604 19,063
Shareholders' equity ................................... 5,946 6,043 5,384 5,869 5,768
Common shareholders' equity ............................ 5,633 5,729 5,069 5,553 5,751
- ---------------------------------------------------------------------------------------------------------------------------
SELECTED RATIOS
Return on
Average common shareholders' equity .................. 22.41% 20.81% 20.01% 17.18% 7.05%
Average assets ....................................... 1.69 1.49 1.49 1.40 .54
Net interest margin .................................... 3.68 3.85 3.94 3.83 3.15
Noninterest income to total revenue .................... 52.79 46.97 41.29 35.68 29.55
Efficiency** ........................................... 54.82 54.76 56.07 56.95 75.24
Leverage ............................................... 6.61 7.28 7.30 7.70 6.37
Common shareholders' equity to assets .................. 7.47 7.42 6.75 7.58 7.83
Dividend payout......................................... 40.22 43.43 45.39 48.89 94.76
===========================================================================================================================
** EXCLUDES AMORTIZATION, DISTRIBUTIONS ON CAPITAL SECURITIES AND
MORTGAGE BANKING HEDGING ACTIVITIES.
34|35
FINANCIAL REVIEW
This Financial Review should be read in conjunction with The PNC Financial
Services Group, Inc. and subsidiaries' ("Corporation" or "PNC") Consolidated
Financial Statements and Statistical Information included herein.
OVERVIEW
THE PNC FINANCIAL SERVICES GROUP, INC.
The Corporation is one of the largest diversified financial services companies
in the United States operating regional banking, wholesale banking and asset
management businesses that provide products and services nationally and in PNC's
primary geographic markets in Pennsylvania, New Jersey, Delaware, Ohio and
Kentucky.
Financial services organizations today are challenged to demonstrate that
they can generate sustainable and consistent earnings growth in an increasingly
competitive and volatile environment. PNC has responded to these challenges by
transitioning to a diversified national financial services organization driven
by businesses that are increasingly national in scope and less balance sheet
dependent. Increasing contributions from fee-based businesses including asset
management, processing and private banking have enhanced PNC's revenue and
earnings mix. In addition, the Corporation seeks to enhance consolidated value
by leveraging technology, information, branding, marketing and financial
resources across all businesses.
As a result of these strategies, the financial characteristics of PNC have
changed significantly over the last few years. Since 1996, PNC has become
significantly less dependent on balance sheet leverage and related net interest
income. Revenue growth over the past three years has been generated through core
noninterest income that has grown more than 20% compounded annually while the
balance sheet and net interest income were essentially flat. Core diluted
earnings per share grew 11% compounded annually over the same time period. Core
performance ratios also improved as noninterest income to total revenue grew
from 36% in 1996 to 51% in 1999 and returns on equity and assets increased from
17.18% and 1.40% in 1996 to 21.24% and 1.60%, respectively, in 1999.
As part of this ongoing transition, during 1999 the Corporation implemented
a number of initiatives designed to improve the risk and return characteristics
of its lending businesses. These include the sale of the credit card business,
exiting certain non-strategic wholesale lending businesses and continued
downsizing of the indirect automobile lending portfolio.
At the same time, PNC has taken aggressive steps to build on asset
management and processing businesses including the completion of the acquisition
of First Data Investor Services Group ("ISG").
The combination of ISG with PFPC, the Corporation's investment servicing
subsidiary, creates one of the nation's leading full-service processors for
pooled investment products. The acquisition was one cent dilutive to the
Corporation's earnings per share in 1999 and is anticipated to be four cents
dilutive in 2000. On a cash basis, ISG is expected to be substantially accretive
to earnings per share in 2000.
Additionally, in October 1999, BlackRock, Inc., PNC's investment management
subsidiary, completed an initial public offering ("IPO") for approximately 14%
of the equity ownership of BlackRock. PNC continues to own approximately 70%
of BlackRock's stock after the IPO.
SUMMARY FINANCIAL RESULTS
Full year 1999 earnings were $1.264 billion or $4.15 per diluted share and
included one-time gains that were partially offset by the cost of certain
strategic initiatives. Cash earnings per diluted share, which excludes goodwill
amortization, were $4.42 for 1999, a 16% increase compared with 1998.
Core earnings were $1.199 billion or $3.93 per diluted share, a 9% increase
compared with 1998. On a core basis, return on average common shareholders'
equity was 21.24% and return on average assets was 1.60% compared with 20.81%
and 1.49%, respectively, in the prior year. Core cash earnings per share were
$4.21 for 1999, a 10% increase compared with 1998.
The following table summarizes one-time gains and the cost of certain
strategic initiatives and reconciles reported to core earnings for full year
1999:
YEAR ENDED DECEMBER 31, 1999
IN MILLIONS, EXCEPT PER SHARE DATA PRETAX AFTER-TAX PER SHARE
- --------------------------------------------------------------------------
Reported earnings .................... $1,891 $1,264 $4.15
Gain on sale of credit card
business ........................ (193) (125) (.41)
Gain on sale of equity
interest in Electronic
Payment Services, Inc. .......... (97) (63) (.21)
BlackRock IPO gain ................ (64) (59) (.20)
Branch gains ...................... (27) (17) (.06)
Gain on sale of Concord EFS,
Inc. stock, net of PNC Bank
Foundation contribution ......... (11) (16) (.05)
Wholesale lending
repositioning ................... 195 126 .42
Costs related to efficiency
initiatives ..................... 98 64 .21
Write-down of an equity
investment ...................... 28 18 .06
Mall ATM buyout ................... 12 7 .02
- --------------------------------------------------------------------------
Core earnings ........................ $1,832 $1,199 $3.93
==========================================================================
Total revenue for 1999 on a reported basis was $5.178 billion, a $303 million
increase compared with the prior year. Noninterest income of $2.745 billion for
1999 increased $443 million or 19% compared with 1998 primarily due to strong
growth in fee-based services. Noninterest income grew to 53% of total revenue
for 1999 compared with 47% in 1998. The ISG acquisition is expected to further
increase noninterest income to 60% of total revenue by the end of 2000.
The increase in noninterest income more than offset the decline in net
interest income that resulted from the sale of the credit card business.
Excluding the impact of credit cards, net interest income for 1999 increased
$111 million or 5% and the net interest margin widened four basis points
compared with the prior year.
The provision for credit losses was $163 million for 1999 and fully covered
net charge-offs of $161 million for the year. Net charge-offs for 1999 were .30%
of average loans compared with .80% in 1998. The year-to-year decrease was
primarily due to the sale of the credit card business in the first quarter of
1999. Excluding credit cards, net charge-offs were .20% of average loans for
1999 compared with .32% in 1998.
Noninterest expense was $3.124 billion for 1999 compared with $2.940
billion in 1998. The increase supported revenue growth in fee-based businesses.
The efficiency ratio of 54.8% for 1999 remained consistent with 1998 reflecting
a continued focus on improving returns in traditional businesses.
Overall asset quality characteristics remained stable during 1999. The
ratio of nonperforming assets to total loans, loans held for sale and foreclosed
assets was .61% at December 31, 1999 and .55% at December 31, 1998.
Nonperforming assets were $338 million at December 31, 1999 compared with $332
million at December 31, 1998. The allowance for credit losses was $674 million
and represented 225% of nonaccrual loans and 1.35% of period-end loans at
December 31, 1999. The comparable ratios were 255% and 1.31%, respectively, at
December 31, 1998.
FORWARD-LOOKING STATEMENTS
This report includes forward-looking statements within the meaning of the
Private Securities Litigation Reform Act with respect to financial performance
and other financial and business matters. Forward-looking statements are
typically identified by words or phrases such as "believe," "expect,"
"anticipate," "intend," "estimate," "position" 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
these forward-looking statements are subject to numerous assumptions, risks and
uncertainties, all of which change over time, and the Corporation assumes no
duty to update forward-looking statements. Actual results could differ
materially from those anticipated in these forward-looking statements.
In addition to factors previously disclosed by the Corporation and those
identified elsewhere herein, the following factors, among others, could cause
actual results to differ materially from forward-looking statements: increased
credit risk; the introduction, withdrawal, success and timing of business
initiatives and strategies; changes in competitive conditions; the inability to
sustain revenue and earnings growth; the inability to realize cost savings or
revenues and implement integration plans associated with acquisitions and
divestitures; changes in economic conditions, interest rates and financial and
capital markets; inflation; changes in investment performance; customer
disintermediation; customer borrowing, repayment, investment and deposit
practices; customer acceptance of PNC products and services; the inability of
the Corporation or others to remediate year 2000 concerns; and the impact,
extent and timing of technological changes, capital management activities,
actions of the Federal Reserve Board and legislative and regulatory actions and
reforms.
36|37
FINANCIAL REVIEW
REVIEW OF BUSINESSES
PNC operates seven major businesses engaged in regional banking, wholesale
banking and asset management activities: PNC Bank - Regional Banking, PNC Bank -
Corporate Banking, PNC Secured Finance, PNC Mortgage, PNC Advisors, BlackRock
and PFPC.
Business results are based on PNC's management accounting practices and the
Corporation's current management structure. There is no comprehensive,
authoritative body of guidance for management accounting equivalent to generally
accepted accounting principles; therefore, PNC's results are not necessarily
comparable with similar information for any other financial services
institution. Financial results are presented as if each business operated on a
stand-alone basis.
The management accounting process uses various balance sheet and income
statement assignments and transfers to measure performance of the businesses.
Methodologies change from time to time as management accounting practices are
enhanced and businesses change. Securities or borrowings and related net
interest income are assigned based on the net asset or liability position of
each business. Capital is assigned based on management's assessment of inherent
risks and equity levels at independent companies providing similar products and
services. Support areas not directly aligned with the businesses are allocated
primarily based on the utilization of services.
Total business financial results differ from consolidated financial results
primarily due to differences between management accounting practices and
generally accepted accounting principles, divested and exited businesses, equity
management activities, minority interests, eliminations and unassigned items,
the impact of which is reflected in Other.
Wholesale lending businesses designated for exit in PNC Bank - Corporate
Banking and PNC Secured Finance are included in Other. Total outstandings and
exposure designated for exit during 1999 in wholesale lending totaled $3.7
billion and $10.5 billion, respectively.
RESULTS OF BUSINESSES
Return on
Earnings Revenue * Assigned Capital Average Assets
- --------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 - DOLLARS IN MILLIONS 1999 1998 1999 1998 1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
PNC Bank - Regional Banking..................... $641 $582 $2,307 $2,317 22% 20% $39,513 $38,848
Wholesale
PNC Bank - Corporate Banking................. 127 56 408 351 22 11 8,417 7,564
PNC Secured Finance.......................... 114 60 281 178 24 16 6,701 5,477
PNC Mortgage................................. 62 35 421 339 14 10 6,906 5,350
- ------------------------------------------------------------------------------------ ----------------
Total wholesale............................ 303 151 1,110 868 20 12 22,024 18,391
Asset Management................................
PNC Advisors................................. 147 119 738 489 27 30 3,353 2,731
BlackRock.................................... 59 36 381 339 36 41 448 441
PFPC......................................... 45 38 257 191 40 41 308 229
- ------------------------------------------------------------------------------------ ----------------
Total asset management..................... 251 193 1,376 1,019 30 34 4,109 3,401
- ------------------------------------------------------------------------------------ ----------------
Total businesses............................. 1,195 926 4,793 4,204 23 19 65,646 60,640
Other........................................... 4 189 208 697 9,174 13,986
- ------------------------------------------------------------------------------------ ----------------
Total consolidated-core **................... 1,199 1,115 5,001 4,901 21 21 74,820 74,626
Gain on sale of credit card business............ 125 193
Gain on sale of equity interest in
Electronic Payment Services, Inc............. 63 97
BlackRock IPO gain.............................. 59 64
Branch gains.................................... 17 27
Gain on sale of Concord stock, net of
PNC Bank Foundation contribution............. 16 41
Wholesale lending repositioning................. (126) (195)
Costs related to efficiency initiatives......... (64)
Write-down of an equity investment.............. (18) (28)
Mall ATM buyout................................. (7)
- ------------------------------------------------------------------------------------ ----------------
Total consolidated-reported.................. $1,264 $1,115 $5,200 $4,901 22 21 $74,820 $74,626
================================================================================================================================
* TAXABLE-EQUIVALENT BASIS
** 1998 CORE RESULTS INCLUDE $162 MILLION OF NET GAINS FROM THE SALE OF THE
CORPORATE TRUST AND ESCROW BUSINESS, BRANCH SALES AND THE SALE OF A CREDIT
CARD PORTFOLIO. THESE ITEMS WERE PRIMARILY OFFSET BY A
HIGHER-THAN-ANTICIPATED PROVISION FOR CREDIT LOSSES RELATED TO A SINGLE
CREDIT IN THE HEALTH CARE INDUSTRY, ONE-TIME COSTS RELATED TO CONSUMER
BANKING INITIATIVES, VALUATION ADJUSTMENTS ON CERTAIN MARKET-SENSITIVE
ASSET POSITIONS AND MERGER AND ACQUISITION INTEGRATION COSTS.
PNC BANK - REGIONAL BANKING
YEAR ENDED DECEMBER 31 - DOLLARS IN MILLIONS 1999 1998
- --------------------------------------------------------------
INCOME STATEMENT
Net interest income ........................ $1,728 $1,706
Noninterest income ......................... 579 611
- --------------------------------------------------------------
Total revenue ........................... 2,307 2,317
Provision for credit losses ................ 59 65
Noninterest expense ........................ 1,215 1,291
- --------------------------------------------------------------
Pretax earnings ......................... 1,033 961
Income taxes ............................... 392 379
- --------------------------------------------------------------
Earnings ................................ $641 $582
- --------------------------------------------------------------
AVERAGE BALANCE SHEET
Loans
Consumer ................................ $8,753 $9,737
Commercial .............................. 9,452 8,998
Residential mortgage .................... 9,876 9,717
Other ................................... 3,061 2,852
- --------------------------------------------------------------
Total loans ........................... 31,142 31,304
Assigned assets and other assets ........... 8,371 7,544
- --------------------------------------------------------------
Total assets ............................ $39,513 $38,848
- --------------------------------------------------------------
Deposits
Noninterest-bearing demand .............. $6,235 $6,546
Interest-bearing demand ................. 4,961 4,241
Money market ............................ 9,311 7,421
Savings ................................. 2,337 2,589
Certificates ............................ 13,338 14,778
- --------------------------------------------------------------
Total net deposits .................... 36,182 35,575
Other liabilities .......................... 363 354
Assigned capital ........................... 2,968 2,919
- --------------------------------------------------------------
Total funds ............................. $39,513 $38,848
- --------------------------------------------------------------
PERFORMANCE RATIOS
Return on assigned capital ................. 22% 20%
Noninterest income to total revenue ........ 25 26
Efficiency ................................. 51 54
==============================================================
PNC Bank - Regional Banking ("Regional Banking") provides credit, deposit,
branch-based brokerage and electronic banking products and services to retail
customers as well as credit, leasing, treasury management and capital markets
products and services to mid-sized and small businesses primarily within PNC's
geographic footprint.
Regional Banking is focused on driving sustainable revenue growth while
aggressively managing the revenue/expense relationship. Regional Banking
utilizes knowledge-based marketing capabilities to analyze customer demographic
information, transaction histories and delivery preferences to develop
customized banking packages focused on improving customer satisfaction and
profitability.
Regional Banking has also invested heavily in building a sales culture and
infrastructure while improving efficiency. Capital investments have been
redistributed strategically with a greater proportion going towards the
development of alternative delivery capabilities consistent with customer
preferences.
Regional Banking contributed 54% of total business earnings for 1999
compared with 63% for 1998. Earnings increased $59 million or 10% to $641
million for 1999 and the return on assigned capital and efficiency ratios
improved. Excluding the impact of $86 million of branch gains and $40 million of
costs related to consumer delivery initiatives in 1998, earnings increased 16%.
Revenue increased $76 million to $2.307 billion for 1999 compared with the
prior year, excluding the impact of the branch gains in 1998. The increase was
primarily due to growth in deposits and fee-based services. Consumer loans
declined primarily due to the continued downsizing of the indirect automobile
lending portfolio and the decision to sell student loans in repayment. Partially
offsetting the decrease in consumer loans was a 5% increase in commercial loans
due to strong growth in middle market lending. More valuable transaction
deposits increased $2.0 billion while higher rate certificates of deposit
decreased in the year-to-year comparison primarily reflecting the impact of
strategic marketing initiatives.
Excluding the impact of costs related to consumer delivery initiatives in
1998, noninterest expense decreased 3% for 1999 compared with the prior year
reflecting the continued focus on operating efficiency.
Regional Banking engages in credit and deposit activities that are affected
by, among other things, economic and financial market conditions. Accordingly,
changes in the economy or financial markets could impact asset quality and
results of operations.
38|39
FINANCIAL REVIEW
- ----------------
PNC BANK - CORPORATE BANKING
YEAR ENDED DECEMBER 31 - DOLLARS IN MILLIONS 1999 1998
- ---------------------------------------------------------------
INCOME STATEMENT
Credit-related revenue ...................... $160 $143
Noncredit revenue ........................... 248 208
- ---------------------------------------------------------------
Total revenue ............................ 408 351
Provision for credit losses ................. 9 84
Noninterest expense ......................... 203 183
- ---------------------------------------------------------------
Pretax earnings .......................... 196 84
Income taxes ................................ 69 28
- ---------------------------------------------------------------
Earnings ................................. $127 $56
- ---------------------------------------------------------------
AVERAGE BALANCE SHEET
Loans
Specialized industries ................... $3,720 $3,391
Large corporate .......................... 2,532 2,340
Other .................................... 451 366
- ---------------------------------------------------------------
Total loans ............................ 6,703 6,097
Other assets ................................ 1,714 1,467
- ---------------------------------------------------------------
Total assets ............................. $8,417 $7,564
- ---------------------------------------------------------------
Net deposits ................................ $2,793 $2,509
Assigned funds and other liabilities ........ 5,035 4,525
Assigned capital ............................ 589 530
- ---------------------------------------------------------------
Total funds .............................. $8,417 $7,564
- ---------------------------------------------------------------
PERFORMANCE RATIOS
Return on assigned capital .................. 22% 11%
Noncredit revenue to total revenue .......... 61 59
Efficiency .................................. 49 51
===============================================================
PNC Bank - Corporate Banking ("Corporate Banking") provides specialized credit,
capital markets and treasury management products and services to corporations,
institutions and government entities primarily within PNC's geographic
footprint.
The strategic focus for Corporate Banking is to reduce historical reliance on
balance sheet leverage and to emphasize higher-margin noncredit products and
services, especially treasury management and capital markets.
Corporate Banking made the decision to exit certain non-strategic wholesale
lending businesses during 1999. These activities are excluded from business
results in both periods.
Corporate Banking contributed 11% of total business earnings for 1999
compared with 6% in the prior year. Earnings of $127 million for 1999 more than
doubled in the comparison with 1998.
Total revenue of $408 million for 1999 increased $57 million or 16%
compared with 1998. Credit-related revenue increased 12% in the year-to-year
comparison driven by higher loans in selected segments that have attractive
risk/return characteristics. Noncredit revenue, which includes noninterest
income and the benefit of compensating balances received in lieu of fees, was
$248 million for 1999, a $40 million or 19% increase compared with the prior
year primarily driven by growth in treasury management and capital markets fees.
Noncredit revenue comprised 61% of total revenue in 1999 reflecting the emphasis
on sales of fee-based products.
The higher provision for credit losses in 1998 related to exposure to a
single health care relationship.
Treasury management and capital markets products offered through Corporate
Banking are sold by several businesses across the Corporation and related
revenue is included in the results of those businesses. Consolidated revenue
from treasury management was $264 million for 1999, a 15% increase compared with
1998. Consolidated revenue from capital markets was $109 million for 1999, a 20%
increase compared with the prior year.
Corporate Banking engages in credit and capital markets activities that are
impacted by, among other things, economic and financial market conditions.
Accordingly, changes in the economy or financial markets could impact asset
quality and results of operations.
PNC SECURED FINANCE
YEAR ENDED DECEMBER 31 - DOLLARS IN MILLIONS 1999 1998
- -----------------------------------------------------------------
INCOME STATEMENT
Net interest income ............................ $164 $122
Noninterest income
Net commercial mortgage banking ............. 64 26
Corporate finance ........................... 31 18
Other ....................................... 22 12
- -----------------------------------------------------------------
Total noninterest income .................. 117 56
- -----------------------------------------------------------------
Total revenue ............................... 281 178
Provision for credit losses .................... (8) (8)
Noninterest expense ............................ 147 106
- -----------------------------------------------------------------
Pretax earnings ............................. 142 80
Income taxes ................................... 28 20
- -----------------------------------------------------------------
Earnings .................................... $114 $60
- -----------------------------------------------------------------
AVERAGE BALANCE SHEET
Loans
Commercial - real estate related ............ $1,791 $1,124
Commercial real estate ...................... 981 1,138
Business credit ............................. 1,726 1,339
Leasing ..................................... 1,032 726
Other ....................................... 282 348
- -----------------------------------------------------------------
Total loans ............................... 5,812 4,675
Commercial mortgages held for sale ............. 135 181
Other assets ................................... 754 621
- -----------------------------------------------------------------
Total assets ................................ $6,701 $5,477
- -----------------------------------------------------------------
Deposits ....................................... $341 $142
Assigned funds and other liabilities ........... 5,891 4,952
Assigned capital ............................... 469 383
- -----------------------------------------------------------------
Total funds ................................. $6,701 $5,477
- -----------------------------------------------------------------
PERFORMANCE RATIOS
Return on assigned capital ..................... 24% 16%
Noninterest income to total revenue ............ 42 31
Efficiency ..................................... 42 48
=================================================================
PNC Secured Finance, serving corporate clients nationwide, is engaged in
commercial real estate finance, business credit, and equipment lease financing.
Over the past several years, through customer segmentation and strategic
acquisitions, commercial real estate finance has redeployed capital historically
assigned to lending activities in PNC's primary geographic markets to fee-based
businesses focused on loan servicing and securitization on a national basis.
In 1998, PNC Secured Finance acquired Midland Loan Services, one of the
nation's largest servicers of commercial mortgage-backed securities, and
Columbia Housing Partners, one of the nation's largest originators of
investments in affordable housing.
At the end of 1999, the decision was made to exit the cyclical mortgage
warehouse lending business and certain non-strategic commercial real estate
portfolios. These activities are excluded from business results in both periods.
PNC Secured Finance also continued the strategy to expand business credit
and equipment leasing. Consistent with this strategy, PNC Secured Finance
increased its business credit marketing presence to fifteen locations, while
maintaining centralized collateral monitoring and loan approval.
PNC Secured Finance contributed 9% of total business earnings for 1999
compared with 6% in the prior year.
Net interest income of $164 million for 1999 increased $42 million or 34%
compared with the prior year. The increase was driven by loan growth within
business credit, equipment lease financing and commercial real estate related
lending.
Noninterest income of $117 million for 1999 increased to 42% of total
revenue. The increase was primarily due to higher commercial mortgage
securitization and servicing revenue and fee income from affordable housing
equity placements, as well as the comparative impact of valuation adjustments
recorded in 1998.
Noninterest expense increased in the year-to-year comparison to support
revenue growth.
COMMERCIAL MORTGAGE SERVICING PORTFOLIO
IN BILLIONS 1999 1998
- ---------------------------------------------------------
January 1 .............................. $39
Acquisitions/additions ................. 17 $39
Repayments/transfers ................... (11)
- ---------------------------------------------------------
December 31 ......................... $45 $39
- ---------------------------------------------------------
At December 31, 1999 the commercial mortgage servicing portfolio was $45
billion, a 15% increase compared with December 31, 1998.
PNC Secured Finance engages in credit and capital markets activities that
are impacted by, among other things, economic and financial market conditions.
Accordingly, changes in the economy or financial markets could impact asset
quality and results of operations.
40|41
FINANCIAL REVIEW
- ----------------
PNC MORTGAGE
YEAR ENDED DECEMBER 31 - DOLLARS IN MILLIONS 1999 1998
- ---------------------------------------------------------------------
INCOME STATEMENT
Net mortgage banking revenue
Residential mortgage servicing ................. $350 $212
Origination and securitization ................. 172 186
MSR amortization, net of
servicing hedge .............................. (190) (144)
- ---------------------------------------------------------------------
Net mortgage banking revenue ................. 332 254
Net interest income ............................... 89 85
- ---------------------------------------------------------------------
Total revenue .................................. 421 339
Operating expense ................................. 318 280
- ---------------------------------------------------------------------
Pretax earnings ................................ 103 59
Income taxes ...................................... 41 24
- ---------------------------------------------------------------------
Earnings ....................................... $62 $35
- ---------------------------------------------------------------------
AVERAGE BALANCE SHEET
Residential mortgages held for sale ............... $2,594 $2,935
Securities available for sale ..................... 2,470 1,245
Mortgage servicing rights and
other assets ................................... 1,842 1,170
- ---------------------------------------------------------------------
Total assets ................................... $6,906 $5,350
- ---------------------------------------------------------------------
Escrow deposits ................................... $1,151 $1,002
Assigned funds and other liabilities .............. 5,306 4,000
Assigned capital .................................. 449 348
- ---------------------------------------------------------------------
Total funds .................................... $6,906 $5,350
- ---------------------------------------------------------------------
PERFORMANCE RATIOS
Return on assigned capital ........................ 14% 10%
Net mortgage banking revenue to
total revenue .................................. 79 75
Efficiency ........................................ 52 58
=====================================================================
PNC Mortgage originates, purchases and services residential mortgages and
related products. PNC Mortgage also acquires and securitizes residential
mortgages as private-label, mortgage-backed securities and performs the master
servicing of those securities for investors.
PNC Mortgage's strategic focus is on expanding sales of a broader array of
financial products while leveraging its technology platform and servicing
capabilities to manage the revenue/expense relationship for traditional mortgage
products.
PNC Mortgage contributed 5% of total business earnings for 1999 compared
with 4% for 1998. Earnings nearly doubled in the comparison primarily due to
lower amortization, improved efficiency and the impact of a larger servicing
portfolio. The efficiency ratio improved significantly as PNC Mortgage continued
to leverage its technology platform and servicing capabilities.
During 1999, PNC Mortgage funded $20 billion of residential mortgages, with
36% consisting of retail originations. The comparable amounts were $22 billion
and 35%, respectively, in 1998. Production volume for 1999 consisted of $7
billion of originated loans and $13 billion of mortgages acquired through
correspondent and contractual flow agreements. The corresponding amounts for
1998 were $8 billion and $14 billion, respectively.
RESIDENTIAL MORTGAGE SERVICING PORTFOLIO
IN BILLIONS 1999 1998
- ---------------------------------------------------------
January 1 ............................... $62 $41
Production volume .................... 20 22
Acquisitions ......................... 8 16
Repayments ........................... (15) (16)
Sales ................................ (1)
- ---------------------------------------------------------
DECEMBER 31 ........... $75 $62
=========================================================
At December 31, 1999, the residential mortgage servicing portfolio totaled $75
billion. Loans included in this portfolio that were serviced for others totaled
$67 billion and had a weighted-average coupon of 7.53%. Capitalized residential
mortgage servicing rights ("MSR") totaled $1.6 billion at December 31, 1999, and
had an estimated fair value of $1.8 billion. The master servicing portfolio grew
33% to $35 billion at December 31, 1999.
Securities available for sale increased $1.2 billion in 1999 compared with
the prior year and are used in managing the interest rate risk associated with
the mortgage servicing portfolio.
The value of MSR and related amortization are affected by changes in
interest rates. If interest rates decline and the rate of prepayments increases,
the underlying servicing fees and related MSR value also would decline. In a
period of rising interest rates, a converse relationship would be expected. PNC
Mortgage seeks to manage this risk by using financial instruments as hedges
designed to move in the opposite direction of expected MSR value changes.
Changes in interest rates also can affect the level of mortgage originations
that generally are expected to decline as interest rates increase and increase
as interest rates decline.
PNC ADVISORS
- -----------------------------------------------------------------
YEAR ENDED DECEMBER 31 - DOLLARS IN MILLIONS 1999 1998
- -----------------------------------------------------------------
INCOME STATEMENT
Net interest income ........................... $130 $121
Noninterest income
Investment management and trust ............ 388 324
Brokerage .................................. 149 31
Other ...................................... 71 13
- -----------------------------------------------------------------
Total noninterest income ................. 608 368
- -----------------------------------------------------------------
Total revenue .............................. 738 489
Provision for credit losses ................... 7 1
Noninterest expense ........................... 494 296
- -----------------------------------------------------------------
Pretax earnings ............................ 237 192
Income taxes .................................. 90 73
- -----------------------------------------------------------------
Earnings ................................... $147 $119
- -----------------------------------------------------------------
AVERAGE BALANCE SHEET
Loans
Residential mortgage ....................... $959 $967
Consumer ................................... 940 936
Commercial ................................. 631 614
Other ...................................... 389 44
- -----------------------------------------------------------------
Total loans .............................. 2,919 2,561
Other assets .................................. 434 170
- -----------------------------------------------------------------
Total assets ............................... $3,353 $2,731
- -----------------------------------------------------------------
Deposits ...................................... $2,164 $2,300
Assigned funds and other liabilities .......... 641 36
Assigned capital .............................. 548 395
- -----------------------------------------------------------------
Total funds ................................ $3,353 $2,731
- -----------------------------------------------------------------
PERFORMANCE RATIOS
Return on assigned capital .................... 27% 30%
Noninterest income to total revenue ........... 82 75
Efficiency .................................... 66 60
=================================================================
PNC Advisors offers customized investment management, high-end brokerage,
personal trust, estate planning and traditional banking services to affluent and
wealthy individuals, and investment management, trust and administrative
services to pensions, 401(k) plans and charitable organizations.
PNC Advisors strives to be the "financial advisor of choice" in the growing
affluent market, providing a full range of high-quality, customized and
predominantly fee-based investment products and services. In 1998, the
Corporation acquired Hilliard-Lyons, Inc. ("Hilliard Lyons"), a firm primarily
focused on delivering brokerage services and investment advice to affluent
clients. PNC Advisors is expanding the Hilliard Lyons brand and organization
throughout PNC's geographic footprint, which includes several of the nation's
wealthiest metropolitan areas.
PNC Advisors contributed 12% of total business earnings for 1999 compared
with 13% in the prior year. Earnings of $147 million for 1999 increased $28
million or 24% compared with 1998.
Revenue increased $249 million or 51% for 1999 compared with the prior
year. The increase was due to higher brokerage revenue resulting from the
Hilliard Lyons acquisition and higher investment management and trust revenue
primarily resulting from new business. The year-to-year increase in noninterest
expense and the efficiency ratio, as well as the lower return on assigned
capital, was due to the impact of Hilliard Lyons.
ASSETS UNDER MANAGEMENT*
DECEMBER 31 - IN BILLIONS 1999 1998
- ------------------------------------------------------------
Personal investment management
and trust ............................ $60 $57
Institutional trust 11 7
- ------------------------------------------------------------
Total ................................ $71 $64
============================================================
* ASSETS UNDER MANAGEMENT DO NOT INCLUDE BROKERAGE ASSETS ADMINISTERED.
At December 31, 1999, PNC Advisors managed $71 billion of assets, an 11%
increase compared with the prior year primarily due to new business. Brokerage
assets administered by PNC Advisors increased $4 billion in the year-to-year
comparison to $27 billion at December 31, 1999, primarily due to increased asset
gathering at Hilliard Lyons.
PNC Advisors' revenue is affected by, among other things, the volume of new
business, the value of assets managed, investment performance and financial
market conditions. Revenue may be positively affected by growth in new business,
increasing values of assets managed, strong investment performance and improving
financial markets. Conversely, a decline in new business, declining values of
assets managed, declining investment performance and deteriorating financial
markets may have an adverse effect on results of operations.
42|43
FINANCIAL REVIEW
BLACKROCK
YEAR ENDED DECEMBER 31 - DOLLARS IN MILLIONS 1999 1998
- ------------------------------------------------------------------------
INCOME STATEMENT
Advisory and administrative fees .................. $ 362 $325
Other income ...................................... 19 14
- ------------------------------------------------------------------------
Total revenue .................................. 381 339
Operating expense ................................. 260 250
Goodwill amortization ............................. 10 10
- ------------------------------------------------------------------------
Operating income ............................... 111 79
Interest expense .................................. 8 11
- ------------------------------------------------------------------------
Pretax earnings ................................ 103 68
Income taxes ...................................... 44 32
- ------------------------------------------------------------------------
Earnings ....................................... $ 59 $ 36
- ------------------------------------------------------------------------
PERIOD-END BALANCE SHEET
Goodwill .......................................... $ 194 $204
Other assets ...................................... 254 237
- ------------------------------------------------------------------------
Total assets ................................... $ 448 $441
- ------------------------------------------------------------------------
Borrowings ........................................ $ 28 $197
Other liabilities ................................. 139 138
Shareholders' equity .............................. 281 106
- ------------------------------------------------------------------------
Total funds .................................... $ 448 $441
- ------------------------------------------------------------------------
PERFORMANCE RATIOS
Return on average equity .......................... 36% 41%
Operating margin* ................................. 37 30
Diluted earnings per share ........................ $1.04 $.66
========================================================================
*EXCLUDES THE IMPACT OF BAI AND AFFILIATE FUND ADMINISTRATION AND SERVICING
COSTS.
BlackRock manages assets for institutions and individuals through a variety of
fixed income, liquidity, equity and alternative investment products, including
BlackRock's flagship fund families.
BlackRock completed an IPO in October 1999 representing approximately a 14%
equity interest. Management anticipates that having its own public currency will
assist BlackRock in attracting and retaining the highest quality professionals
and support its long-term growth objectives.
BlackRock contributed 5% of total business earnings for 1999 compared with
4% a year ago. Earnings of $59 million for 1999 increased 67% compared with the
prior year primarily due to strong growth in advisory and administrative fees
resulting from new asset management mandates that accounted for the majority of
the $34 billion or 26% increase in assets under management. Total revenue for
1999 increased $110 million or 39% compared with the prior year, excluding
performance fees in both years associated with BlackRock Asset Investors
("BAI"), a pooled investment fund that was liquidated in the third quarter of
1999. The growth in revenue was strong across all product categories,
particularly fixed income separate accounts that increased primarily due to
significant new business. The increase in operating expense in the year-to-year
comparison supported revenue growth.
At December 31, 1999, BlackRock managed $165 billion of assets for
individual and institutional investors.
ASSETS UNDER MANAGEMENT
DECEMBER 31 - IN BILLIONS 1999 1998
- ----------------------------------------------------------
Separate Accounts
Fixed income* ....................... $ 75 $ 53
Liquidity ........................... 21 14
Equity .............................. 3 2
- ----------------------------------------------------------
Subtotal .......................... 99 69
Mutual Funds
Fixed income ........................ 13 14
Liquidity ........................... 37 36
Equity .............................. 16 12
- ----------------------------------------------------------
Subtotal .......................... 66 62
- ----------------------------------------------------------
Total assets under management .......... $165 $131
- ----------------------------------------------------------
Proprietary mutual funds
BlackRock Funds ..................... $ 27 $ 24
Provident Institutional Funds ....... 26 25
- ----------------------------------------------------------
Total proprietary mutual funds .... $ 53 $ 49
==========================================================
* INCLUDES ALTERNATIVE INVESTMENT PRODUCTS.
BlackRock's revenue is affected by, among other things, the volume of new
business, the value of assets managed, investment performance and financial
market conditions. Revenue may be positively affected by growth in new business,
increasing values of assets managed, strong investment performance and improving
financial markets. Conversely, a decline in new business, declining values of
assets managed, declining investment performance and deteriorating financial
markets may have an adverse effect on results of operations.
BlackRock's common stock 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.
PFPC
YEAR ENDED DECEMBER 31 - DOLLARS IN MILLIONS 1999 1998
- -------------------------------------------------------------------------
INCOME STATEMENT
Revenue .......................................... $257 $191
Operating expense ................................ 185 131
- -------------------------------------------------------------------------
Pretax earnings ............................... 72 60
Income taxes ..................................... 27 22
- -------------------------------------------------------------------------
Earnings ...................................... $ 45 $ 38
- -------------------------------------------------------------------------
AVERAGE BALANCE SHEET
Total assets ..................................... $308 $229
- -------------------------------------------------------------------------
Other liabilities ................................ $196 $137
Assigned capital ................................. 112 92
- -------------------------------------------------------------------------
Total funds ................................... $308 $229
- -------------------------------------------------------------------------
PERFORMANCE RATIOS
Return On Assigned Capital ....................... 40% 41%
Operating margin ................................. 28 31
Efficiency ....................................... 70 68
=========================================================================
PFPC, the Corporation's global fund services subsidiary, provides a wide range
of processing services to the investment management community. PFPC provides
customized services to clients in the United States and to the global funds
marketplace through its Dublin, Ireland operation.
On December 1, 1999, PFPC acquired First Data Investor Services Group
("ISG"), one of the nation's leading providers of back-office services to mutual
funds and retirement plans. The transaction was valued at $1.1 billion and
accounted for as a purchase. The acquisition adds key related businesses, as
well as retirement plan servicing, to PFPC's expanding operations.
PFPC contributed 4% of total business earnings for 1999 and 1998. Earnings
increased $7 million or 18% to $45 million for 1999. Excluding the net impact of
ISG, earnings increased 26% in the year-to-year comparison.
Revenue increased $66 million to $257 million for 1999, of which $24 million
was attributable to the one-month impact of ISG. The remaining increase was
driven by new business, existing client growth and market appreciation.
Operating expense increased in the year-to-year comparison due to the impact of
ISG and to support revenue growth and infrastructure costs associated with
business expansion.
At December 31, 1999, PFPC provided accounting/ administration services for
$412 billion of mutual fund and other pooled assets, a 63% increase compared
with December 31, 1998, primarily due to the impact of ISG. PFPC provided
custody services for $388 billion of assets at December 31, 1999, an increase of
23% compared with December 31, 1998.
ASSETS SERVICED
DECEMBER 31 - IN BILLIONS 1999 1998
- -------------------------------------------------
Accounting/administration ..... $412 $252
Custody ....................... 388 315
=================================================
PFPC's revenue is affected by, among other things, the number and value of
customer accounts serviced and financial market conditions. Revenue may be
positively affected by increasing customer accounts and account values serviced
or improving financial markets. Conversely, declining customer accounts and
account values serviced or deteriorating financial markets may have an adverse
effect on results of operations.
44|45
FINANCIAL REVIEW
CONSOLIDATED INCOME STATEMENT REVIEW
NET INTEREST INCOME ANALYSIS
TAXABLE-EQUIVALENT BASIS AVERAGE BALANCES INTEREST INCOME/EXPENSE AVERAGE YIELDS/RATES
--------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 -- DOLLARS IN MILLIONS 1999 1998 CHANGE 1999 1998 CHANGE 1999 1998 CHANGE
- ---------------------------------------------------------------------------------------------------------------------------------
Interest-earning assets
Loans held for sale ...................... $3,986 $3,371 $615 $291 $233 $58 7.30% 6.91% 39bp
Securities available for sale ............ 8,554 7,374 1,180 487 430 57 5.70 5.83 (13)
Loans, net of unearned income
Consumer ............................... 10,314 11,073 (759) 844 940 (96) 8.18 8.49 (31)
Credit card ............................ 672 3,849 (3,177) 100 538 (438) 14.88 13.98 90
Residential mortgage ................... 12,451 12,496 (45) 871 905 (34) 7.00 7.24 (24)
Commercial ............................. 23,084 22,773 311 1,792 1,794 (2) 7.76 7.88 (12)
Commercial real estate ................. 3,362 3,279 83 265 277 (12) 7.88 8.45 (57)
Other .................................. 3,096 2,223 873 222 157 65 7.17 7.06 11
- ----------------------------------------------------------------------------------------------------
Total loans, net of
unearned income ..................... 52,979 55,693 (2,714) 4,094 4,611 (517) 7.73 8.28 (55)
Other .................................... 1,117 1,001 116 71 65 6 6.36 6.49 (13)
- ----------------------------------------------------------------------------------------------------
Total interest-earning assets/
interest income ..................... 66,636 67,439 (803) 4,943 5,339 (396) 7.42 7.92 (50)
Noninterest-earning assets .................. 8,184 7,187 997
- -----------------------------------------------------------------------
Total assets ........................... $74,820 $74,626 $194
- -----------------------------------------------------------------------
Interest-bearing liabilities
Deposits
Demand and money market ................ $17,698 $14,820 $2,878 493 439 54 2.79 2.96 (17)
Savings ................................ 2,390 2,620 (230) 39 51 (12) 1.63 1.95 (32)
Other time ............................. 15,734 17,206 (1,472) 793 929 (136) 5.04 5.40 (36)
Deposits in foreign offices ............ 872 935 (63) 44 52 (8) 5.05 5.56 (51)
- ----------------------------------------------------------------------------------------------------
Total interest-bearing deposits ........ 36,694 35,581 1,113 1,369 1,471 (102) 3.73 4.13 (40)
Borrowed funds ........................... 20,594 21,809 (1,215) 1,119 1,269 (150) 5.43 5.82 (39)
- ----------------------------------------------------------------------------------------------------
Total interest-bearing liabilities/
interest expense ....................... 57,288 57,390 (102) 2,488 2,740 (252) 4.34 4.77 (43)
-----------------------------------------------------
Noninterest-bearing liabilities,
capital securities and
shareholders' equity ..................... 17,532 17,236 296
- -----------------------------------------------------------------------
Total liabilities, capital
securities and
shareholders' equity ................ $74,820 $74,626 $194
- -----------------------------------------------------------------------
Interest rate spread ........................ 3.08 3.15 (7)
Impact of noninterest-bearing
sources .................................. .60 .70 (10)
--------------------
Net interest income/margin ............. $2,455 $2,599 $(144) 3.68% 3.85% (17)bp
=================================================================================================================================
NET INTEREST INCOME
Changes in net interest income and margin result from the interaction between
the volume and composition of earning assets, related yields and associated
funding costs. Accordingly, portfolio size, composition and related yields
earned and funding costs can have a significant impact on net interest income
and margin.
Taxable-equivalent net interest income was $2.455 billion for 1999, a $144
million decrease compared with 1998. The net interest margin was 3.68% for 1999
compared with 3.85% in the prior year. These declines were primarily due to the
sale of the credit card business in the first quarter of 1999. Excluding the
credit card business, net interest income for 1999 increased $111 million or 5%
and the net interest margin widened four basis points compared with the prior
year. The increases were primarily due to higher commercial and other loans that
resulted from strong growth in middle market lending and the strategic expansion
of secured and equipment lease financing. The decrease in consumer loans was due
to the continued downsizing of the indirect automobile lending portfolio and the
decision to sell student loans in repayment. Excluding indirect automobile loans
and student loans, consumer loans increased 5% due to strong growth in home
equity loans. Loans represented 80% of average earning assets for 1999 compared
with 83% for the prior year. Average loans held for sale increased $615 million
in the year-to-year comparison, reflecting the decision to exit certain
non-strategic wholesale lending businesses during 1999. Average securities
available for sale increased $1.2 billion compared with the prior year and
represented 13% of average earning assets for 1999 compared with 11% a year ago.
The increase was due to securities purchased as part of PNC Mortgage's risk
management strategies.
Funding cost is affected by the volume and composition of funding sources as
well as related rates paid thereon. Average deposits comprised 61% and 60% of
total sources of funds for 1999 and 1998, respectively, with the remainder
primarily comprised of wholesale funding obtained at prevailing market rates.
Average demand and money market deposits increased $2.9 billion or 19% to $17.7
billion for 1999 primarily reflecting the impact of strategic marketing
initiatives while savings and certificates decreased in the year-to-year
comparison.
PROVISION FOR CREDIT LOSSES
The provision for credit losses was $163 million in 1999 compared with $225
million in the prior year. Net charge-offs were $161 million or .30% of average
loans for 1999 compared with $447 million or .80%, respectively, in 1998. The
decreases were primarily due to the sale of the credit card business in the
first quarter of 1999. Excluding credit cards, net charge-offs were .20% of
average loans for 1999 compared with .32% in 1998.
NONINTEREST INCOME
Noninterest income was $2.745 billion for 1999 and represented 53% of total
revenue compared with $2.302 billion and 47%, respectively, in 1998. The
increases were primarily due to strong growth in fee-based businesses.
Asset management fees of $681 million for 1999 increased $143 million or 26%
compared with 1998, excluding performance fees associated with BAI, a pooled
investment fund that was liquidated in the third quarter of 1999, and revenue
from the corporate trust business that was sold in the fourth quarter of 1998.
Assets under management increased to approximately $213 billion at December 31,
1999 compared with $174 billion at December 31, 1998.
Mutual fund servicing fees of $251 million for 1999 increased $69 million or
38% compared with 1998 of which $30 million was attributable to the one-month
impact of the ISG acquisition. The remaining increase was primarily due to new
business and existing client growth as well as market appreciation.
Service charges on deposits of $207 million remained consistent with the
prior year.
Brokerage income of $219 million in 1999 increased $128 million compared
with 1998 primarily due to the acquisition of Hilliard Lyons.
Other consumer services revenue of $236 million for 1999 decreased $63
million compared with 1998 due to the sale of the credit card business in the
first quarter of 1999.
The decrease in corporate services revenue primarily reflected the impact of
$195 million of valuation adjustments in 1999 associated with the exit of
certain non-strategic wholesale lending businesses. Excluding valuation
adjustments in both years, corporate services revenue was $328 million and $275
million for 1999 and 1998, respectively, a 19% increase primarily due to growth
in commercial mortgage banking, capital markets and treasury management fees.
Net residential mortgage banking revenue of $272 million for 1999 increased
$60 million or 28% compared with the prior year primarily due to a larger
servicing portfolio.
Equity management income was $100 million for 1999 and $96 million for 1998.
Both years benefited from strong equity market conditions.
Net securities gains for 1999 were $22 million and included a $41 million
gain from the sale of Concord EFS, Inc. stock partially offset by a $28 million
write-down of an equity investment in Friedman Billings Ramsey Group, Inc.
Sale of subsidiary stock of $64 million in 1999 reflects the gain from the
BlackRock IPO.
Other noninterest income included a $193 million gain from the sale of the
credit card business in the first quarter of 1999. Also included in other
noninterest income was a $97 million gain from the sale of an equity interest in
Electronic Payment Services Inc. ("EPS") and $27 million of gains from the sale
of twelve branches in Western Pennsylvania. During 1998, other noninterest
income included a $97 million gain from the sale of the corporate trust
business, $86 million of branch gains and a $21 million loss from the sale of a
credit card portfolio. Excluding these items, other noninterest income increased
$73 million in the comparison primarily due to the Hilliard Lyons acquisition.
NONINTEREST EXPENSE
Noninterest expense was $3.124 billion for 1999 compared with $2.940 billion in
1998. The increase was primarily to support revenue growth in fee-based
businesses. On a comparable basis, noninterest expense increased $120 million or
4% excluding $98 million of costs related to efficiency initiatives
(compensation -- $22 million, net occupancy -- $35 million, equipment -- $38
million and other -- $3 million), a $30 million contribution to the PNC Bank
Foundation and $12 million of expense associated with the buyout of PNC's mall
ATM marketing representative from 1999. For 1998, $55 million of costs related
to consumer banking initiatives and $21 million of merger and acquisition
integration costs were excluded from the comparison. The efficiency ratio of
54.8% for 1999 remained consistent with 1998 reflecting a continued focus on
improving returns in traditional businesses. Average full-time equivalent
employees were relatively consistent in the year-to-year comparison and totaled
approximately 25,600 and 25,500 in 1999 and 1998, respectively.
46|47
FINANCIAL REVIEW
CONSOLIDATED
BALANCE SHEET REVIEW
LOANS
Loans outstanding of $50.0 billion at December 31, 1999 decreased $7.7 billion
from year-end 1998 primarily due to the impact of strategies designed to reduce
balance sheet leverage in lower-return businesses. During 1999, the Corporation
sold the credit card business, decided to sell education loans in repayment and
continued the downsizing of the indirect automobile lending portfolio. In the
first quarter of 1999, the decision was made to exit certain non-strategic
wholesale lending businesses. Additional actions were taken in the fourth
quarter of 1999 to further reduce exposure to wholesale lending businesses and
exit the mortgage warehouse lending business. Total outstandings and exposure
designated for exit during 1999 totaled $3.7 billion and $10.5 billion,
respectively. At December 31, 1999, the remaining outstandings and exposure
associated with this initiative totaled $2.9 billion and $7.7 billion,
respectively.
DETAILS OF LOANS
DECEMBER 31 - IN MILLIONS 1999 1998
- -------------------------------------------------------------
Consumer
Home equity ...................... $ 6,068 $ 5,731
Automobile ....................... 1,691 2,444
Education ........................ 85 1,196
Other ............................ 1,513 1,609
- -------------------------------------------------------------
Total consumer ................. 9,357 10,980
Credit card ......................... 2,958
Residential mortgage ................ 12,869 12,265
Commercial
Manufacturing .................... 5,355 5,336
Retail/wholesale ................. 4,301 4,452
Service providers ................ 3,208 3,263
Real estate related .............. 2,862 3,093
Communications ................... 1,370 1,529
Health care ...................... 772 1,136
Financial services ............... 1,300 2,928
Other ............................ 2,300 3,445
- -------------------------------------------------------------
Total commercial ............... 21,468 25,182
Commercial real estate
Mortgage ......................... 761 1,398
Real estate project .............. 1,969 2,051
- -------------------------------------------------------------
Total commercial real estate 2,730 3,449
Lease financing ..................... 3,663 2,978
Other ............................... 683 392
Unearned income ..................... (724) (554)
- -------------------------------------------------------------
Total, net of unearned income .... $ 50,046 $57,650
=============================================================
Loan portfolio composition continued to be geographically diversified among
numerous industries and types of businesses.
SECURITIES AVAILABLE FOR SALE
The securities available for sale portfolio increased $537 million from December
31, 1998 to $7.6 billion at December 31, 1999. Total securities used in mortgage
banking risk management were $1.7 billion at December 31, 1999. Portfolio
securities represented 8% of total assets at December 31, 1999. The expected
weighted-average life of the portfolio securities increased to 4 years and 7
months at December 31, 1999 compared with 2 years and 8 months at year-end 1998.
DETAILS OF SECURITIES AVAILABLE FOR SALE
AMORTIZED FAIR
DECEMBER 31 - IN MILLIONS COST VALUE
- ---------------------------------------------------------------------------
1999
PORTFOLIO SECURITIES
Debt securities
U.S. Treasury and government agencies .......... $ 411 $ 400
Mortgage-backed ................................ 3,918 3,769
Asset-backed ................................... 1,051 1,027
State and municipal ............................ 134 131
Other debt ..................................... 40 39
Corporate stocks and other ........................ 590 594
- ---------------------------------------------------------------------------
Total .......................................... $6,144 $5,960
===========================================================================
MORTGAGE BANKING RISK
MANAGEMENT
Debt securities
U.S. Treasury and government agencies .......... $1,791 $1,587
Mortgage-backed ................................ 68 64
- ---------------------------------------------------------------------------
TOTAL ............................................. $1,859 $1,651
- ---------------------------------------------------------------------------
Total securities available for sale .......... $8,003 $7,611
===========================================================================
1998
PORTFOLIO SECURITIES
Debt securities
U.S. Treasury and government agencies .......... $ 152 $ 152
Mortgage-backed ................................ 2,942 2,936
Asset-backed ................................... 709 708
State and municipal ............................ 122 128
Other debt ..................................... 33 31
Corporate stocks and other ........................ 542 517
- ---------------------------------------------------------------------------
Total .......................................... $4,500 $4,472
===========================================================================
MORTGAGE BANKING RISK
MANAGEMENT
Debt securities
U.S. Treasury and government agencies .......... $2,629 $2,602
- ---------------------------------------------------------------------------
Total .......................................... $2,629 $2,602
- ---------------------------------------------------------------------------
Total securities available for sale .......... $7,129 $7,074
===========================================================================
FUNDING SOURCES
Total funding sources were $66.0 billion at December 31, 1999, a decrease of
$2.4 billion compared with December 31, 1998, primarily resulting from reduced
wholesale funding related to the credit card business that was sold in the first
quarter of 1999.
While total demand, savings and money market deposits decreased
approximately $700 million in the year-to-year comparison, money market deposits
individually increased more than $600 million reflecting strategic marketing
initiatives in regional banking. Time deposits decreased $3.0 billion primarily
due to a decrease in higher rate certificates of deposit.
During 1999, the Corporation issued $250 million of 6.13% subordinated
notes. Additionally, the Corporation issued $300 million of 6.95% notes, $300
million of 7.00% notes and $400 million of 7.50% subordinated notes to fund the
ISG acquisition.
DETAILS OF FUNDING SOURCES
DECEMBER 31 - IN MILLIONS 1999 1998
- -------------------------------------------------------------------------
Deposits
Demand, savings and money market ...... $28,689 $29,359
Time .................................. 14,786 17,774
Foreign ............................... 3,193 363
- -------------------------------------------------------------------------
Total deposits ...................... 46,668 47,496
Borrowed funds
Federal funds purchased ............... 1,281 390
Repurchase agreements ................. 1,122 1,669
Bank notes and senior debt ............ 6,975 10,384
Other borrowed funds .................. 7,642 6,722
Subordinated debt ..................... 2,327 1,781
- -------------------------------------------------------------------------
Total borrowed funds ................ 19,347 20,946
- -------------------------------------------------------------------------
Total ............................. $66,015 $68,442
=========================================================================
CAPITAL
The access to and cost of funding new business initiatives including
acquisitions, ability to pay dividends, deposit insurance costs, and the level
and nature of regulatory oversight depend, in large part, on a financial
institution's capital strength. At December 31, 1999, the Corporation and each
bank subsidiary were considered well capitalized based on regulatory capital
ratio requirements.
RISK-BASED CAPITAL
DECEMBER 31 - DOLLARS IN MILLIONS 1999 1998
- -------------------------------------------------------------------------
Capital components
Shareholders' equity
Common .............................. $5,633 $5,729
Preferred ........................... 313 314
Trust preferred capital securities .... 848 848
Goodwill and other .................... (2,318) (1,381)
Net unrealized securities losses ...... 255 36
- -------------------------------------------------------------------------
Tier I risk-based capital ........... 4,731 5,546
Subordinated debt ..................... 2,040 1,641
Eligible allowance for credit losses .. 667 753
- -------------------------------------------------------------------------
Total risk-based capital ............ $7,438 $7,940
=========================================================================
Assets
Risk-weighted assets and
off-balance-sheet instruments ....... $67,118 $71,146
Average tangible assets ............... 71,617 76,135
=========================================================================
Capital ratios
Tier I risk-based ..................... 7.05% 7.80%
Total risk-based ...................... 11.08 11.16
Leverage .............................. 6.61 7.28
=========================================================================
The capital position is managed through balance sheet size and composition,
issuance of debt and equity instruments, treasury stock activities, dividend
policies and retention of earnings.
During 1999, PNC repurchased 13.5 million shares of common stock. On
February 17, 2000, the Board of Directors authorized the Corporation to purchase
up to 10 million shares of common stock through February 28, 2001. This new
program replaces the prior program that was rescinded.
48|49
FINANCIAL REVIEW
RISK MANAGEMENT
In the normal course of business, the Corporation assumes various types of risk,
the most significant of which are credit, liquidity, interest rate and market
risk. To manage these risks, PNC has risk management processes designed to
provide for risk identification, measurement, monitoring and control.
CREDIT RISK
Credit risk represents the possibility that a borrower or counterparty may not
perform in accordance with contractual terms. Credit risk is inherent in the
financial services business and results from extending credit to customers,
purchasing securities and entering into off-balance-sheet financial derivative
transactions. The Corporation seeks to manage credit risk through, among others,
diversification, limiting exposure to any single industry or customer, requiring
collateral or selling participations to third parties and purchasing
credit-related derivatives.
NONPERFORMING ASSETS
DECEMBER 31 - DOLLARS IN MILLIONS 1999 1998
- -------------------------------------------------------------------
Nonaccrual loans
Commercial ............................... $220 $188
Residential mortgage ..................... 56 51
Commercial real estate
Real estate project .................... 13 28
Mortgage ............................... 8 22
Consumer ................................. 2 6
- -------------------------------------------------------------------
Total nonaccrual loans ................. 299 295
Foreclosed and other assets
Residential mortgage ..................... 12 17
Commercial real estate ................... 5 15
Other .................................... 22 5
- -------------------------------------------------------------------
Total foreclosed and other assets ...... 39 37
- -------------------------------------------------------------------
Total nonperforming assets ............. $338 $332
===================================================================
Nonaccrual loans to total loans ............. .60% .51%
Nonperforming assets to total
loans, loans held for sale and
foreclosed assets ........................ .61 .55
Nonperforming assets to total assets ........ .45 .43
===================================================================
The above table excludes $13 million of equity management assets at December
31, 1999 carried at fair value.
The amount of nonperforming loans that were current as to principal and
interest was $42 million at December 31, 1999 and $28 million at December 31,
1998. There were no troubled debt restructured loans outstanding as of either
period end.
CHANGE IN NONPERFORMING ASSETS
IN MILLIONS 1999 1998
- ---------------------------------------------------
January 1 .................... $332 $333
Transferred from accrual ..... 418 377
Returned to performing ....... (11) (12)
Principal reductions ......... (268) (175)
Sales ........................ (49) (58)
Charge-offs and other ........ (84) (133)
- ---------------------------------------------------
December 31 ............... $338 $332
===================================================
ACCRUING LOANS PAST DUE 90 DAYS OR MORE
AMOUNT PERCENT OF LOANS
DECEMBER 31 ------------- ----------------
DOLLARS IN MILLIONS 1999 1998 1999 1998
- -------------------------------------------------------------------
CONSUMER
Education ............... $23 1.92%
Other ................... $25 38 .27% .39
- --------------------------------------------
Total consumer 25 61 .27 .56
Credit card ................ 63 2.13
Residential mortgage ....... 34 53 .26 .43
Commercial ................. 30 56 .14 .22
Commercial real estate ..... 5 32 .18 .93
Other ...................... 2 1 .05 .04
- --------------------------------------------
Total ................... $96 $266 .19 .46
===================================================================
Education loans were excluded from the above table in 1999 due to the decision
to sell student loans in repayment. Also, credit cards declined due to the sale
of the credit card business in 1999.
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 $95 million at December 31, 1999.
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 others, actual versus estimated
losses, current regional and national economic conditions, business segment and
portfolio concentrations, industry competition and consolidation, and the impact
of government regulations. Consumer and residential mortgage loan allocations
are made at a total portfolio level based on historical loss experience adjusted
for portfolio activity and current economic conditions.
While PNC's commercial and consumer pool reserve methodologies strive to
reflect all risk factors, there continues to be a certain element of risk
associated with, but not limited to, potential estimation or judgmental errors.
Unallocated reserves 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 in 1999 and the evaluation of the allowance
for credit losses as of December 31, 1999 reflected changes in loan portfolio
composition, changes in asset quality, the impact of selling the credit card
business, the decision to exit certain wholesale lending businesses and downsize
the indirect automobile lending portfolio. The unallocated portion of the
allowance for credit losses at December 31, 1999 represented 20% of the total
allowance and .27% of total loans compared with 22% and .29%, respectively, at
December 31, 1998.
ROLLFORWARD OF ALLOWANCE FOR CREDIT LOSSES
IN MILLIONS 1999 1998
- ----------------------------------------------------------
January 1 ...................... $ 753 $ 972
Charge-offs .................... (216) (524)
Recoveries ..................... 55 77
- ----------------------------------------------------------
Net charge-offs ............. (161) (447)
Provision for credit losses .... 163 225
Sale of credit card business ... (81)
Acquisitions ................... 3
- ----------------------------------------------------------
December 31 ................. $ 674 $ 753
==========================================================
The allowance as a percent of nonaccrual loans and period-end loans was 225% and
1.35%, respectively, at December 31, 1999. The comparable year-end 1998 amounts
were 255% and 1.31%, respectively.
CHARGE-OFFS AND RECOVERIES
NET PERCENT OF
YEAR ENDED DECEMBER 31 CHARGE- CHARGE- AVERAGE
DOLLARS IN MILLIONS OFFS RECOVERIES OFFS LOANS
- ------------------------------------------------------------------------------
1999
Consumer ................... $ 63 $25 $ 38 .37%
Credit card ................ 60 2 58 8.63
Residential mortgage ....... 8 1 7 .06
Commercial ................. 72 22 50 .22
Commercial real estate ..... 4 4
Other ...................... 9 1 8 .26
- ----------------------------------------------------------------
Total ................... $216 $55 $161 .30
==============================================================================
1998
Consumer ................... $ 83 $34 $ 49 .44%
Credit card ................ 297 17 280 7.27
Residential mortgage ....... 7 1 6 .05
Commercial ................. 122 20 102 .45
Commercial real estate ..... 8 3 5 .15
Other ...................... 7 2 5 .22
- ----------------------------------------------------------------
Total ................... $524 $77 $447 .80
==============================================================================
The actual level of net charge-offs and the provision for credit losses in
future periods can be affected by many business and economic factors and may
differ from current or historical experience.
LIQUIDITY RISK
Liquidity represents the Corporation's ability to obtain cost-effective funding
to meet the needs of customers, as well as the Corporation's financial
obligations. Liquidity is centrally managed by Asset and Liability Management,
with oversight provided by the Corporate Asset and Liability Committee and the
Finance Committee of the Board of Directors.
Access to capital markets funding sources is a key factor affecting
liquidity management. Access to such markets is in part based on the
Corporation's credit ratings, which are influenced by a number of factors
including capital ratios, credit quality, and earnings. Additional factors that
impact liquidity include the maturity structure of existing assets, liabilities,
and off-balance-sheet positions, the level of liquid investment securities and
loans available for sale and the Corporation's ability to securitize 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 as well as alternative forms of borrowing including Federal funds
purchased, repurchase agreements and debt issuances. At December 31, 1999, such
assets totaled $14.6 billion with $4.2 billion pledged as collateral for
borrowing, trust and other commitments. Funding can also be obtained through
secured advances from the Federal Home Loan Bank ("FHLB") system, of which PNC
is a member. These borrowings are generally secured by residential mortgages. At
December 31, 1999, approximately $6.3 billion of residential mortgages were
available as collateral for borrowings from the FHLB.
Liquidity for the parent company and subsidiaries is also generated through
the issuance of securities in public or private markets and lines of credit and
through asset securitizations and sales. During 1999, the Corporation issued
$1.3 billion of senior and subordinated debt. At December 31, 1999, the
Corporation had unused capacity under effective shelf registration statements of
approximately $1.5 billion of debt and equity securities and $400 million of
trust preferred capital securities. In addition, the Corporation has an unused
line of credit of $500 million.
The principal source of parent company revenue and cash flow is dividends
from subsidiary banks. PNC Bancorp, Inc. is a wholly-owned subsidiary of the
parent company and is the holding company for all bank subsidiaries. There are
legal limitations on the ability of bank subsidiaries to pay dividends and make
other distributions to PNC Bancorp, Inc. and in turn the parent company. Without
regulatory approval, the amount available for dividend payments to PNC Bancorp,
Inc. by all bank subsidiaries was $489 million at December 31, 1999. Dividends
may also be impacted by capital needs, regulatory requirements, corporate
policies, contractual restrictions and other factors.
50|51
FINANCIAL REVIEW
Management believes the Corporation has sufficient liquidity to meet current
obligations to borrowers, depositors, debt holders and others. The impact of
replacing maturing liabilities is reflected in the income simulation model in
the overall asset and liability management process.
INTEREST RATE RISK
Interest rate risk arises primarily through the Corporation's traditional
business activities of extending loans and accepting deposits. Many factors,
including economic and financial conditions, movements in market interest rates
and consumer preferences, affect the spread between interest earned on assets
and interest paid on liabilities. In managing interest rate risk, the
Corporation seeks to minimize its reliance on a particular interest rate
scenario as a source of earnings, while maximizing net interest income and net
interest margin. To achieve these objectives, the Corporation uses securities
purchases and sales, long-term and short-term funding, financial derivatives and
other capital markets instruments.
Interest rate risk is centrally managed by Asset and Liability Management.
The Corporation actively measures and monitors components of interest rate risk
including term structure or repricing risk, yield curve or nonparallel rate
shift risk, basis risk and options risk. Senior management's Corporate Asset and
Liability Committee provides strategic direction to Asset and Liability
Management and, in doing so, reviews capital markets activities and interest
rate risk exposures. The Finance Committee of the Board of Directors is
responsible for overseeing the Corporation's interest rate risk management
process.
The Corporation measures and manages both the short-term and long-term
effects of changing interest rates. An income simulation model is used to
measure the sensitivity of net interest income to changing interest rates over
the next twenty-four month period. An economic value of equity model is used to
measure the sensitivity of the value of existing on-balance-sheet and
off-balance-sheet positions to changing interest rates.
The income simulation model is the primary tool used to measure the
direction and magnitude of changes in net interest income resulting from changes
in interest rates. Forecasting net interest income and its sensitivity to
changes in interest rates requires that the Corporation make assumptions about
the volume and characteristics of new business and the behavior of existing
positions. These business assumptions are based on the Corporation's experience,
business plans and published industry experience. Key assumptions employed in
the model include prepayment speeds on mortgage-related assets and consumer
loans, loan volumes and pricing, deposit volumes and pricing, the expected life
and repricing characteristics of nonmaturity loans and deposits, and
management's financial and capital plans.
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 December 31, 1999, if interest rates were to gradually increase by
100 basis points over the next twelve months, the model indicates that net
interest income would decrease by .9%. If interest rates were to gradually
decrease by 100 basis points over the next twelve months, the model indicates
that net interest income would increase by 1.2%.
The Corporation models additional interest rate scenarios covering a wider
range of rate movements to identify yield curve, term structure and basis risk
exposures. These scenarios are developed based on historical rate relationships
or management's expectations regarding the future direction and level of
interest rates. Depending on market conditions and other factors, these
scenarios may be modeled more or less frequently. Such analyses are used in
conjunction with the net interest income simulation model and economic value of
equity model to identify inherent risk and develop appropriate strategies.
The Corporation measures the sensitivity of the value of its
on-balance-sheet and off-balance-sheet positions to movements in interest rates
using an economic value of equity model. The model computes the value of all
current on-balance-sheet and off-balance-sheet positions under a range of
instantaneous interest rate changes. The resulting change in the value of equity
is the measure of overall long-term interest rate risk inherent in the
Corporation's existing on-balance-sheet and off-balance-sheet positions. The
Corporation uses the economic value of equity model to complement the net
interest income simulation modeling process.
The Corporation's risk management policies provide that the change in
economic value of equity should not decline by more than 1.5% of the book value
of assets for a 200 basis point instantaneous increase or decrease in interest
rates. Based on the results of the economic value of equity model at December
31, 1999, if interest rates were to instantaneously increase by 200 basis
points, the economic value of existing on-balance-sheet and off-balance-sheet
positions would decline by 1.00% of assets. If interest rates were to
instantaneously decrease by 200 basis points, the economic value of existing
on-balance-sheet and off-balance-sheet positions would increase by .3% of
assets.
MARKET RISK
Most of PNC's trading activities are designed to provide capital markets
services for customers of PNC Bank - Corporate Banking, PNC Secured Finance and
PNC Advisors. The performance of PNC's trading operations is predominantly based
on providing services to customers and not on positioning the Corporation's
portfolio for gains from market movements.
Market risk associated with trading, capital markets and foreign exchange
activities is managed using a value-at-risk approach that combines interest rate
risk, foreign exchange rate risk, spread risk and volatility risk. Exposure is
measured as the potential loss due to a two standard deviation, one-day move.
The combined period-end value-at-risk of all trading operations using this
measurement was less than $850 thousand at December 31, 1999.
FINANCIAL DERIVATIVES
A variety of off-balance-sheet financial derivatives are used as part of the
overall risk management process to manage interest rate, market and credit risk
inherent in the Corporation's business activities. Interest rate swaps and
purchased interest rate caps and floors are the primary instruments used for
interest rate risk management. Interest rate swaps are agreements to exchange
fixed and floating interest rate payments calculated on a notional principal
amount. The floating rate is based on a money market index, primarily short-term
LIBOR indices. Purchased interest rate caps and floors are agreements where, for
a fee, the counterparty agrees to pay the Corporation the amount, if any, by
which a specified market interest rate exceeds or is less than a defined rate
applied to a notional amount, respectively.
Forward contracts provide for the delivery of financial instruments at a
specified future date and at a specified price or yield. Such contracts are
primarily used to manage risk positions associated with certain mortgage banking
and student lending activities.
Credit-related derivatives provide, for a fee, an assumption of a portion
of the credit risk associated with the underlying financial instruments. Such
contracts are primarily used to manage credit risk and regulatory capital
associated with commercial lending activities.
Financial derivatives involve, to varying degrees, interest rate, market
and credit risk in excess of the amount on the balance sheet, but less than the
notional amount of the contract. For interest rate swaps, caps and floors, only
periodic cash payments and, with respect to caps and floors, premiums, are
exchanged. Therefore, cash requirements and exposure to credit risk are
significantly less than the notional value.
During 1999, financial derivatives used in interest rate risk management
increased net interest income by $43 million compared with an $18 million
increase in the prior year.
The following table sets forth changes in the notional value of
off-balance-sheet financial derivatives used for risk management during 1999.
FINANCIAL DERIVATIVES ACTIVITY
WEIGHTED-
AVERAGE
1999 - DOLLARS IN MILLIONS JANUARY 1 ADDITIONS MATURITIES TERMINATIONS DECEMBER 31 MATURITY
- -----------------------------------------------------------------------------------------------------------------------------------
Interest rate risk management
Interest rate swaps
Receive fixed ............................... $ 7,163 $ 1,400 $ (650) $ (500) $ 7,413 2 yrs. 6 mos
Pay fixed ................................... 13 4 (12) 5 1 yr.
Basis swaps ................................. 2,274 (624) 1,650 3 yrs. 6 mos
Interest rate caps ............................ 722 (220) (28) 474 4 yrs.
Interest rate floors .......................... 1,939 3,000 (1,602) (26) 3,311 2 yrs. 5 mos
- --------------------------------------------------------------------------------------------------------------------
Total interest rate risk management ...... 12,111 4,404 (3,108) (554) 12,853
Mortgage banking risk management
Residential
Forward contracts
Commitments to purchase loans ............ 1,286 29,709 (30,691) 304 2 mos.
Commitments to sell loans ................ 3,248 36,995 (39,049) 1,194 2 mos.
Options .................................. 207 890 (1,001) 96 2 mos.
Options - MSR ............................... 4,875 4,025 (525) (700) 7,675 3 yrs. 11 mos.
- --------------------------------------------------------------------------------------------------------------------
Total residential ........................ 9,616 71,619 (71,266) (700) 9,269
Commercial - interest rate swaps ................. 657 1,431 (88) (1,357) 643 7 yrs. 1 mo.
- --------------------------------------------------------------------------------------------------------------------
Total mortgage banking risk management ... 10,273 73,050 (71,354) (2,057) 9,912
Student lending activities
Forward contracts ............................. 681 681 1 yr. 4 mos.
Credit-related activities
Credit default swaps .......................... 4,255 60 4,315 2 yrs. 5 mos.
- --------------------------------------------------------------------------------------------------------------------
Total .................................... $26,639 $ 78,195 $(74,462) $(2,611) $27,761
==================================================================================================================================
52|53
FINANCIAL REVIEW
The following table sets forth, by designated assets and liabilities, the
notional value and the estimated fair value of financial derivatives used for
risk management. Weighted-average interest rates presented are those expected to
be in effect based on the implied forward yield curve at December 31, 1999.
FINANCIAL DERIVATIVES
WEIGHTED-AVERAGE INTEREST RATES
NOTIONAL ESTIMATED -------------------------------
DECEMBER 31, 1999 - DOLLARS IN MILLIONS VALUE FAIR VALUE PAID RECEIVED
- -------------------------------------------------------------------------------------------------------------------
Interest rate risk management
Asset rate conversion
Interest rate swaps(1)
Receive fixed designated to loans ............ $ 5,550 $(48) 6.53% 5.49%
Basis swaps designated to other
earning assets ............................. 226 3 6.44 6.72
Interest rate caps designated to loans(2) ....... 474 12 NM NM
Interest rate floors designated to loans(3) ..... 3,311 NM NM
- -------------------------------------------------------------------------------
Total asset rate conversion ................ 9,561 (33)
Liability rate conversion
Interest rate swaps(1)
Receive fixed designated to:
Interest-bearing deposits .................. 150 (2) 6.85 6.65
Borrowed funds ............................. 1,713 (23) 6.75 6.24
Pay fixed designated to borrowed funds ....... 5 1 6.09 7.04
Basis swaps designated to borrowed funds ..... 1,424 7 6.70 6.71
- -------------------------------------------------------------------------------
Total liability rate conversion ............ 3,292 (17)
- -------------------------------------------------------------------------------
Total interest rate risk management ..... 12,853 (50)
Mortgage banking risk management
Residential
Forward contracts
Commitments to purchase loans ................ 304 6 NM NM
Commitments to sell loans .................... 1,194 2 NM NM
Options ...................................... 96 1 NM NM
Options - MSR ................................... 7,675 19 NM NM
- -------------------------------------------------------------------------------
Total residential .......................... 9,269 28
Commercial
Pay fixed interest rate swaps
designated to securities(1) .................. 144 3 7.16 6.08
Pay fixed interest rate swaps
designated to loans(1) ...................... 499 48 5.49 7.05
- -------------------------------------------------------------------------------
Total commercial ........................... 643 51
- -------------------------------------------------------------------------------
Total mortgage banking risk management .. 9,912 79
Student lending activities
Forward contracts ................................. 681 NM NM
Credit-related activities
Credit default swaps .............................. 4,315 (4) NM NM
- -------------------------------------------------------------------------------
Total financial derivatives ..................... $27,761 $ 25
===================================================================================================================
(1) THE FLOATING RATE PORTION OF INTEREST RATE CONTRACTS IS BASED ON
MONEY-MARKET INDICES. AS A PERCENT OF NOTIONAL VALUE, 27% WERE BASED ON
1-MONTH LIBOR, 70% ON 3-MONTH LIBOR AND THE REMAINDER ON OTHER SHORT-TERM
INDICES.
(2) INTEREST RATE CAPS WITH NOTIONAL VALUES OF $142 MILLION, $129 MILLION AND
$199 MILLION REQUIRE THE COUNTERPARTY TO PAY THE CORPORATION THE EXCESS, IF
ANY, OF 3-MONTH LIBOR OVER A WEIGHTED-AVERAGE STRIKE OF 6.16%, 1-MONTH
LIBOR OVER A WEIGHTED-AVERAGE STRIKE OF 5.72% AND PRIME OVER A
WEIGHTED-AVERAGE STRIKE OF 8.76%, RESPECTIVELY. AT DECEMBER 31, 1999,
3-MONTH LIBOR WAS 6.00%, 1-MONTH LIBOR WAS 5.82% AND PRIME WAS 8.50%.
(3) INTEREST RATE FLOORS WITH NOTIONAL VALUES OF $3.0 BILLION, $3.8 BILLION AND
$3.2 BILLION REQUIRE THE COUNTERPARTY TO PAY THE CORPORATION THE EXCESS, IF
ANY, OF THE WEIGHTED-AVERAGE STRIKE OF 4.63% OVER 3-MONTH LIBOR, THE
WEIGHTED-AVERAGE STRIKE OF 5.08% OVER 10-YEAR CMT AND THE WEIGHTED-AVERAGE
STRIKE OF 4.99% OVER 10-YEAR CMS, RESPECTIVELY. AT DECEMBER 31, 1999,
3-MONTH LIBOR WAS 6.00%, 10-YEAR CMT WAS 6.45% AND 10-YEAR CMS WAS 7.18%.
NM - NOT MEANINGFUL
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. These positions are recorded at estimated fair value
and changes in value are included in results of operations.
OTHER DERIVATIVES AT DECEMBER 31, 1999 1999
--------------------------------------------------- -----------
POSITIVE NEGATIVE NET AVERAGE
NOTIONAL FAIR FAIR ASSET FAIR
IN MILLIONS VALUE VALUE VALUE (LIABILITY) VALUE
- ----------------------------------------------------------------------------- -----------
Customer-related
Interest rate
Swaps ............. $17,103 $110 $(116) $(6) $(13)
Caps/floors
Sold ............ 3,440 (25) (25) (20)
Purchased ....... 3,337 22 22 18
Foreign exchange .... 3,310 47 (36) 11 7
Other ............... 2,161 22 (9) 13 3
- ----------------------------------------------------------------------------- -----------
Total customer-
related ........... 29,351 201 (186) 15 (5)
Other .................. 1,238 6 6 4
- ----------------------------------------------------------------------------- -----------
Total other
derivatives ....... $30,589 $207 $(186) $21 $(1)
============================================================================= ===========
The following table sets forth, by designated assets and liabilities, the
notional value and the estimated fair value of financial derivatives used for
risk management. Weighted-average interest rates presented are those expected to
be in effect based on the implied forward yield curve at December 31, 1998.
FINANCIAL DERIVATIVES
WEIGHTED-AVERAGE INTEREST RATES
NOTIONAL ESTIMATED -------------------------------
DECEMBER 31, 1998 - DOLLARS IN MILLIONS VALUE FAIR VALUE PAID RECEIVED
- ------------------------------------------------------------------------------------------------------------------------------
Interest rate risk management
Asset rate conversion
Interest rate swaps(1)
Receive fixed designated to loans ...................... $5,550 $83 5.06% 5.49%
Pay fixed designated to loans .......................... 5 6.23 4.98
Basis swaps designated to other earning assets ......... 300 4 4.78 5.17
Interest rate caps designated to loans(2) ................. 722 6 NM NM
Interest rate floors designated to loans(3) ............... 1,939 (9) NM NM
- --------------------------------------------------------------------------------------------
Total asset rate conversion .......................... 8,516 84
Liability rate conversion
Interest rate swaps(1)
Receive fixed designated to:
Interest-bearing deposits ............................ 150 10 5.23 6.65
Borrowed funds ....................................... 1,463 60 5.12 5.83
Pay fixed designated to borrowed funds ................. 8 1 7.22 5.58
Basis swaps designated to borrowed funds ............... 1,974 9 5.09 5.09
- --------------------------------------------------------------------------------------------
Total liability rate conversion ...................... 3,595 80
- --------------------------------------------------------------------------------------------
Total interest rate risk management ............. 12,111 164
Mortgage banking risk management
Residential
Forward contracts
Commitments to purchase loans .......................... 1,286 4 NM NM
Commitments to sell loans .............................. 3,248 4 NM NM
Options ................................................ 207 5 NM NM
Interest rate floors - MSR(3) ............................. 4,875 53 NM NM
- --------------------------------------------------------------------------------------------
Total residential .................................... 9,616 66
Commercial
Pay fixed swaps ...................................... 657 (2) 5.42 5.34
- --------------------------------------------------------------------------------------------
Total mortgage banking risk management ............... 10,273 64
Credit-related activities
Credit default swaps ........................................ 4,255 (2) NM NM
- --------------------------------------------------------------------------------------------
Total financial derivatives .......................... $26,639 $226
================================================================================================================================
(1) THE FLOATING RATE PORTION OF INTEREST RATE CONTRACTS IS BASED ON
MONEY-MARKET INDICES. AS A PERCENT OF NOTIONAL VALUE, 33% WERE BASED ON
1-MONTH LIBOR, 63% ON 3-MONTH LIBOR AND THE REMAINDER ON OTHER SHORT-TERM
INDICES.
(2) INTEREST RATE CAPS WITH NOTIONAL VALUES OF $248 MILLION, $209 MILLION AND
$257 MILLION REQUIRE THE COUNTERPARTY TO PAY THE EXCESS, IF ANY, OF 3-MONTH
LIBOR OVER A WEIGHTED-AVERAGE STRIKE OF 6.19%, 1-MONTH LIBOR OVER A
WEIGHTED-AVERAGE STRIKE OF 5.85% AND PRIME OVER A WEIGHTED-AVERAGE STRIKE
OF 8.77%, RESPECTIVELY. AT DECEMBER 31, 1998, 3-MONTH LIBOR WAS 5.07%,
1-MONTH LIBOR WAS 5.06% AND PRIME WAS 7.8%.
(3) INTEREST RATE FLOORS WITH NOTIONAL VALUES OF $1.5 BILLION, $1.7 BILLION AND
$3.2 BILLION REQUIRE THE COUNTERPARTY TO PAY THE CORPORATION THE EXCESS, IF
ANY, OF THE WEIGHTED-AVERAGE STRIKE OF 5.01% OVER 3-MONTH LIBOR, THE
WEIGHTED-AVERAGE STRIKE OF 5.19% OVER 10-YEAR CMT AND THE WEIGHTED-AVERAGE
STRIKE OF 4.99% OVER 10-YEAR CMS, RESPECTIVELY. AT DECEMBER 31, 1998,
3-MONTH LIBOR WAS 5.07%, 10-YEAR CMT WAS 4.65% AND 10-YEAR CMS WAS 5.47%.
NM - NOT MEANINGFUL
54/55
FINANCIAL REVIEW
1998 VERSUS 1997
CONSOLIDATED INCOME
STATEMENT REVIEW
OVERVIEW
Consolidated net income for 1998 was $1.115 billion compared with $1.052 billion
in 1997. Diluted earnings per share increased 10% to $3.60 for 1998 compared
with $3.28 in 1997. Returns on average common shareholders' equity and average
assets were 20.81% and 1.49% for 1998 compared with 20.01% and 1.49%,
respectively, in 1997.
NET INTEREST INCOME
Taxable-equivalent net interest income increased $75 million to $2.599 billion
in 1998 compared with $2.524 billion in 1997. The net interest margin narrowed
to 3.85% in 1998 compared with 3.94% in the prior year. The increase in net
interest income was primarily due to a $3.4 billion increase in average earning
assets, which more than offset a narrower net interest margin resulting from a
change in balance sheet composition.
PROVISION FOR CREDIT LOSSES
The provision for credit losses was $225 million in 1998 compared with $70
million in 1997. Net charge-offs were .80% of average loans in 1998 compared
with .51% in 1997. The increase in the net charge-off ratio was primarily
associated with credit cards and a single credit in the health care industry.
NONINTEREST INCOME
Noninterest income was $2.302 billion in 1998 compared with $1.775 billion in
1997. Asset management, mutual fund servicing, brokerage, other consumer
services, corporate services and mortgage banking revenues each grew 24% or more
compared with the prior year. Noninterest income for 1998 included $162 million
of net gains from the sale of the corporate trust and escrow business, branch
sales and the sale of a credit card portfolio as well as the negative impact of
$30 million of valuation adjustments on certain market-sensitive asset
positions.
Asset management fees of $626 million for 1998 increased 35% compared with
1997 primarily due to new business, market appreciation and performance fees.
Assets under management increased 27% to $174 billion at December 31, 1998,
compared with $137 billion at December 31, 1997. Mutual fund servicing fees of
$182 million for 1998 increased 29% compared with 1997 resulting from an
increase in assets serviced. At December 31, 1998, custody and
accounting/administration services were provided for $315 billion and $252
billion of mutual fund assets, respectively. The comparable amounts were $232
billion and $182 billion, respectively, at December 31, 1997.
Brokerage income was $91 million for 1998, a $21 million increase compared
with 1997, primarily due to an increase in brokerage accounts.
Other consumer services revenue of $299 million for 1998 increased $57
million or 24% compared with 1997 primarily due to an increase in credit card
accounts. Corporate services revenue of $245 million for 1998 increased 24%
compared with 1997 resulting from the Midland acquisition and higher treasury
management and capital markets fees, partially offset by $30 million of
valuation adjustments.
Net residential mortgage banking revenue of $212 million in 1998 increased
$60 million or 39% compared with the prior year primarily due to significant
mortgage refinance activity and higher servicing income resulting from servicing
portfolio acquisitions. Residential mortgage production volume, including both
retail and correspondent activity totaled $22 billion in 1998 compared with $6
billion in 1997.
Net securities gains were $16 million in 1998 compared with $40 million in
1997. The year-to-year increase in other noninterest income was primarily due to
the net gains from the sale of the corporate trust and escrow business, branches
and a credit card portfolio in 1998.
NONINTEREST EXPENSE
Noninterest expense of $2.940 billion in 1998 increased $358 million compared
with the prior year primarily to support revenue growth in fee-based businesses,
the impact of acquisitions and consumer banking initiatives. Average full-time
equivalent employees totaled approximately 25,500 in 1998 compared with 24,600
in the prior year, an increase of 4% mainly due to acquisitions.
CONSOLIDATED BALANCE SHEET
REVIEW
Total assets were $77.2 billion at December 31, 1998, compared with $75.1
billion at December 31, 1997.
LOANS
Loans outstanding increased $3.4 billion from year-end 1997 to $57.7 billion at
December 31, 1998. Growth in commercial and home equity loans more than offset a
decline in commercial and residential mortgages and credit card and automobile
loans. The increase in commercial loans was primarily in real estate related,
specialized lending and middle market.
SECURITIES AVAILABLE FOR SALE
The securities available for sale portfolio declined $1.4 billion from year-end
1997 to $7.1 billion at December 31, 1998. The expected weighted-average life of
the securities portfolio increased to 5 years and 3 months at December 31, 1998,
compared with 2 years and 9 months at December 31, 1997, due to the purchase of
U.S. Treasury and government agency securities with maturities of 10 years or
more used as part of PNC's risk management strategies.
FUNDING SOURCES
Total funding sources increased $1.2 billion to $68.4 billion at December 31,
1998. Increases in transaction deposit accounts and other borrowed funds were
mostly offset by decreases in foreign deposits and federal funds purchased. This
change in funding composition resulted in a strengthening of liquidity as 48% of
wholesale liabilities had a maturity beyond one year at December 31, 1998,
compared with 29% at December 31, 1997. During 1998, the Corporation continued
to expand funding sources by issuing approximately $800 million of bank notes
under the Euro medium-term bank note program.
ASSET QUALITY
The ratio of nonperforming assets to total loans, loans held for sale and
foreclosed assets was .55% at December 31, 1998, and .59% at December 31, 1997.
Nonperforming assets were $332 million at December 31, 1998, compared with $333
million at December 31, 1997. The allowance for credit losses was 255% of
nonperforming loans and 1.31% of total loans at December 31, 1998, compared with
352% and 1.79%, respectively, at December 31, 1997.
CAPITAL
Shareholders' equity totaled $6.0 billion and $5.4 billion at December 31, 1998
and 1997, respectively, and the leverage ratio was 7.28% and 7.30% in the
comparison. Tier I and total risk-based capital ratios were 7.80% and 11.16%,
respectively, at December 31, 1998. The comparable December 31, 1997 ratios were
7.43% and 11.11%, respectively.
YEAR 2000
During 1999, the Corporation completed the process of preparing for the year
2000 date change event. This process involved reviewing, modifying and replacing
existing hardware, software and embedded chip technology systems, as necessary.
The Corporation also assessed the year 2000 preparedness of third parties such
as vendors, customers, governmental entities and others. Contingency plans,
subject to oversight and regulation by certain federal bank regulatory
authorities, for year 2000 issues were maintained. Business continuity plans
were reviewed and strengthened to address year 2000 implications.
The estimated total cumulative cost to become year 2000 ready through
December 31, 1999, which has been expensed as incurred, was approximately $24
million. Expenses incurred for year 2000 readiness efforts did not exceed one
percent of technology-related expenses in 1999. No significant outlays were made
to replace existing systems solely for year 2000 reasons.
The Corporation to date has not encountered any materially significant
problems associated with its mission critical systems or service providers as a
result of the date change event.
Unanticipated issues associated with the year 2000 date change event could
still occur that may have an adverse impact on the financial condition and
results of operations of the Corporation, its customers and service providers.
To the extent that customers' financial positions are weakened due to year 2000
issues, credit quality could be adversely affected. It is not possible to
predict with certainty all of the adverse effects that could result from a
failure of third parties to address year 2000 issues or whether such effects
could have a material adverse impact on the Corporation.
56|57
TABLE OF CONTENTS
REPORTS ON CONSOLIDATED
FINANCIAL STATEMENTS
59 Management's
Responsibility for
Financial Reporting
59 Report of Ernst &
Young LLP,
Independent Auditors
CONSOLIDATED FINANCIAL STATEMENTS
60 Consolidated
Statement of Income
61 Consolidated Balance
Sheet
62 Consolidated
Statement of
Shareholders' Equity
63 Consolidated
Statement of Cash
Flows
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
64 Note 1 - Accounting
Policies
67 Note 2 - Acquisitions
and Divestitures
67 Note 3 - Sale of
Subsidiary Stock
68 Note 4 - Cash Flows
68 Note 5 - Trading
Activities
68 Note 6 - Securities
Available for Sale
69 Note 7 - Loans and
Commitments to
Extend Credit
70 Note 8 - Nonperforming
Assets
71 Note 9 - Allowance for
Credit Losses
71 Note 10 - Premises,
Equipment and
Leasehold Improvements
71 Note 11 - Goodwill and
Other Amortizable
Assets
72 Note 12 - Residential
Mortgage Banking
Activities
72 Note 13 - Deposits
72 Note 14 - Borrowed
Funds
72 Note 15 - Capital
Securities of Subsidiary
Trusts
73 Note 16 - Shareholders'
Equity
73 Note 17 - Regulatory
Matters
74 Note 18- Financial
Derivatives
75 Note 19 - Employee
Benefit Plans
77 Note 20 - Stock-Based
Compensation Plans
78 Note 21 - Income Taxes
78 Note 22 - Earnings
Per Share
79 Note 23 - Segment
Reporting
81 Note 24 - Comprehensive
Income
81 Note 25 - Litigation
81 Note 26 - Fair Value of
Financial Instruments
82 Note 27 - Other
Financial Information
83 Note 28 - Unused Line
of Credit
STATISTICAL INFORMATION
84 Selected Quarterly
Financial Data
85 Analysis of Year-to-
Year Changes in Net
Interest Income
86 Average Consolidated
Balance Sheet and Net
Interest Analysis
88 Allowance for Credit
Losses
89 Short-Term Borrowings
89 Loan Maturities and
Interest Sensitivity
89 Time Deposits of
$100,000 or More
REPORTS ON CONSOLIDATED FINANCIAL STATEMENTS
MANAGEMENT'S RESPONSIBILITY
FOR FINANCIAL REPORTING
The PNC Financial Services Group, Inc. is responsible for the preparation,
integrity and fair presentation of its published financial statements. The
accompanying consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States and, as such,
include judgments and estimates of management. The PNC Financial Services Group,
Inc. also prepared the other information included in the Annual Report and is
responsible for its accuracy and consistency with the consolidated financial
statements.
Management is responsible for establishing and maintaining effective
internal control over financial reporting. The internal control system is
augmented by written policies and procedures and by audits performed by an
internal audit staff, which reports to the Audit Committee of the Board of
Directors. Internal auditors test the operation of the internal control system
and report findings to management and the Audit Committee, and corrective
actions are taken to address identified control deficiencies and other
opportunities for improving the system. The Audit Committee, composed solely of
outside directors, provides oversight to the financial reporting process.
There are inherent limitations in the effectiveness of any system of
internal control, including the possibility of human error and circumvention or
overriding of controls. Accordingly, even effective internal control can provide
only reasonable assurance with respect to financial statement preparation.
Further, because of changes in conditions, the effectiveness of internal control
may vary over time.
Management assessed The PNC Financial Services Group, Inc.'s internal
control over financial reporting as of December 31, 1999. This assessment was
based on criteria for effective internal control over financial reporting
described in "Internal Control.Integrated Framework" issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on this assessment,
management believes that The PNC Financial Services Group, Inc. maintained an
effective internal control system over financial reporting as of December 31,
1999.
/s/ Thomas H. O'Brien /s/ Robert L. Haunschild
- ------------------------- ----------------------------
Thomas H. O'Brien Robert L. Haunschild
Chairman and Senior Vice President and
Chief Executive Officer Chief Financial Officer
REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS
Shareholders and Board of Directors
The PNC Financial Services Group, Inc.
We have audited the accompanying consolidated balance sheet of The PNC Financial
Services Group, Inc. and subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of income, shareholders' equity, and cash flows
for each of the three years in the period ended December 31, 1999. These
financial statements are the responsibility of The PNC Financial Services Group,
Inc.'s management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of The PNC
Financial Services Group, Inc. and subsidiaries at December 31, 1999 and 1998,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
- ----------------------------
Pittsburgh, Pennsylvania
January 20, 2000
58|59
CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31 - IN MILLIONS, EXCEPT PER SHARE DATA 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Loans and fees on loans..................................................... $4,077 $4,590 $4,354
Securities available for sale............................................... 483 425 540
Other....................................................................... 361 298 157
- ---------------------------------------------------------------------------------------------------------------------------
Total interest income................................................... 4,921 5,313 5,051
===========================================================================================================================
INTEREST EXPENSE
Deposits.................................................................... 1,369 1,471 1,457
Borrowed funds.............................................................. 1,119 1,269 1,099
- ---------------------------------------------------------------------------------------------------------------------------
Total interest expense.................................................. 2,488 2,740 2,556
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income..................................................... 2,433 2,573 2,495
Provision for credit losses................................................. 163 225 70
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income less provision for credit losses.................... 2,270 2,348 2,425
===========================================================================================================================
NONINTEREST INCOME
Asset management ........................................................... 681 626 462
Mutual fund servicing....................................................... 251 182 141
Service charges on deposits................................................. 207 203 203
Brokerage................................................................... 219 91 70
Other consumer services..................................................... 236 299 242
Corporate services.......................................................... 133 245 198
Net residential mortgage banking............................................ 272 212 152
Equity management........................................................... 100 96 98
Net securities gains ....................................................... 22 16 40
Sale of subsidiary stock ................................................... 64
Other....................................................................... 560 332 169
- ---------------------------------------------------------------------------------------------------------------------------
Total noninterest income................................................ 2,745 2,302 1,775
===========================================================================================================================
NONINTEREST EXPENSE
Staff expense............................................................... 1,535 1,416 1,241
Net occupancy............................................................... 249 204 189
Equipment................................................................... 245 205 180
Amortization ............................................................... 93 111 94
Marketing................................................................... 75 96 70
Distributions on capital securities......................................... 65 60 43
Other....................................................................... 862 848 765
- ---------------------------------------------------------------------------------------------------------------------------
Total noninterest expense............................................... 3,124 2,940 2,582
- ---------------------------------------------------------------------------------------------------------------------------
Income before income taxes.................................................. 1,891 1,710 1,618
Income taxes................................................................ 627 595 566
- ---------------------------------------------------------------------------------------------------------------------------
Net income.............................................................. $1,264 $1,115 $1,052
===========================================================================================================================
EARNINGS PER COMMON SHARE
Basic....................................................................... $4.19 $3.64 $3.33
Diluted..................................................................... 4.15 3.60 3.28
CASH DIVIDENDS PER COMMON SHARE............................................. 1.68 1.58 1.50
AVERAGE COMMON SHARES OUTSTANDING
Basic....................................................................... 296.9 300.8 310.1
Diluted..................................................................... 300.0 305.1 316.2
===========================================================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
CONSOLIDATED BALANCE SHEET
DECEMBER 31 - IN MILLIONS, EXCEPT PAR VALUE 1999 1998
- -----------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks..................................................... $3,097 $2,534
Short-term investments...................................................... 1,148 1,014
Loans held for sale......................................................... 5,798 3,226
Securities available for sale............................................... 7,611 7,074
Loans, net of unearned income of $724 and $554.............................. 50,046 57,650
Allowance for credit losses............................................. (674) (753)
- -----------------------------------------------------------------------------------------------------------
Net loans............................................................... 49,372 56,897
Goodwill and other amortizable assets....................................... 4,123 2,548
Other....................................................................... 4,264 3,914
- -----------------------------------------------------------------------------------------------------------
Total assets............................................................ $75,413 $77,207
===========================================================================================================
LIABILITIES
Deposits
Noninterest-bearing....................................................... $8,441 $9,943
Interest-bearing.......................................................... 38,227 37,553
- -----------------------------------------------------------------------------------------------------------
Total deposits.......................................................... 46,668 47,496
Borrowed funds
Federal funds purchased................................................... 1,281 390
Repurchase agreements..................................................... 1,122 1,669
Bank notes and senior debt................................................ 6,975 10,384
Other borrowed funds...................................................... 7,642 6,722
Subordinated debt......................................................... 2,327 1,781
- -----------------------------------------------------------------------------------------------------------
Total borrowed funds.................................................... 19,347 20,946
Other....................................................................... 2,604 1,874
- -----------------------------------------------------------------------------------------------------------
Total liabilities....................................................... 68,619 70,316
===========================================================================================================
Mandatorily redeemable capital securities of subsidiary trusts.............. 848 848
SHAREHOLDERS' EQUITY
Preferred stock............................................................. 7 7
Common stock - $5 par value
Authorized: 450 shares
Issued: 353 shares........................................................ 1,764 1,764
Capital surplus............................................................. 1,276 1,250
Retained earnings........................................................... 6,006 5,262
Deferred benefit expense.................................................... (17) (36)
Accumulated other comprehensive loss........................................ (267) (43)
Common stock held in treasury at cost: 60 and 49 shares..................... (2,823) (2,161)
- -----------------------------------------------------------------------------------------------------------
Total shareholders' equity.............................................. 5,946 6,043
- -----------------------------------------------------------------------------------------------------------
Total liabilities, capital securities and shareholders' equity.......... $75,413 $77,207
===========================================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
60|61
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Accumulated
Other
PREFERRED Common Capital Retained Comprehensive
IN MILLIONS STOCK Stock Surplus Earnings Loss Other Total
- ---------------------------------------------------------------------------------------------------------------------------
Balance at January 1, 1997 .............. $7 $1,726 $939 $4,075 $(67) $(811) $5,869
Net income .............................. 1,052 1,052
Net unrealized securities gains.......... 44 44
- ---------------------------------------------------------------------------------------------------------------------------
Comprehensive income ................. 1,096
- ---------------------------------------------------------------------------------------------------------------------------
Cash dividends declared
Common ............................... (469) (469)
Preferred ............................ (19) (19)
Common stock issued (3.3 shares)........ 16 57 73
Treasury stock activity
(27.0 net shares purchased)........... 19 (1,233) (1,214)
Tax benefit of ESOP and
stock option plans.................... 27 2 29
Deferred benefit expense ............... 19 19
- ---------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997.......... 7 1,742 1,042 4,641 (23) (2,025) 5,384
Net income ............................. 1,115 1,115
Net unrealized securities losses ....... (13) (13)
Minimum pension liability adjustment.... (7) (7)
- ---------------------------------------------------------------------------------------------------------------------------
Comprehensive income ................. 1,095
- ---------------------------------------------------------------------------------------------------------------------------
Cash dividends declared
Common ............................... (476) (476)
Preferred............................. (19) (19)
Common stock issued (4.4 shares)........ 22 99 121
Treasury stock activity
(1.1 net shares purchased) ........... 90 (177) (87)
Tax benefit of ESOP and
stock option plans ................... 19 1 20
Deferred benefit expense ............... 5 5
- ---------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998.......... 7 1,764 1,250 5,262 (43) (2,197) 6,043
Net income ............................. 1,264 1,264
Net unrealized securities losses ....... (219) (219)
Minimum pension liability adjustment.... (5) (5)
- ---------------------------------------------------------------------------------------------------------------------------
Comprehensive income ................. 1,040
- ---------------------------------------------------------------------------------------------------------------------------
Cash dividends declared
Common ............................... (501) (501)
Preferred............................. (19) (19)
Treasury stock activity
(11.0 net shares purchased) .......... 13 (662) (649)
Tax benefit of ESOP and
stock option plans ................... 13 13
Deferred benefit expense ............... 19 19
- ---------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1999.......... $7 $1,764 $1,276 $6,006 $(267) $(2,840) $5,946
===========================================================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31 - IN MILLIONS 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income................................................................. $1,264 $1,115 $1,052
Adjustments to reconcile net income to net cash provided (used)
by operating activities
Provision for credit losses ............................................. 163 225 70
Depreciation, amortization and accretion ................................ 327 632 346
Deferred income taxes ................................................... 204 170 133
Net securities losses (gains) ........................................... 93 (120) (49)
Net gains on sales of assets ............................................ (554) (328) (179)
Valuation adjustments ................................................... 195 30
Change in
Loans held for sale ..................................................... 613 (1,331) (1,383)
Other ................................................................... (445) (679) (31)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities ....................... 1,860 (286) (41)
===========================================================================================================================
INVESTING ACTIVITIES
Net change in loans ........................................................ (11) (6,031) (5,182)
Repayment of securities available for sale ................................. 1,306 2,120 2,014
Sales
Securities available for sale ............................................ 9,620 12,779 10,223
Loans .................................................................... 648 3,030 2,863
Foreclosed assets......................................................... 39 69 116
Purchases
Securities available for sale ............................................ (10,997) (13,342) (8,725)
Loans .................................................................... (363) (129) (534)
Net cash received (paid) for acquisitions/divestitures ..................... 1,854 (1,031)
Other...................................................................... (139) (241) (823)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities ....................... 1,957 (2,776) (48)
===========================================================================================================================
FINANCING ACTIVITIES
Net change in
Noninterest-bearing deposits ............................................. (1,478) (215) (779)
Interest-bearing deposits ................................................ 1,037 696 2,766
Federal funds purchased .................................................. 891 (3,242) (301)
Sale/issuance
Repurchase agreements .................................................... 139,175 112,108 84,315
Bank notes and senior debt ............................................... 2,416 9,229 9,125
Other borrowed funds ..................................................... 35,997 98,534 99,469
Subordinated debt ........................................................ 650 140 350
Capital securities ....................................................... 198 300
Common stock ............................................................. 141 123 155
Repayment/maturity
Repurchase agreements .................................................... (139,722) (111,153) (84,246)
Bank notes and senior debt ............................................... (5,827) (8,672) (7,390)
Other borrowed funds ..................................................... (35,107) (95,616) (101,368)
Subordinated debt ........................................................ (104)
Acquisition of treasury stock .............................................. (803) (342) (1,532)
Cash dividends paid ........................................................ (520) (495) (488)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash (used) provided by financing activities ....................... (3,254) 1,293 376
===========================================================================================================================
INCREASE (DECREASE) IN CASH AND DUE FROM BANKS 563 (1,769) 287
Cash and due from banks at beginning of year ........................... 2,534 4,303 4,016
- ---------------------------------------------------------------------------------------------------------------------------
Cash and due from banks at end of year.................................. $3,097 $2,534 $4,303
===========================================================================================================================
CASH PAID FOR
Interest................................................................ $2,484 $2,727 $2,569
Income taxes ........................................................... 289 397 418
NONCASH ITEMS
Transfer (to) from loans held for sale (from) to loans ................. (3,378) 429
Transfers from loans to other assets.................................... 40 44 71
Conversion of debt to equity ........................................... 55 7
===========================================================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
62|63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BUSINESS
The PNC Financial Services Group, Inc. ("Corporation" or "PNC") is one of the
largest diversified financial services companies in the United States operating
regional banking, wholesale banking and asset management businesses that provide
financial products and services nationally and in PNC's primary geographic
markets in Pennsylvania, New Jersey, Delaware, Ohio and Kentucky. PNC is subject
to intense competition from other financial services companies with respect to
these businesses and is subject to the regulations of certain federal and state
agencies and undergoes periodic examinations by those authorities.
NOTE 1 ACCOUNTING POLICIES
BASIS OF FINANCIAL STATEMENT PRESENTATION
The consolidated 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. Certain prior year amounts have been reclassified to conform with
the current year presentation.
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.
LOANS HELD FOR SALE
Loans held for sale are carried at the lower of cost or aggregate market value.
Gains and losses on sales of loans held for sale are included in noninterest
income.
SECURITIES
Securities purchased with the intention of recognizing short-term profits are
placed in the trading account, carried at market value and classified as
short-term investments. Gains and losses on trading securities are included in
noninterest income. Securities not classified as trading are designated as
securities available for sale and carried at fair value with unrealized gains
and losses, net of income taxes, reflected in accumulated other comprehensive
income or loss. Gains and losses on sales of securities available for sale are
computed on a specific security basis and included in noninterest income.
LOANS
Loans are stated at the principal amounts outstanding, net of unearned income.
Interest income with respect to loans is accrued on the principal amount
outstanding, except for lease financing income which is recognized over its
respective terms using methods which approximate the level yield method.
Significant loan fees are deferred and accreted to interest income over the
respective lives of the loans.
LOAN SECURITIZATIONS
The Corporation sells mortgage and other loans through secondary market
securitizations. The Corporation receives a fee for servicing the securitized
loans. Securitized loans are removed from the balance sheet and the Corporation
records a servicing asset and a corresponding gain or loss on sale. Certain
estimates are inherent in determining the fair value of servicing assets and are
subject to change.
NONPERFORMING ASSETS
Nonperforming assets are comprised of nonaccrual loans, troubled debt
restructurings and foreclosed assets. Generally, loans other than consumer are
classified as nonaccrual when it is determined that the collection of interest
or principal is doubtful or when a default of interest or principal has existed
for 90 days or more, unless the loans are well secured and in the process of
collection. When interest accrual is discontinued, accrued but uncollected
interest credited to income in the current year is reversed and unpaid interest
accrued in the prior year, if any, is charged against the allowance for credit
losses. Consumer loans are generally charged off when payments are past due 120
days.
A loan is categorized as a troubled debt restructuring in the year of
restructuring if a concession is granted to the borrower due to a deterioration
in the financial condition of the borrower.
Nonperforming loans are generally not returned to performing status until
the obligation is brought current and has performed in accordance with the
contractual terms for a reasonable period of time and collection of the
contractual principal and interest is no longer doubtful.
Foreclosed assets are comprised of property acquired through a foreclosure
proceeding or acceptance of a deed-in-lieu of foreclosure. These assets are
recorded on the date acquired at the lower of the related loan balance or market
value of the collateral less estimated disposition costs. Market values are
estimated primarily based on appraisals. Subsequently, foreclosed assets are
valued at the lower of the amount recorded at acquisition date or the current
market value less estimated disposition costs. Gains or losses realized from
disposition of such property are reflected in noninterest expense.
Impaired loans consist of nonaccrual commercial and commercial real estate
loans and troubled debt restructurings. Interest collected on these loans is
recognized on the cash basis or cost recovery method.
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses is established through provisions charged
against income. Loans deemed to be uncollectible are charged against the
allowance and recoveries of previously charged-off loans are credited to the
allowance.
The allowance is maintained at a level believed by management to be
sufficient to absorb estimated probable credit losses. Management's
determination of the adequacy of the allowance is based on periodic evaluations
of the credit portfolio and other relevant factors. This evaluation is
inherently subjective as it requires material estimates, including, among
others, the amounts and timing of expected future cash flows on impaired loans,
estimated losses on consumer loans and residential mortgages, and general
amounts for historical loss experience, economic conditions, uncertainties in
estimating losses and inherent risks in the various credit portfolios, all of
which may be susceptible to significant change. 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. These factors may
include, among others, actual versus estimated losses, current regional and
national economic conditions, business segment portfolio concentrations,
industry competition and consolidation, and the impact of government
regulations. Consumer and residential mortgage loan allocations are made at a
total portfolio level based on historical loss experience adjusted for portfolio
activity and current economic conditions.
While PNC's commercial and consumer pool reserve methodologies strive to
reflect all risk factors, there continues to be a certain element of risk
associated with, but not limited to, potential estimation or judgmental errors.
Unallocated reserves 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.
SERVICING OF FINANCIAL ASSETS
Servicing rights retained in a sale or securitization of loans are recorded by
allocating the previous carrying amount of the loans sold or securitized to the
relative fair values of the assets retained and sold. Purchased servicing rights
are recorded at cost. Servicing rights are amortized in proportion to estimated
net servicing income. To determine the fair value of servicing rights, the
Corporation estimates the present value of future cash flows incorporating
numerous assumptions including cost of servicing, discount rates, prepayment
speeds and default rates.
A valuation allowance is maintained for the excess, if any, of the carrying
amount of capitalized servicing rights over estimated fair value.
EQUITY MANAGEMENT ASSETS
Equity management assets are included in other assets. These investments are
carried at estimated fair value with changes in fair value recognized in equity
management income.
GOODWILL AND OTHER AMORTIZABLE ASSETS
Goodwill is amortized on a straight-line basis over periods ranging from 15 to
25 years. Other amortizable assets are amortized using accelerated or
straight-line methods over their respective estimated useful lives. On a
periodic basis, management reviews goodwill and other amortizable assets and
evaluates events or changes in circumstances that may indicate impairment in the
carrying amount of such assets. In such instances, impairment, if any, is
measured on a discounted future cash flow basis.
DEPRECIATION AND AMORTIZATION
For financial reporting purposes, premises and equipment are depreciated
principally using the straight-line method over the estimated useful lives
ranging from one to 39 years. Accelerated methods are used for federal income
tax purposes. Leasehold improvements are amortized over their estimated useful
lives or their respective lease terms, whichever is shorter.
REPURCHASE AND RESALE AGREEMENTS
Repurchase and resale agreements are treated as collateralized financing
transactions and are carried at the amounts that the securities will be
subsequently reacquired or resold, including accrued interest, as specified in
the respective agreements. The Corporation's policy is to take possession of
securities purchased under agreements to resell. The market value of securities
to be repurchased and resold is monitored, and additional collateral is obtained
where appropriate to protect against credit exposure.
TREASURY STOCK
The Corporation records common stock purchased for treasury at cost. At the date
of subsequent reissue, the treasury stock account is reduced by the cost of such
stock on the first-in, first-out basis.
FINANCIAL DERIVATIVES
The Corporation uses off-balance-sheet financial derivatives as part of the
overall asset and liability management process, for mortgage banking risk
management and to manage credit risk. Substantially all such instruments are
used to manage risk related to changes in interest rates. Financial deriva-
tives primarily consist of interest rate swaps, purchased interest rate caps and
floors, forward contracts and credit default swaps.
64|65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Interest rate swaps are agreements with a counterparty to exchange periodic
interest payments calculated on a notional principal amount. Purchased interest
rate caps and floors are agreements where, for a fee, the counterparty agrees to
pay the Corporation the amount, if any, by which a specified market interest
rate is higher or lower than a defined rate applied to a notional amount.
Interest rate swaps, caps and floors that modify the interest rate
characteristics (such as from fixed to variable, variable to fixed, or one
variable index to another) of designated interest-bearing assets or liabilities
are accounted for under the accrual method. The net amount payable or receivable
from the derivative contract is accrued as an adjustment to interest income or
interest expense of the designated instrument. Premiums on contracts are
deferred and amortized over the life of the agreement as an adjustment to
interest income or interest expense of the designated instruments. Unamortized
premiums are included in other assets. Changes in fair value of financial
derivatives accounted for under the accrual method are not reflected in results
of operations. Realized gains and losses, except losses on terminated interest
rate caps and floors, are deferred as an adjustment to the carrying amount of
the designated instruments and amortized over the shorter of the remaining
original life of the agreements or the designated instruments. Losses on
terminated interest rate caps and floors are recognized immediately in the
results of operations. If the designated instruments are disposed of, the fair
value of the associated derivative contracts and any unamortized deferred gains
or losses are included in the determination of gain or loss on the disposition
of such instruments. Contracts not qualifying for accrual accounting are marked
to market with gains or losses included in noninterest income.
Forward contracts provide for the delivery of financial instruments at a
specified future date and at a specified price or yield. The Corporation uses
forward contracts primarily to manage risk associated with its residential
mortgage banking and student lending activities. Realized gains and losses on
mandatory and optional delivery forward commitments are recorded in noninterest
income in the period settlement occurs. Unrealized gains or losses are
considered in the lower of cost or market valuation of loans held for sale.
Credit-related derivatives are entered into to manage credit risk and
regulatory capital associated with commercial lending activities. If the
credit-related derivative qualifies for hedge accounting treatment, the premium
paid to enter the credit-related derivative is recorded in other assets and is
deferred and amortized to noninterest expense over the life of the agreement.
Changes in the fair value of credit-related derivatives qualifying for hedge
accounting treatment are not reflected in the Corporation's financial position
and have no impact on results of operations.
If the credit-related derivative does not qualify for hedge accounting
treatment or if the Corporation is the seller of credit protection, the
credit-related derivative is marked to market with gains or losses included in
noninterest income.
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 risk exposure from customer positions
is managed through transactions with other dealers. These positions are recorded
at estimated fair value and changes in value are included in noninterest income.
Additionally, the Corporation enters into other derivative transactions for
risk management purposes that do not qualify for accrual accounting. These
transactions are recorded at estimated fair value and changes in value are
included in noninterest income.
INCOME TAXES
Income taxes are accounted for under the liability method. Deferred tax assets
and liabilities are determined based on differences between financial reporting
and tax bases of assets and liabilities and are measured using the enacted tax
rates and laws that will be in effect when the differences are expected to
reverse.
STOCK OPTIONS
For stock options granted at exercise prices not less than the fair market value
of common stock on the date of grant, no compensation expense is recognized.
EARNINGS PER COMMON SHARE
Basic earnings per common share is calculated by dividing net income adjusted
for preferred stock dividends declared by the weighted-average number of shares
of common stock outstanding.
Diluted earnings per common share is based on net income adjusted for
interest expense, net of tax, on outstanding convertible debentures and
dividends declared on nonconvertible preferred stock. The weighted-average
number of shares of common stock outstanding is increased by the assumed
conversion of outstanding convertible preferred stock and convertible debentures
from the beginning of the year or date of issuance, if later, and the number of
shares of common stock which would be issued assuming the exercise of stock
options. Such adjustments to net income and the weighted-average number of
shares of common stock outstanding are made only when such adjustments dilute
earnings per common share.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards ("SFAS") No. 137, "Accounting for
Derivative Instruments and Hedging Activities-- Deferral of the Effective Date
of FASB Statement No. 133" (an amendment of SFAS No. 133), issued in June 1999,
defers the effective date of SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," until fiscal years beginning after June 15,
2000. The Corporation expects to adopt SFAS No. 133, as amended by SFAS No. 137,
effective January 1, 2001, the statement's effective date. The impact of
adopting the provisions of this statement on PNC's financial position and
results of operations is currently not estimable and will depend on the
financial position of the Corporation and the nature and purpose of the
derivative instruments in place as of the effective date.
SFAS No. 133 was originally required to be adopted in years beginning after
June 15, 1999, although early adoption is permitted. This statement requires the
Corporation to recognize all financial derivatives on the balance sheet at fair
value. Derivatives that do not qualify as hedges must be adjusted to fair value
through results of operations. If the derivative is a hedge as defined by the
statement, changes in the fair value of derivatives will be either offset
against the change in fair value of the hedged assets, liabilities, or firm
commitments through results of operations or recognized in other comprehensive
income until the hedged item is recognized in results of operations based on the
nature of the hedge. The ineffective portion of a derivative's change in fair
value will be immediately recognized in earnings.
NOTE 2 ACQUISITIONS AND
DIVESTITURES
On December 1, 1999, the Corporation completed the acquisition of First Data
Investor Services Group, Inc. ("ISG") one of the nation's leading providers of
processing services for pooled investment products that include mutual fund and
retirement plans. The acquisition of ISG was for $1.1 billion in cash and is
being accounted for under the purchase method of accounting. ISG's financial
results are included in the Corporation's financial results beginning on the
acquisition date. Goodwill of approximately $1 billion was recorded in
connection with the acquisition and is being amortized on a straight-line basis
over 25 years. Other customer-based intangibles of approximately $147 million
are being amortized on a straight-line basis over 10 years.
The following financial information presents combined results of PNC and
ISG as if the acquisition had occurred as of January 1, 1999 and 1998:
(UNAUDITED)
YEAR ENDED DECEMBER 31 PROFORMA PNC
IN MILLIONS, EXCEPT PER SHARE DATA 1999 1998
- ---------------------------------------------------------
Net interest income .................. $2,374 $2,500
Provision for credit losses .......... 163 225
Noninterest income ................... 3,088 2,639
Noninterest expense .................. 3,413 3,217
- ---------------------------------------------------------
Income before income taxes ........ 1,886 1,697
Income taxes ......................... 625 589
- ---------------------------------------------------------
Net income ........................ $1,261 $1,108
- ---------------------------------------------------------
Diluted earnings per common share .... $4.14 $3.58
=========================================================
The proforma financial information includes only those actions to be completed
on or prior to the closing date and excludes revenue enhancements, one-time
costs and expense savings, which could result from the integration of ISG into
PNC's operations.
In March 1999, the Corporation completed the sale of its credit card
business, which represented approximately $2.9 billion of outstandings and 3.3
million accounts, including PNC National Bank, Wilmington, Delaware. This
transaction resulted in a $193 million pretax gain.
NOTE 3 SALE OF SUBSIDIARY STOCK
PNC recognizes as income the gain from the sale of stock in its subsidiaries.
The gain is the difference between PNC's basis in the stock and the proceeds per
share received. PNC provides applicable taxes on the gain.
In October 1999, BlackRock, Inc. ("BlackRock"), a majority-owned investment
management subsidiary of the Corporation, issued nine million shares of class A
common stock at $14.00 per share in an initial public offering. Prior to the
public offering PNC and BlackRock's management owned approximately 82% and 18%,
respectively, of BlackRock's outstanding common stock. Proceeds from the sale
were approximately $115 million and resulted in PNC recording a pretax gain in
the amount of $64 million or $59 million after tax. Subsequent to the public
offering, PNC and BlackRock's management owned approximately 70% and 16%,
respectively.
66|67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 CASH FLOWS
For the statement of cash flows, cash and cash equivalents are defined as cash
and due from banks.
The following table sets forth information pertaining to acquisitions and
divestitures which affect cash flows:
YEAR ENDED DECEMBER 31 - IN MILLIONS 1999 1998
- ----------------------------------------------------------
Assets (divested) acquired .......... $(2,062) $1,007
Liabilities divested ................ (208) (322)
Cash paid ........................... 1,407 1,184
Cash and due from banks received .... 3,261 153
==========================================================
The Corporation did not have acquisition or divestiture activity which affected
1997 cash flows.
NOTE 5 TRADING ACTIVITIES
PNC engages in trading activities as part of risk management strategies and for
"market making" in equity securities. Additionally, PNC participates in
derivatives and foreign exchange trading as an accommodation to customers.
Net trading income in 1999, 1998, and 1997 totaled $7 million, $87 million
and $23 million, respectively, and was included in noninterest income as
follows:
IN MILLIONS 1999 1998 1997
- ----------------------------------------------------------
Net residential mortgage banking
Risk management ............. $(66) $61 $10
Other income
Securities trading .......... 48 3 1
Derivatives trading ......... 8 11 2
Foreign exchange ............ 17 12 10
- ----------------------------------------------------------
Net trading income $7 $87 $23
==========================================================
NOTE 6 SECURITIES AVAILABLE FOR SALE
UNREALIZED
-----------------------
DECEMBER 31 - IN MILLIONS AMORTIZED COST GAINS LOSSES FAIR VALUE
- ----------------------------------------------------------------------------------------------------
1999 PORTFOLIO SECURITIES
Debt securities
U.S. Treasury and government agencies .... $411 $(11) $400
Mortgage-backed .......................... 3,918 $2 (151) 3,769
Asset-backed ............................. 1,051 (24) 1,027
State and municipal ...................... 134 2 (5) 131
Other debt ............................... 40 (1) 39
- ----------------------------------------------------------------------------------------------------
Total debt securities .................. 5,554 4 (192) 5,366
Corporate stocks and other ............... 590 9 (5) 594
- ----------------------------------------------------------------------------------------------------
Total .................................. 6,144 13 (197) 5,960
====================================================================================================
1999 MORTGAGE BANKING RISK MANAGEMENT
Debt securities
U.S. Treasury and government agencies .... 1,791 (204) 1,587
Mortgage-backed .......................... 68 (4) 64
- ----------------------------------------------------------------------------------------------------
Total .................................. 1,859 (208) 1,651
- ----------------------------------------------------------------------------------------------------
Total securities available for sale .. $8,003 $13 $(405) $7,611
====================================================================================================
1998 PORTFOLIO SECURITIES
Debt securities
U.S. Treasury and government agencies .... $152 $2 $(2) $152
Mortgage-backed .......................... 2,942 5 (11) 2,936
Asset-backed ............................. 709 1 (2) 708
State and municipal ...................... 122 6 128
Other debt ............................... 33 (2) 31
- ----------------------------------------------------------------------------------------------------
Total debt securities .................. 3,958 14 (17) 3,955
Corporate stocks and other ............... 542 10 (35) 517
- ----------------------------------------------------------------------------------------------------
Total .................................. 4,500 24 (52) 4,472
====================================================================================================
1998 MORTGAGE BANKING RISK MANAGEMENT
Debt securities
U.S. Treasury and government agencies .... 2,629 8 (35) 2,602
- ----------------------------------------------------------------------------------------------------
Total .................................. 2,629 8 (35) 2,602
====================================================================================================
Total securities available for sale .. $7,129 $32 $(87) $7,074
====================================================================================================
1997 PORTFOLIO SECURITIES
Debt securities
U.S. Treasury and government agencies .... $658 $3 $(1) $660
Mortgage-backed .......................... 4,627 4 (45) 4,586
Asset-backed ............................. 2,079 5 (1) 2,083
State and municipal ...................... 170 7 177
Other debt ............................... 34 (1) 33
- ----------------------------------------------------------------------------------------------------
Total debt securities .................. 7,568 19 (48) 7,539
Corporate stocks and other ............... 501 3 (3) 501
- ----------------------------------------------------------------------------------------------------
Total .................................. 8,069 22 (51) 8,040
====================================================================================================
1997 MORTGAGE BANKING RISK MANAGEMENT
Debt securities
U.S. Treasury and government agencies .... 444 1 445
Mortgage-backed .......................... 45 (8) 37
- ----------------------------------------------------------------------------------------------------
Total .................................. 489 1 (8) 482
====================================================================================================
Total securities available for sale .. $8,558 $23 $(59) $8,522
====================================================================================================
The securities available for sale portfolio increased $537 million from December
31, 1998 to $7.6 billion at December 31, 1999. Total securities used in mortgage
banking risk management were $1.7 billion at December 31, 1999. Portfolio
securities represented 8% of total assets at December 31, 1999. The expected
weighted-average life of the portfolio securities increased to 4 years and 7
months at December 31, 1999, compared with 2 years and 8 months at year-end
1998. The expected weighted-average life of total securities available for sale
increased to 5 years and 7 months at December 31, 1999, compared with 5 years
and 3 months at year-end 1998.
Net securities gains were $22 million in 1999 and included a $41 million
gain from the sale of Concord EFS, Inc. ("Concord") stock, partially offset by a
$28 million write-down of an equity investment in Friedman, Billings, Ramsey
Group, Inc. ("FBR").
Net securities gains in 1998 and 1997 were $16 million and $40 million,
respectively. Net securities losses of $118 million in 1999 and net securities
gains of $104 million and $9 million, respectively, in 1998 and 1997, related to
residential mortgage banking risk management strategies were reported in net
residential mortgage banking revenue. Net securities gains of $3 million in 1999
related to commercial mortgage banking activities were included in corporate
services revenue.
Information relating to security sales is set forth in the following table:
YEAR ENDED DECEMBER 31 GROSS GROSS
IN MILLIONS PROCEEDS GAINS LOSSES TAXES
- --------------------------------------------------------------
1999 ..................... $9,640 $69 $162 $(33)
1998 ..................... 12,779 124 4 42
1997 ..................... 10,223 59 10 17
==============================================================
The carrying value of securities pledged to secure public and trust deposits,
repurchase agreements and for other purposes was $4.2 billion at December 31,
1999.
The following table presents the amortized cost, fair value and weighted-average
yield of debt securities at December 31, 1999 by remaining contractual maturity.
CONTRACTUAL MATURITY OF DEBT SECURITIES
DECEMBER 31, 1999 WITHIN 1 TO 5 TO AFTER 10
IN MILLIONS 1 YEAR 5 YEARS 10 YEARS YEARS TOTAL
- ---------------------------------------------------------------------------
PORTFOLIO SECURITIES
U.S. Treasury and
government agencies ..... $18 $356 $36 $1 $411
Mortgage-backed ......... 1 3 286 3,628 3,918
Asset-backed ............ 2 7 1,042 1,051
State and
municipal ............. 10 16 36 72 134
Other debt .............. 2 11 11 16 40
- ---------------------------------------------------------------------------
Total ................. $31 $388 $376 $4,759 $5,554
===========================================================================
Fair value .............. $31 $380 $362 $4,593 $5,366
Weighted-average
yield ................. 6.06% 6.06% 6.11% 6.26% 6.23%
===========================================================================
MORTGAGE BANKING RISK MANAGEMENT
U.S. Treasury and
government agencies ..... $1,791 $1,791
Mortgage-backed ......... $68 68
- ---------------------------------------------------------------------------
Total ................. $1,791 $68 $1,859
===========================================================================
Fair value .............. $1,587 $64 $1,651
Weighted-average
yield ................. 5.59% 5.52% 5.59%
===========================================================================
Total debt
securities ........ $31 $388 $2,167 $4,827 $7,413
- ---------------------------------------------------------------------------
Total fair value....... $31 $380 $1,949 $4,657 $7,017
Weighted-average
yield ............... 6.06% 6.06% 5.68% 6.25% 6.07%
===========================================================================
Based on current interest rates and expected prepayment speeds, the total
weighted-average expected maturity of mortgage-backed and asset-backed
securities was 4 years and 11 months and 3 years and 11 months, respectively, at
December 31, 1999. Weighted-average yields are based on historical cost with
effective yields weighted for the contractual maturity of each security.
NOTE 7 LOANS AND COMMITMENTS TO EXTEND CREDIT
Loans outstanding were as follows:
DECEMBER 31 - IN MILLIONS 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
Consumer ............................... $9,357 $10,980 $11,205 $12,092 $12,535
Credit card ............................ 2,958 3,830 2,776 1,004
Residential mortgage ................... 12,869 12,265 12,785 12,703 11,689
Commercial ............................. 21,468 25,182 19,989 18,588 17,446
Commercial real estate ................. 2,730 3,449 3,974 4,098 4,280
Lease financing ........................ 3,663 2,978 2,224 1,641 1,236
Other .................................. 683 392 650 285 866
- --------------------------------------------------------------------------------------------------------------------
Total loans ......................... 50,770 58,204 54,657 52,183 49,056
Unearned income ..................... (724) (554) (412) (385) (403)
- --------------------------------------------------------------------------------------------------------------------
Total loans, net of unearned income $50,046 $57,650 $54,245 $51,798 $48,653
====================================================================================================================
68|69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Loan outstandings and related unfunded commitments are concentrated in PNC's
primary geographic markets. At December 31, 1999, no specific industry
concentration exceeded 6% of total outstandings and unfunded commitments.
NET UNFUNDED COMMITMENTS
DECEMBER 31 - IN MILLIONS 1999 1998
- ----------------------------------------------------------
Consumer ......................... $4,603 $3,664
Credit card ...................... 14,794
Residential mortgage ............. 648 2,756
Commercial ....................... 23,953 28,842
Commercial real estate ........... 38 1,022
Other ............................ 1,649 468
- ----------------------------------------------------------
Total ......................... $30,891 $51,546
==========================================================
Commitments to extend credit represent arrangements to lend funds provided there
is no violation of specified contractual conditions. Commercial commitments are
reported net of participations, assignments and syndications, primarily to
financial institutions, totaling $7.2 billion and $5.9 billion at December 31,
1999 and 1998, respectively. Commitments generally have fixed expiration dates,
may require payment of a fee, and contain termination clauses in the event the
customer's credit quality deteriorates. Based on the Corporation's historical
experience, most commitments expire unfunded, and therefore cash requirements
are substantially less than the total commitment. Unfunded commitments related
to loans designated for exit totaling $4.8 billion at December 31, 1999 are
excluded from the above table.
Net outstanding letters of credit totaled $4.6 billion and $4.7 billion at
December 31, 1999 and 1998, respectively, and consisted primarily of standby
letters of credit, which commit the Corporation to make payments on behalf of
customers when certain specified future events occur. Such instruments are
typically issued to support industrial revenue bonds, commercial paper, and bid
or performance related contracts. At year-end 1999, the largest industry
concentration within standby letters of credit was to government entities, which
accounted for approximately 9% of the total. Maturities for standby letters of
credit ranged from 2000 to 2020.
At December 31, 1999, $9.3 billion of loans were pledged to secure
borrowings and for other purposes.
Certain directors and executive officers of the Corporation and its
subsidiaries, as well as certain affiliated companies of these directors and
officers, were customers of and had loans with subsidiary banks in the ordinary
course of business. All such loans were on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with other customers and did not involve more than a
normal risk of collectibility. The aggregate dollar amounts of these loans were
$27 million and $28 million at December 31, 1999 and 1998, respectively. During
1999, new loans of $15 million were funded and repayments totaled $16 million.
NOTE 8 NONPERFORMING ASSETS
The following table sets forth nonperforming assets and related information:
DECEMBER 31 - DOLLARS IN MILLIONS 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------
Nonaccrual loans .............................. $299 $295 $276 $347 $335
Troubled debt restructured loans .............. 2 23
- ---------------------------------------------------------------------------------------------------------------
Total nonperforming loans .................. 299 295 276 349 358
- ---------------------------------------------------------------------------------------------------------------
Foreclosed and other assets ................... 39 37 57 110 178
- ---------------------------------------------------------------------------------------------------------------
Total nonperforming assets* ................ $338 $332 $333 $459 $536
- ---------------------------------------------------------------------------------------------------------------
Nonperforming loans to total loans ............ .60% .51% .51% .67% .74%
Nonperforming assets to total loans, loans held
for sale and foreclosed assets ............. .61 .55 .59 .87 1.08
Nonperforming assets to total assets .......... .45 .43 .44 .63 .73
- ---------------------------------------------------------------------------------------------------------------
Interest on nonperforming loans
Computed on original terms ................. $28 $25 $31 $35 $36
Recognized ................................. 11 6 6 10 10
- ---------------------------------------------------------------------------------------------------------------
Past due loans
Accruing loans past due 90 days or more .... $96 $266 $288 $244 $225
As a percentage of total loans ............. .19% .46% .53% .47% .46%
===============================================================================================================
*THE ABOVE TABLE EXCLUDES $13 MILLION OF EQUITY MANAGEMENT ASSETS AT DECEMBER
31, 1999 CARRIED AT FAIR VALUE.
NOTE 9 ALLOWANCE FOR CREDIT LOSSES
Changes in the allowance for credit losses were as follows:
IN MILLIONS 1999 1998 1997
- ----------------------------------------------------------
January 1 ..................... $753 $972 $1,166
Charge-offs ................... (216) (524) (385)
Recoveries .................... 55 77 113
- ----------------------------------------------------------
Net charge-offs ............ (161) (447) (272)
Provision for credit losses ... 163 225 70
- ----------------------------------------------------------
Sale of credit card business .. (81)
Acquisitions .................. 3 8
- ----------------------------------------------------------
December 31 ................ $674 $753 $972
==========================================================
Impaired loans totaling $241 million and $238 million at December 31, 1999 and
1998, respectively, had a corresponding specific allowance for credit losses of
$60 million and $53 million. The average balance of impaired loans was $243
million in 1999, $223 million in 1998, and $271 million in 1997. There was no
interest income recognized on impaired loans in 1999. Interest income recognized
on impaired loans in 1998 and 1997 was $1 million and $2 million, respectively.
NOTE 10 PREMISES, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Premises, equipment and leasehold improvements, stated at cost less accumulated
depreciation and amortization, were as follows:
DECEMBER 31 - IN MILLIONS 1999 1998
- ----------------------------------------------------------
Land ............................... $83 $90
Buildings .......................... 427 498
Equipment .......................... 1,402 1,168
Leasehold improvements ............. 214 198
- ----------------------------------------------------------
Total ........................... 2,126 1,954
- ----------------------------------------------------------
Accumulated depreciation
and amortization ................ (1,198) (1,030)
- ----------------------------------------------------------
Net book value ................ $928 $924
==========================================================
Depreciation and amortization expense on premises, equipment and leasehold
improvements totaled $209 million in 1999, $159 million in 1998 and $148 million
in 1997.
Certain facilities and equipment are leased under agreements expiring at
various dates until the year 2071. Substantially all such leases are accounted
for as operating leases. Rental expense on such leases amounted to $151 million
in 1999, $112 million in 1998 and $88 million in 1997.
At December 31, 1999 and 1998, required minimum annual rentals due on
noncancelable leases having terms in excess of one year aggregated $796 million
and $685 million, respectively. Minimum annual rentals for each of the years
2000 through 2004 are $116 million, $115 million, $106 million, $89 million and
$76 million, respectively.
During 1999, PNC made the decision to sell various branches and office
buildings. Buildings that were designated for sale, but not sold during 1999 are
classified as held for sale. Initial write-downs were recorded in noninterest
expense and generally reflected the difference between book value and appraised
value less selling costs. Write-downs totaled $35 million and subsequent net
gains from disposals totaled $8 million in 1999. It is anticipated that
properties remaining in held for sale will be sold during 2000.
NOTE 11 GOODWILL AND OTHER AMORTIZABLE ASSETS
Goodwill and other amortizable assets, net of amortization, consisted of the
following:
DECEMBER 31 - IN MILLIONS 1999 1998
- ----------------------------------------------------------
Goodwill ............................ $2,239 $1,347
Purchased credit cards .............. 292
Customer-related intangibles ........ 165 20
Mortgage servicing rights
Residential ...................... 1,594 772
Commercial ....................... 125 117
- ----------------------------------------------------------
Total ............................... $4,123 $2,548
==========================================================
Amortization of goodwill and other amortizable assets was as follows:
YEAR ENDED DECEMBER 31 - IN MILLIONS 1999 1998 1997
- -----------------------------------------------------------------
Goodwill ............................. $81 $68 $53
Purchased credit cards ............... 6 36 34
Other ................................ 6 7 7
- -----------------------------------------------------------------
Total ............................. 93 111 94
Mortgage servicing rights
Residential ....................... 6 309 80
Commercial ........................ 20 12
- -----------------------------------------------------------------
Total ............................. $119 $432 $174
=================================================================
70|71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 RESIDENTIAL MORTGAGE BANKING ACTIVITIES
The following table presents the components of net residential mortgage banking
income:
YEAR ENDED DECEMBER 31 - IN MILLIONS 1999 1998 1997
- -------------------------------------------------------------------
Mortgage servicing ..................... $288 $167 $119
Originations and securitization ........ 172 190 94
MSR amortization, net of
servicing hedge ..................... (188) (145) (61)
- -------------------------------------------------------------------
Net residential mortgage banking
income .............................. $272 $212 $152
===================================================================
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheets. The outstanding balances of residential mortgage
loans serviced for others were $67 billion, $54 billion and $32 billion at
December 31, 1999, 1998, and 1997, respectively.
The following table summarizes the changes in capitalized mortgage loan
servicing rights:
IN MILLIONS 1999 1998 1997
- --------------------------------------------------------------
Balance at beginning of year...... $980 $413 $333
Originations................... 260 226 104
Purchases...................... 568 488 37
Sales.......................... (17)
Amortization................... (213) (130) (61)
- --------------------------------------------------------------
Total.......................... 1,595 980 413
Less: Valuation allowance...... 1 208 29
- --------------------------------------------------------------
Net balance at end of year........ $1,594 $772 $384
==============================================================
The fair value of capitalized residential mortgage servicing rights at December
31, 1999 was approximately $1.8 billion. The estimated fair value of the
residential servicing rights was determined by stratifying the portfolio by
fixed rate versus variable rate, government guaranteed loans versus
non-government guaranteed loans and using market interest rates.
The following table summarizes the changes in the valuation allowance for
capitalized residential mortgage servicing rights:
IN MILLIONS 1999 1998 1997
- ------------------------------------------------------------------------
Balance at beginning of year .............. $208 $29 $10
(Reduction of) provision for
capitalized residential mortgage
servicing rights in excess of
fair value ............................. (207) 179 19
- ------------------------------------------------------------------------
Balance at end of year .................... $1 $208 $29
- ------------------------------------------------------------------------
NOTE 13 DEPOSITS
The aggregate amount of time deposits with a denomination greater than $100,000
was $6.8 billion and $6.0 billion at December 31, 1999 and 1998, respectively.
Remaining contractual maturities of time deposits for the years 2000 through
2004 and thereafter are $14 billion, $2.1 billion, $670 million, $181 million
and $1.0 billion, respectively.
NOTE 14 BORROWED FUNDS
Approximately 58.1% of bank notes mature in 2000 and have interest rates that
range from 3.66% to 6.61%. Obligations to the Federal Home Loan Bank have
maturities ranging from 2000 to 2018 and interest rates that range from 1.00% to
7.91%. Senior and subordinated notes consisted of the following:
DECEMBER 31, 1999
DOLLARS IN MILLIONS OUTSTANDING STATED RATE MATURITY
- ------------------------------------------------------------------------
Senior ................. $621 5.43 - 7.00% 2000 - 2004
Subordinated
Nonconvertible ...... 2,327 6.13 - 9.88% 2001 - 2009
Total ............. $2,948
========================================================================
Borrowed funds have scheduled repayments for the years 2000 through 2004 and
thereafter of $10.8 billion, $.7 billion, $3.0 billion, $2.8 billion and $2.0
billion, respectively.
NOTE 15 CAPITAL SECURITIES OF SUBSIDIARY TRUSTS
Mandatorily Redeemable Capital Securities of Subsidiary Trusts ("Capital
Securities") include preferred beneficial interests in the assets of PNC
Institutional Capital Trust A, Trust B and Trust C. Trust A, formed in December
1996, holds $350 million of 7.95% junior subordinated debentures, due December
15, 2026, and redeemable after December 15, 2006, at a declining redemption
price ranging from 103.975% to par on or after December 15, 2016. Trust B,
formed in May 1997, holds $300 million of 8.315% junior subordinated debentures
due May 15, 2027, and redeemable after May 15, 2007, at a declining redemption
price ranging from 104.1575% to par on or after May 15, 2017. Trust C, formed in
June 1998, holds $200 million of junior subordinated debentures due June 1,
2028, bearing interest at a floating rate per annum equal to 3-month LIBOR plus
57 basis points. The rate in effect at December 31, 1999 was 6.68%. Trust C
Capital Securities are redeemable on or after June 1, 2008, at par. Cash
distributions on the Capital Securities are made to the extent interest on the
debentures is received by the Trusts. In the event of certain changes or
amendments to regulatory requirements or federal tax rules, the Capital
Securities are redeemable in whole.
NOTE 16 SHAREHOLDERS' EQUITY
Information related to preferred stock is as follows:
SHARES OUTSTANDING
DECEMBER 31 LIQUIDATION ------------------
SHARES IN THOUSANDS VALUE PER SHARE 1999 1998
- ----------------------------------------------------------------------
Authorized
$1 par value ............... 17,300 17,352
Issued and outstanding
Series A ................... $40 12 13
Series B ................... 40 3 5
Series C ................... 20 255 284
Series D ................... 20 367 388
Series F ................... 50 6,000 6,000
- ----------------------------------------------------------------------
Total .................... 6,637 6,690
======================================================================
Series A through D are cumulative and, except for Series B, are redeemable at
the option of the Corporation. Annual dividends on Series A, B and D preferred
stock total $1.80 per share and on Series C preferred stock total $1.60 per
share. Holders of Series A through D preferred stock are entitled to a number of
votes equal to the number of full shares of common stock into which such
preferred stock is convertible. Series A through D preferred stock have the
following conversion privileges: (i) one share of Series A or Series B is
convertible into eight shares of common stock; and (ii) 2.4 shares of Series C
or Series D are convertible into four shares of common stock.
The Series F preferred stock is nonconvertible and nonvoting, except in
limited circumstances. Noncumulative dividends are payable quarterly through
September 30, 2001, at a rate of 6.05% and, thereafter, indexed to certain
market indices at rates not less than 6.55% or greater than 12.55%. The Series F
preferred stock is redeemable until September 29, 2001, in the event of certain
amendments to the Internal Revenue Code, at a declining redemption price from
$51.50 to $50.50 per share. After September 29, 2001, the Series F preferred
stock may be redeemed at $50 per share.
The Corporation has a dividend reinvestment and stock purchase plan.
Holders of preferred stock and common stock may participate in the plan, which
provides that additional shares of common stock may be purchased at market value
with reinvested dividends and voluntary cash payments. Common shares purchased
pursuant to this plan were: 567,266 shares in 1999; 596,179 shares in 1998 and
765,760 shares in 1997.
At December 31, 1999, the Corporation had reserved approximately 16.5
million common shares to be issued in connection with certain stock plans and
the conversion of certain debt and equity securities.
NOTE 17 REGULATORY MATTERS
The Corporation is subject to the regulations of certain federal and state
agencies and undergoes periodic examinations by such regulatory authorities.
Neither the Corporation nor any of its subsidiaries is subject to written
regulatory agreements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Corporation must meet specific capital guidelines that
involve quantitative measures of assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting practices.
Failure to meet minimum capital requirements can initiate certain mandatory and
possibly additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on PNC's financial position and results of
operations. The Corporation's capital amounts and classification are also
subject to qualitative judgments by regulatory agencies about components, risk
weightings and other factors.
The following table sets forth regulatory capital ratios for PNC and the
Corporation's only significant bank subsidiary, PNC Bank, N.A.:
REGULATORY CAPITAL
AMOUNT RATIOS
DECEMBER 31 ---------------- -------------
DOLLARS IN MILLIONS 1999 1998 1999 1998
- --------------------------------------------------------------
RISK-BASED CAPITAL
Tier I
PNC ................. $4,731 $5,546 7.05% 7.80%
PNC Bank, N.A. ...... 4,746 5,102 7.69 7.73
Total
PNC ................. 7,438 7,940 11.08 11.16
PNC Bank, N.A. ...... 6,815 7,038 11.04 10.66
Leverage
PNC ................. 4,731 5,546 6.61 7.28
PNC Bank, N.A. ...... 4,746 5,102 7.13 7.21
==============================================================
The access to and cost of funding new business initiatives including
acquisitions, ability to pay dividends, deposit insurance costs, and the level
and nature of regulatory oversight depend, in large part, on a financial
institution's capital strength. The minimum regulatory capital ratios are 4% for
Tier I risk-based, 8% for total risk-based and 3% for leverage. However,
regulators may require higher capital levels when particular circumstances
warrant. To qualify as well capitalized, regulators require banks to maintain
capital ratios of at least 6% for Tier I, 10% for total risk-based and 5% for
leverage. At December 31, 1999, the Corporation and each bank subsidiary met the
well capitalized capital ratio requirements.
Dividends that may be paid by subsidiary banks to the parent company are
subject to certain legal limitations and also may be impacted by capital needs,
regulatory requirements, corporate policies, contractual restrictions and other
factors. Without regulatory approval, the amount available for payment of
dividends by all subsidiary banks was $489 million at December 31, 1999.
72|73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Under federal law, generally no bank subsidiary may extend credit to the
parent company or its nonbank subsidiaries on terms and under circumstances
which are not substantially the same as comparable extensions of credit to
nonaffiliates. No extension of credit may be made to the parent company or a
nonbank subsidiary which is in excess of 10% of the capital stock and surplus of
such bank subsidiary or in excess of 20% of the capital and surplus of such bank
subsidiary as to aggregate extensions of credit to the parent company and its
subsidiaries. In certain circumstances, federal regulatory authorities may
impose more restrictive limitations. Such extensions of credit, with limited
exceptions, must be fully collateralized. The maximum amount available under
statutory limitations for transfer from subsidiary banks to the parent company
in the form of loans and dividends approximated 18% of consolidated net assets
at December 31, 1999.
Federal Reserve Board regulations require depository institutions to
maintain cash reserves with the Federal Reserve Bank. During 1999, subsidiary
banks maintained reserves which averaged $156 million.
NOTE 18 FINANCIAL DERIVATIVES
FAIR VALUE OF FINANCIAL DERIVATIVES
POSITIVE NEGATIVE
DECEMBER 31 NOTIONAL FAIR NOTIONAL FAIR
IN MILLIONS VALUE VALUE VALUE VALUE
- -----------------------------------------------------------------------
1999
Interest rate
Swaps ................ $3,666 $46 $5,402 $(108)
Caps ................. 474 12
Floors ............... 3,000 1 311 (1)
- -----------------------------------------------------------------------
Total interest rate
risk management ...... 7,140 59 5,713 (109)
Mortgage banking
risk management ...... 8,747 80 1,165 (1)
Forward contracts ....... 681
Credit default swaps .... 60 4,255 (4)
- -----------------------------------------------------------------------
Total ................ $16,628 $139 $11,133 $(114)
=======================================================================
1998
Interest rate
Swaps ................ $6,915 $177 $2,535 $(10)
Caps ................. 722 6
Floors ............... 1,500 439 (9)
- -----------------------------------------------------------------------
Total interest rate
risk management ...... 9,137 183 2,974 (19)
Mortgage banking
risk management ...... 9,367 74 906 (10)
Credit default swaps .... 4,255 (2)
- -----------------------------------------------------------------------
Total ................ $18,504 $257 $8,135 $(31)
=======================================================================
The Corporation uses a variety of off-balance-sheet financial derivatives as
part of its overall interest rate risk management process and to manage risk
associated with mortgage banking activities. Financial derivatives involve, to
varying degrees, interest rate and credit risk in excess of the amount
recognized on the balance sheet but less than the notional amount of the
contract. For interest rate swaps and purchased interest rate caps and floors,
only periodic cash payments and, with respect to such caps and floors, premiums
are exchanged. Therefore, cash requirements and exposure to credit risk are
significantly less than the notional value. The Corporation manages these risks
as part of its asset 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.
The Corporation uses interest rate swaps and purchased caps and floors to
modify the interest rate characteristics of designated interest-bearing assets
or liabilities from fixed to variable, variable to fixed, or one variable index
to another. At December 31, 1999, $9.8 billion of interest rate swaps, caps and
floors were designated to loans. At December 31, 1999, $144 million of financial
derivatives were designated to securities available for sale. During 1999,
derivative contracts modified the average effective yield on interest-earning
assets from 7.38% to 7.42%. At December 31, 1999, $3.3 billion of interest rate
swaps were designated to interest-bearing liabilities. During 1999, derivative
contracts modified the average rate on interest-bearing liabilities from 4.36%
to 4.34%.
PNC uses a combination of on-balance-sheet instruments and financial
derivatives to manage risk associated with its mortgage banking activities. The
inherent risk affecting the value of MSR is the potential for the related
mortgages to prepay, thereby eliminating the underlying servicing fee income
stream. Generally, derivatives used to hedge the value of MSR have been marked
to market with gains or losses included in noninterest income.
Forward contracts are used to manage risk positions associated with
mortgage origination and student lending activities. Substantially all forward
contracts mature within 90 days of origination. Forward contracts are traded in
over-the-counter markets and do not have standardized terms. Counterparties to
the Corporation's forward contracts are primarily U.S. government agencies and
brokers and dealers in mortgage-backed securities. In the event the counterparty
is unable to meet its contractual obligations, the Corporation may be exposed to
selling or purchasing mortgage loans at prevailing market prices. Unrealized
gains or losses are considered in the lower of cost or market valuation of loans
held for sale.
Credit default swaps are used to manage credit risk and regulatory capital
associated with commercial lending activities.
At December 31, 1999 and 1998, the Corporation's exposure to credit losses
with respect to financial derivatives was not material.
OTHER DERIVATIVES
The following schedule sets forth information relating to positions associated
with customer-related and other derivatives:
AT DECEMBER 31
--------------------------------------------------
POSITIVE NEGATIVE NET AVERAGE
NOTIONAL FAIR FAIR ASSET FAIR
IN MILLIONS VALUE VALUE VALUE (LIABILITY) VALUE
- --------------------------------------------------------------------------------
1999
Customer-related
Interest rate
Swaps ............... $17,103 $110 $(116) $(6) $(13)
Caps/floors
Sold .............. 3,440 (25) (25) (20)
Purchased ......... 3,337 22 22 18
Foreign exchange ...... 3,310 47 (36) 11 7
Other ................. 2,161 22 (9) 13 3
- --------------------------------------------------------------------------------
Total customer-related 29,351 201 (186) 15 (5)
Other .................... 1,238 6 6 4
- --------------------------------------------------------------------------------
Total other derivatives $30,589 $207 $(186) $21 $(1)
================================================================================
1998
Customer-related
Interest rate
Swaps ............... $11,040 $69 $(89) $(20) $(10)
Caps/floors
Sold ................ 2,844 (19) (19) (9)
Purchased ........... 2,589 20 20 11
Foreign exchange ...... 2,108 33 (27) 6 3
Other ................. 457 7 (8) (1)
- --------------------------------------------------------------------------------
Total customer-related 19,038 129 (143) (14) (5)
Other .................... 709 1 1 1
- --------------------------------------------------------------------------------
Total other derivatives $19,747 $130 $(143) $(13) $(4)
- --------------------------------------------------------------------------------
NOTE 19 EMPLOYEE
BENEFIT PLANS
INCENTIVE SAVINGS PLANS
The Corporation sponsors incentive savings plans covering substantially all
employees. Under the plans, employee contributions up to 6% of biweekly
compensation, as defined in the plans, subject to Internal Revenue Code
limitations, are matched. Contributions to the plans are matched primarily by
shares of PNC common stock held by the Corporation's employee stock ownership
plan ("ESOP").
The Corporation makes annual contributions to the ESOP that are at least
equal to the debt service requirements on the ESOP's borrowings less dividends
received by the ESOP. All dividends received by the ESOP are used to pay debt
service. Dividends used for debt service totaled $9 million in 1999 and 1998 and
$10 million in 1997. To satisfy additional debt service requirements, PNC
contributed $9 million in 1999, $7 million in 1998 and $13 million in 1997.
As the ESOP's borrowings are repaid, shares are allocated to employees
who made contributions during the year based on the proportion of annual debt
service to total debt service. The Corporation includes all ESOP shares as
common shares outstanding in the earnings per share computation. Components of
ESOP shares are:
AS OF OR FOR THE YEAR ENDED
DECEMBER 31 - IN THOUSANDS 1999 1998
- -----------------------------------------------------------
Shares
Unallocated ....................... 712 1,353
Allocated ......................... 4,251 3,772
Released for allocation ........... 652 1,014
Retired ........................... (587) (536)
- -----------------------------------------------------------
Total ........................... 5,028 5,603
===========================================================
Compensation expense related to the portion of contributions matched with ESOP
shares is determined based on the number of ESOP shares allocated. Compensation
expense related to these plans was $21 million for 1999.
PENSION PLANS
The Corporation has a noncontributory, defined benefit pension plan covering
most employees. Retirement benefits are derived from a cash balance formula that
uses certain compensation levels, age and length of service. Pension
contributions are based on an actuarially determined amount necessary to fund
total benefits payable to plan participants. The Corporation also maintains
nonqualified supplemental retirement plans for certain employees. All retirement
benefits provided under these plans are unfunded and any payments to plan
participants are made by the Corporation.
Plan amendments encompassing covered compensation, determination of
benefits, eligibility and interest rates used to calculate certain distributions
from the plans were implemented during 1998. The Corporation also offered an
enhanced voluntary retirement program to certain employees in the defined
benefit plan meeting specific age and service requirements. These special
termination benefits increased pension cost by $10 million in 1998.
74|75
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation of the changes in benefit obligation and plan assets for
the defined benefit and supplemental plans is as follows:
DECEMBER 31 - IN MILLIONS 1999 1998
- -----------------------------------------------------------------
Benefit obligation at beginning of year ..... $866 $812
Service cost ............................. 24 28
Interest cost ............................ 60 58
Plan amendments .......................... (16)
Special termination benefits ............. 10
Actuarial loss ........................... (39) 82
Benefits paid ............................ (71) (108)
- -----------------------------------------------------------------
Benefit obligation at end of year ........... $840 $866
=================================================================
Fair value of plan assets at beginning
of year ................................ $758 $773
Actual return on plan assets ............. 147 88
Employer contribution .................... 105 5
Benefits paid ............................ (71) (108)
- -----------------------------------------------------------------
Fair value of plan assets at end of year .... $939 $758
=================================================================
Funded status ............................... $99 $(108)
Unrecognized net actuarial (gain) loss ... (60) 51
Unrecognized prior service cost .......... (6) (6)
Unrecognized net transition asset ........ (4) (10)
- -----------------------------------------------------------------
Net amount recognized ....................... $29 $(73)
=================================================================
Accrued pension cost ........................ $29 $(73)
Additional minimum liability ............. (22) (15)
Intangible asset ......................... 3 4
Accumulated other comprehensive loss ..... 19 11
- -----------------------------------------------------------------
Net amount recognized on the
balance sheet ............................ $29 $(73)
=================================================================
The nonqualified supplemental retirement plan had an accrued benefit liability
of $46 million at December 31, 1999 and $42 million at December 31, 1998.
The nonqualified supplemental retirement plans had an accumulated benefit
obligation of $68 million and $67 million at December 31, 1999 and 1998,
respectively.
Plan assets primarily consist of listed common stocks, U.S. government and
agency securities and collective funds. Plan assets are managed by BlackRock and
do not include common stock of the Corporation.
The components of net periodic pension cost were as follows:
YEAR ENDED DECEMBER 31 - IN MILLIONS 1999 1998 1997
- ---------------------------------------------------------------------
Service cost ......................... $24 $28 $29
Interest cost ........................ 58 58 58
Expected return on plan
assets ............................ (75) (71) (66)
Transition amount
amortization ...................... (5) (5) (5)
Special termination benefits ......... 10
Amortization of prior
service cost ...................... (1) 1 2
Recognized net actuarial loss ........ 2 1 1
- ---------------------------------------------------------------------
Net periodic pension cost ......... $3 $22 $19
=====================================================================
Weighted-average assumptions were as follows:
YEAR ENDED DECEMBER 31 1999 1998 1997
- -----------------------------------------------------------------------
Discount rate ....................... 7.75% 6.75% 7.20%
Rate of compensation increase ....... 4.50 4.50 4.50
Expected return on plan assets ...... 9.50 9.50 9.50
=======================================================================
POSTRETIREMENT BENEFIT PLANS
The Corporation also provides certain health care and life insurance benefits
for retired employees ("postretirement benefits") through various plans. During
1998, additional health care options were offered to certain of the
Corporation's retirees aged 65 years and over. A reconciliation of the accrued
postretirement benefit obligation is as follows:
DECEMBER 31 - IN MILLIONS 1999 1998
- ----------------------------------------------------------------
Benefit obligation at beginning of year ... $187 $213
Service cost ........................... 2 2
Interest cost .......................... 12 14
Plan amendments ........................ (31)
Actuarial loss ......................... 13 6
Participant contributions .............. 3 3
Benefits paid .......................... (19) (20)
- ----------------------------------------------------------------
Benefit obligation at end of year ......... $198 $187
================================================================
Funded status ............................. $(198) $(187)
Unrecognized actuarial loss ............... 30 17
Unrecognized prior service cost ........... (69) (75)
- ----------------------------------------------------------------
Net amount recognized on the
balance sheet .......................... $(237) $(245)
================================================================
The components of postretirement benefit cost were as follows:
YEAR ENDED DECEMBER 31 - IN MILLIONS 1999 1998 1997
- --------------------------------------------------------------------
Service cost .......................... $2 $2 $2
Interest cost ......................... 12 14 16
Amortization of prior
service cost ....................... (6) (6) (4)
- --------------------------------------------------------------------
Net postretirement
benefit cost .................... $8 $10 $14
====================================================================
Weighted-average assumptions were as follows:
DECEMBER 31 1999 1998 1997
- ----------------------------------------------------------------
Discount rate ...................... 7.75% 6.75% 7.20%
Expected health care cost trend rate
Medical pre-65 .................. 7.00 5.45 6.50
Medical post-65 ................. 8.00 5.45 6.50
Dental .......................... 7.00 5.25 6.20
================================================================
The health care cost trend rate declines until it stabilizes at 5.25% beginning
in 2005. A one-percentage-point change in assumed health care cost trend rates
would have the following effects:
YEAR ENDED DECEMBER 31, 1999 - IN MILLIONS INCREASE DECREASE
- --------------------------------------------------------------------
Effect on total service and
interest cost ........................... $1 $(1)
Effect on postretirement
benefit obligation ...................... 9 (9)
- --------------------------------------------------------------------
NOTE 20 STOCK-BASED
COMPENSATION PLANS
The Corporation has a senior executive long-term incentive award plan
("Incentive Plan") that provides for the granting of incentive stock options,
nonqualified options, stock appreciation rights ("SAR"), performance units and
incentive shares. In any given year, the number of shares of common stock
available for grant under the Incentive Plan may range from 1.5% to 3% of total
issued shares of common stock determined at the end of the preceding calendar
year.
STOCK OPTIONS
Options are granted at exercise prices not less than the market value of common
stock on the date of grant. Options granted in 1999 are exercisable in one-third
increments on the first, second and third anniversaries after the grant date.
Options granted in prior years are mainly exercisable twelve months after the
grant date. Payment of the option price may be in cash or shares of common stock
at market value on the exercise date. The following table presents stock option
data related to the Incentive Plan, a similar predecessor plan and other plans
assumed in certain mergers:
PER OPTION WEIGHTED-
-------------- AVERAGE
EXERCISE
SHARES IN THOUSANDS EXERCISE PRICE PRICE SHARES
- ---------------------------------------------------------------
January 1, 1997 ........ $11.38 -$37.31 $26.03 9,030
Granted ............. 43.31 - 43.75 43.75 2,912
Exercised ........... 11.38 - 31.13 24.10 (2,969)
SAR exercised ....... 17.13 (4)
Terminated .......... 21.75 - 43.75 41.32 (178)
---------
December 31, 1997 ...... 11.38 - 43.75 32.25 8,791
Granted ............. 43.66 - 66.00 55.17 3,449
Exercised ........... 11.38 - 43.75 31.26 (2,449)
Terminated .......... 43.75 - 54.72 52.35 (225)
---------
December 31, 1998 ...... 11.38 - 66.00 40.30 9,566
Granted ............. 50.47 - 76.00 51.62 3,585
Exercised ........... 11.38 - 54.72 33.89 (1,856)
Terminated .......... 21.75 - 55.59 51.65 (246)
---------
December 31, 1999 ...... $11.38 -$76.00 $44.79 11,049
===============================================================
At December 31, 1999, the weighted-average remaining contractual life of
outstanding options was 7 years and 4 months and options for 7,682,745 shares of
common stock were exercisable at a weighted-average price of $42.05 per share.
The grant-date fair value of options granted in 1999 was $10.15 per option.
Options for 82,000 and 118,000 shares of common stock were granted with an
exercise price in excess of the market value on the date of grant in 1999 and
1998, respectively. Shares of common stock available for the granting of options
under the Incentive Plan and the predecessor plans were: 10,584,683 at December
31, 1999 and 1998, and 9,012,899 at December 31, 1997.
INCENTIVE SHARE AWARDS
In 1999, there were no incentive share awards granted. In 1998, 241,500
incentive shares of common stock were granted to certain senior executives
pursuant to the Incentive Plan. Issuance of such incentive shares is subject to
the market price of PNC's common stock equaling or exceeding specified levels
for defined periods. The restricted period ends two years after the issue date.
During the restricted period, the recipient receives dividends and can vote the
shares. If the recipient leaves the Corporation within the restricted period,
the shares will be forfeited. There were no forfeitures in 1999 and there were
8,000 shares forfeited in 1998. At December 31, 1999, the shares granted in 1998
had not met the specified levels required for issuance. The requirements for the
shares granted in 1997 were met on April 6, 1998. As a result of exceeding
performance targets, 112.5% of the remaining 1997 shares, or 343,125 shares of
restricted common stock were issued. Compensation expense recognized for
incentive share awards was $12 million, $15 million and $6 million in 1999, 1998
and 1997, respectively.
EMPLOYEE STOCK PURCHASE PLAN
The Corporation's employee stock purchase plan ("ESPP") has approximately 3.5
million shares available for issuance. Persons who have been continuously
employed for at least one year are eligible to participate. Participants
purchase the Corporation's common stock at 85% of the lesser of fair market
value on the first or last day of each offering period. No charge to earnings is
recorded with respect to the ESPP. Shares issued pursuant to the ESPP were as
follows:
YEAR ENDED DECEMBER 31 SHARES PRICE PER SHARE
- --------------------------------------------------------------
1999 ...................... 406,740 $43.99 AND $47.39
1998 ...................... 315,097 43.83 and 48.34
1997 ...................... 367,494 33.15 and 35.49
===============================================================
The following table sets forth pro forma net income and diluted earnings per
share as if compensation expense was recognized for stock options and the ESPP.
PRO FORMA NET INCOME AND EPS
YEAR ENDED DECEMBER 31 REPORTED PRO FORMA
- ------------------------------------------------------------
Net income (in millions)
1999 ............................ $1,264 $1,243
1998 ............................ 1,115 1,099
1997 ............................ 1,052 1,035
- ------------------------------------------------------------
Diluted earnings per share
1999 ............................ $4.15 $4.08
1998 ............................ 3.60 3.54
1997 ............................ 3.28 3.23
- ------------------------------------------------------------
For purposes of computing pro forma results, PNC estimated the fair value of
stock options and ESPP shares using the Black-Scholes option pricing model.
Black-Scholes is predominantly used to value traded options which differ from
PNC's options.
76|77
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The model requires the use of numerous assumptions, many of which are
highly subjective in nature. Therefore, the pro forma results are estimates of
results of operations as if compensation expense had been recognized for all
stock-based compensation plans and are not indicative of the impact on future
periods. The following assumptions were used in the option pricing model for
purposes of estimating pro forma results. The dividend yield represents average
yields over the previous three-year period.
YEAR ENDED DECEMBER 31 1999 1998 1997
- ---------------------------------------------------------------
Risk-free interest rate ........ 5.2% 5.5% 6.2%
Dividend yield ................. 3.6 4.4 4.9
Volatility ..................... 22.1 19.9 27.6
Expected life .................. 6 YRS. 6 yrs. 6 yrs.
===============================================================
NOTE 21 INCOME TAXES
The components of income taxes were as follows:
YEAR ENDED DECEMBER 31 - IN MILLIONS 1999 1998 1997
- ---------------------------------------------------------------------
Current
Federal ......................... $384 $368 $380
State ........................... 39 57 53
- ---------------------------------------------------------------------
Total current ................ 423 425 433
Deferred
Federal ......................... 209 167 126
State ........................... (5) 3 7
- ---------------------------------------------------------------------
Total deferred ............... 204 170 133
- ---------------------------------------------------------------------
Total ........................ $627 $595 $566
=====================================================================
Significant components of deferred tax assets and liabilities are as follows:
DECEMBER 31 - IN MILLIONS 1999 1998
- -----------------------------------------------------------
Deferred tax assets
Allowance for credit losses .......... $247 $269
Compensation and benefits ............ 132 163
Net unrealized securities losses ..... 130 5
Other ................................ 175 75
- -----------------------------------------------------------
Total deferred tax assets .......... 684 512
Deferred tax liabilities
Leasing .............................. 548 418
Depreciation ......................... 29 39
Other ................................ 199 130
- -----------------------------------------------------------
Total deferred tax liabilities ..... 776 587
- -----------------------------------------------------------
Net deferred tax liability ......... $92 $75
===========================================================
A reconciliation between the statutory and effective tax rates follows:
YEAR ENDED DECEMBER 31 1999 1998 1997
- -----------------------------------------------------------------
Statutory tax rate ................ 35.0% 35.0% 35.0%
Increases (decreases) resulting from
State taxes .................... 1.2 2.3 2.4
Tax-exempt interest ............ (.7) (1.0) (1.1)
Goodwill ....................... .9 .8 .8
Other .......................... (3.2) (2.3) (2.1)
- -----------------------------------------------------------------
Effective tax rate .......... 33.2% 34.8% 35.0%
=================================================================
NOTE 22 EARNINGS PER SHARE
The following table sets forth basic and diluted earnings per share
calculations:
YEAR ENDED DECEMBER 31 - IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
CALCULATION OF BASIC EARNINGS PER COMMON SHARE
Net income ......................................................................... $1,264 $1,115 $1,052
Less: Preferred dividends declared ................................................. 19 19 19
- ------------------------------------------------------------------------------------------------------------------------------------
Net income applicable to basic earnings per common share ........................... $1,245 $1,096 $1,033
- ------------------------------------------------------------------------------------------------------------------------------------
Basic weighted-average common shares outstanding (IN THOUSANDS) .................... 296,886 300,761 310,147
- ------------------------------------------------------------------------------------------------------------------------------------
Basic Earnings Per Common Share .................................................... $4.19 $3.64 $3.33
====================================================================================================================================
CALCULATION OF DILUTED EARNINGS PER COMMON SHARE
Net income ......................................................................... $1,264 $1,115 $1,052
Add: Interest expense on convertible debentures (net of tax) ....................... 1 3
Less: Dividends declared on nonconvertible preferred stock ......................... 18 18 18
- ------------------------------------------------------------------------------------------------------------------------------------
Net income applicable to diluted earnings per common share ......................... $1,246 $1,098 $1,037
====================================================================================================================================
Basic weighted-average common shares outstanding (IN THOUSANDS) .................... 296,886 300,761 310,147
Weighted-average common shares to be issued using average market price and assuming:
Conversion of preferred stock Series A and B .................................... 131 148 163
Conversion of preferred stock Series C and D .................................... 1,072 1,145 1,237
Conversion of debentures ........................................................ 24 761 2,449
Exercise of stock options ....................................................... 1,529 1,846 1,914
Incentive share awards .......................................................... 383 486 311
- ------------------------------------------------------------------------------------------------------------------------------------
Diluted weighted-average common shares outstanding (IN THOUSANDS) .................. 300,025 305,147 316,221
- ------------------------------------------------------------------------------------------------------------------------------------
Diluted Earnings Per Common Share .................................................. $4.15 $3.60 $3.28
====================================================================================================================================
NOTE 23 SEGMENT REPORTING
PNC operates seven major businesses engaged in regional banking, wholesale
banking and asset management activities: PNC Bank-Regional Banking, PNC
Bank-Corporate Banking, PNC Secured Finance, PNC Mortgage, PNC Advisors,
BlackRock, and PFPC.
Business results presented are based on PNC's management accounting
practices and the Corporation's current management structure.
The management accounting process uses various balance sheet and income
statement assignments and transfers to measure performance of the businesses.
Methodologies change from time to time as management accounting practices are
enhanced and businesses change. Securities or borrowings and related net
interest income are assigned based on the net asset or liability position of
each business. Capital is assigned based on management's assessment of inherent
risks and equity levels at independent companies providing similar products and
services. Support areas not directly aligned with the businesses are allocated
primarily based on the utilization of services.
Total business financial results differ from consolidated financial results
primarily due to differences between management accounting practices and
generally accepted accounting principles, divested and exited businesses, equity
management activities, minority interests, eliminations and unassigned items,
the impact of which is reflected in Other.
The following changes were made in the first quarter of 1999 to the
presentation of business results: PNC Bank - Regional Banking reflects the
combination of PNC Regional Community Bank and PNC National Consumer Bank.
Branch-based brokerage activities (previously included in PNC Advisors), the
middle market customer segment (previously included in PNC Bank - Corporate
Banking) and regional real estate lending and leasing activities in PNC's
geographic footprint (previously included in PNC Secured Finance) were also
combined with PNC Bank - Regional Banking. Additionally, residential mortgages
(previously included in PNC Mortgage) were realigned with PNC Bank - Regional
Banking. Certain non-strategic wholesale lending businesses designated for exit
(previously included in PNC Bank - Corporate Banking and PNC Secured Finance) as
well as equity management activities (previously included in PNC Bank -
Corporate Banking) are included in Other. Total outstandings and exposure
designated for exit during 1999 in wholesale lending totaled $3.7 billion and
$10.5 billion, respectively.
Financial results for 1999, 1998 and 1997 are presented consistent with
this structure.
BUSINESS SEGMENT PRODUCTS AND SERVICES
PNC Bank - Regional Banking provides credit, deposit, branch-based brokerage and
electronic banking products and services to retail customers as well as credit,
leasing, treasury management and capital markets products and services to
mid-sized and small businesses primarily within PNC's geographic footprint.
PNC Bank - Corporate Banking provides specialized credit, capital markets
and treasury management products and services to corporations, institutions and
government entities primarily within PNC's geographic footprint.
PNC Secured Finance, serving corporate clients nationwide, is engaged in
commercial real estate finance, business credit, and equipment lease financing.
PNC Mortgage originates, purchases and services residential mortgages and
related products. PNC Mortgage also acquires and securitizes residential
mortgages as private-label, mortgage-backed securities and performs the master
servicing of those securities for investors.
PNC Advisors offers customized investment management, high-end brokerage
services, personal trust, estate planning and traditional banking services to
affluent and wealthy individuals, and investment management, trust and
administrative services to pensions, 401(k) plans and charitable organizations.
BlackRock manages assets for institutions and individuals through a variety
of fixed income, liquidity, equity and alternative investment products,
including BlackRock's flagship fund families.
PFPC, the Corporation's global fund services subsidiary, provides a wide
range of processing services to the investment management community.
78|79
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RESULTS OF BUSINESSES
PNC BANK PNC BANK PNC
YEAR ENDED DECEMBER 31 REGIONAL CORPORATE SECURED PNC PNC TOTAL
IN MILLIONS BANKING BANKING FINANCE MORTGAGE ADVISORS BLACKROCK PFPC OTHER PNC
- -----------------------------------------------------------------------------------------------------------------------------------
1999
INCOME STATEMENT
Net interest income* ........ $1,728 $219 $164 $89 $130 $(8) $6 $127 $2,455
Noninterest income .......... 579 189 117 332 608 381 251 288 2,745
- -----------------------------------------------------------------------------------------------------------------------------------
Total revenue ............ 2,307 408 281 421 738 373 257 415 5,200
Provision for credit losses . 59 9 (8) 7 96 163
Depreciation and amortization 91 13 22 11 14 18 10 123 302
Other noninterest expense ... 1,124 190 125 307 480 252 175 169 2,822
- -----------------------------------------------------------------------------------------------------------------------------------
Pretax earnings .......... 1,033 196 142 103 237 103 72 27 1,913
Income taxes ................ 392 69 28 41 90 44 27 (42) 649
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings ................. $641 $127 $114 $62 $147 $59 $45 $69 $1,264
===================================================================================================================================
Inter-segment revenue ....... $30 $(42) $13 $36 $8 $84 $(129)
===================================================================================================================================
Average assets .............. $39,513 $8,417 $6,701 $6,906 $3,353 $448 $308 $9,174 $74,820
===================================================================================================================================
1998
INCOME STATEMENT
Net interest income* ........ $1,706 $200 $122 $85 $121 $(11) $8 $368 $2,599
Noninterest income .......... 611 151 56 254 368 339 183 340 2,302
- -----------------------------------------------------------------------------------------------------------------------------------
Total revenue ............ 2,317 351 178 339 489 328 191 708 4,901
Provision for credit losses . 65 84 (8) 1 83 225
Depreciation and amortization 104 12 16 11 6 13 6 102 270
Other noninterest expense ... 1,187 171 90 269 290 247 125 291 2,670
- -----------------------------------------------------------------------------------------------------------------------------------
Pretax earnings .......... 961 84 80 59 192 68 60 232 1,736
Income taxes ................ 379 28 20 24 73 32 22 43 621
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings ................. $582 $56 $60 $35 $119 $36 $38 $189 $1,115
===================================================================================================================================
Inter-segment revenue ....... $18 $(27) $10 $33 $1 $6 $(41)
===================================================================================================================================
Average assets .............. $38,848 $7,564 $5,477 $5,350 $2,731 $441 $229 $13,986 $74,626
===================================================================================================================================
1997
INCOME STATEMENT
Net interest income* ........ $1,606 $152 $108 $50 $106 $(17) $7 $512 $2,524
Noninterest income .......... 518 135 45 189 289 206 142 251 1,775
- -----------------------------------------------------------------------------------------------------------------------------------
Total revenue ............... 2,124 287 153 239 395 189 149 763 4,299
Provision for credit losses . 59 12 9 3 (13) 70
Depreciation and amortization 103 11 1 9 5 12 4 97 242
Other noninterest expense ... 1,174 173 49 207 249 138 94 256 2,340
- -----------------------------------------------------------------------------------------------------------------------------------
Pretax earnings .......... 788 91 94 23 138 39 51 423 1,647
Income taxes ................ 310 28 28 9 53 17 20 130 595
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings ................. $478 $63 $66 $14 $85 $22 $31 $293 $1,052
===================================================================================================================================
Inter-segment revenue ....... $13 $(21) $10 $34 $2 $(38)
===================================================================================================================================
Average assets .............. $38,939 $7,043 $3,606 $2,577 $2,575 $336 $164 $15,404 $70,644
===================================================================================================================================
*TAXABLE-EQUIVALENT BASIS
Gains in 1999 from the sales of the credit card business, an equity
interest in Electronic Payment Services, Inc., the BlackRock IPO, Concord stock
and branches totaling $422 million are included in Other. Also in 1999,
valuation adjustments associated with exiting certain non-strategic wholesale
lending businesses totaling $195 million, costs related to efficiency
initiatives of $98 million, a contribution to the PNC Bank Foundation of $30
million, the write-down of an equity investment in FBR of $28 million and
expense associated with the buyout of PNC's mall ATM representative of $12
million are included in Other.
The results of the credit card business through the
first quarter of 1999, the corporate trust and escrow business in 1998 and 1997,
minority interests, equity management activities, the impact of asset and
liability management, eliminations, reclassifications and unassigned items
comprise the remainder of Other.
NOTE 24 COMPREHENSIVE INCOME
Effective January 1, 1998, the Corporation adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 established new rules for the reporting and
display of comprehensive income and its components. SFAS No. 130 requires
unrealized gains or losses on securities available for sale and minimum pension
liability adjustments to be included in other comprehensive income. Prior to the
adoption of SFAS No. 130, unrealized gains or losses were reported separately in
shareholders' equity. Prior year financial statements have been reclassified to
conform to the requirements of SFAS No. 130. The income tax effects allocated to
each component of other comprehensive income (loss) are as follows:
BEFORE-TAX TAX BENEFIT NET-OF-TAX
DECEMBER 31 - IN MILLIONS AMOUNT (EXPENSE) AMOUNT
- ----------------------------------------------------------------------------
1999
Unrealized securities losses ......... $(363) $127 $(236)
Less: Reclassification
adjustment for losses realized
in net income ..................... (26) 9 (17)
- ----------------------------------------------------------------------------
Net unrealized securities
losses ............................ (337) 118 (219)
Minimum pension liability
adjustment ........................ (8) 3 (5)
- ----------------------------------------------------------------------------
Other comprehensive loss ............. $(345) $121 $(224)
============================================================================
1998
Unrealized securities losses ......... $(42) $15 $(27)
Less: Reclassification adjustment
for losses realized
in net income ..................... (22) 8 (14)
- ----------------------------------------------------------------------------
Net unrealized securities
losses ............................ (20) 7 (13)
Minimum pension liability
adjustment ........................ (11) 4 (7)
- ----------------------------------------------------------------------------
Other comprehensive loss ............. $(31) $11 $(20)
============================================================================
1997
Net unrealized securities
gains ............................. $68 $(24) $44
- ----------------------------------------------------------------------------
Other comprehensive income ........... $68 $(24) $44
============================================================================
The accumulated balances related to each component of other comprehensive loss
are as follows:
DECEMBER 31 - IN MILLIONS 1999 1998
- ----------------------------------------------------------
Net unrealized securities losses........ $(255) $(36)
Minimum pension liability adjustment.... (12) (7)
- ----------------------------------------------------------
Accumulated other comprehensive loss.... $(267) $(43)
==========================================================
NOTE 25 LITIGATION
The Corporation and persons to whom the Corporation may have indemnification
obligations, in the normal course of business, are subject to various pending
and threatened lawsuits in which claims for monetary damages are asserted.
Management, after consultation with legal counsel, does not at the present time
anticipate the ultimate aggregate liability, if any, arising out of such
lawsuits will have a material adverse effect on the Corporation's financial
position. At the present time, management is not in a position to determine
whether any such pending or threatened litigation will have a material adverse
effect on the Corporation's results of operations in any future reporting
period.
NOTE 26 FAIR VALUE OF FINANCIAL INSTRUMENTS
1999 1998
------------------------------------------
CARRYING FAIR CARRYING FAIR
DECEMBER 31 - IN MILLIONS AMOUNT VALUE AMOUNT VALUE
- ----------------------------------------------------------------------------
ASSETS
Cash and short-term
assets .................... $4,570 $4,570 $3,946 $3,946
Securities available
for sale .................. 7,611 7,611 7,074 7,074
Loans held for sale .......... 5,798 5,798 3,226 3,226
Net loans (EXCLUDES LEASES) .. 46,414 46,767 54,442 56,535
Mortgage servicing rights .... 1,719 1,897 889 982
LIABILITIES
Demand, savings and
money market deposits ..... 28,689 28,689 29,359 29,359
Time deposits ................ 17,979 17,890 18,137 18,291
Borrowed funds ............... 19,507 19,582 21,094 21,362
OFF-BALANCE-SHEET
Commitments
to extend credit .......... (5) (5) (17) (17)
Letters of credit ............ (9) (9) (15) (15)
Financial derivatives used for
Interest rate
risk management ......... 75 (50) 76 164
Mortgage banking
risk management ......... 18 79 51 64
Credit-related
activities .............. (4) (1) (2)
Customer/other
derivatives ............. 21 21 (13) (13)
============================================================================
Real and personal property, lease financing, loan customer relationships,
deposit customer intangibles, retail branch networks, fee-based businesses, such
as asset management, mortgage banking and brokerage, trademarks and brand names
are excluded from the amounts set forth above. Accordingly, the aggregate fair
value amounts presented do not represent the underlying value of the
Corporation.
Fair value is defined as the estimated amount at which a financial
instrument could be exchanged in a current
80|81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
transaction between willing parties, or other than in a forced or liquidation
sale. However, it is not management's intention to immediately dispose of a
significant portion of such financial instruments, and unrealized gains or
losses should not be interpreted as a forecast of future earnings and cash
flows. The derived fair values are subjective in nature, involve uncertainties
and significant judgment and, therefore, cannot be determined with precision.
Changes in assumptions could significantly impact the derived fair value
estimates. The following methods and assumptions were used in estimating fair
value amounts for financial instruments.
GENERAL
For short-term financial instruments realizable in three months or less, the
carrying amount reported in the consolidated balance sheet approximates fair
value. Unless otherwise stated, the rates used in discounted cash flow analyses
are based on market yield curves.
CASH AND SHORT-TERM ASSETS
The carrying amounts reported in the consolidated balance sheet for cash and
short-term investments approximate those assets' fair values primarily due to
their short-term nature. For purposes of this disclosure only, short-term assets
include due from banks, interest-earning deposits with banks, federal funds sold
and resale agreements, trading securities, customer's acceptance liability and
accrued interest receivable.
SECURITIES AVAILABLE FOR SALE
The fair value of securities available for sale is based on quoted market
prices, where available. If quoted market prices are not available, fair value
is estimated using the quoted market prices of comparable instruments.
NET LOANS AND LOANS HELD FOR SALE
Fair values are estimated based on the discounted value of expected net cash
flows incorporating assumptions about prepayment rates, credit losses and
servicing fees and costs. For credit cards and revolving home equity loans, this
fair value does not include any amount for new loans or the related fees that
will be generated from the existing customer relationships. In the case of
nonaccrual loans, scheduled cash flows exclude interest payments. The carrying
value of loans held for sale approximates fair value.
MORTGAGE SERVICING RIGHTS
The fair value of mortgage servicing rights is estimated based on the present
value of future cash flows.
DEPOSITS
The carrying amounts of noninterest-bearing demand and interest-bearing money
market and savings deposits approximate fair values. For time deposits,
including foreign deposits, fair values are estimated based on the discounted
value of expected net cash flows taking into account current interest rates.
BORROWED FUNDS
The carrying amounts of federal funds purchased, commercial paper, acceptances
outstanding and accrued interest payable are considered fair value because of
their short-term nature. For all other borrowed funds, fair values are estimated
based on the discounted value of expected net cash flows taking into account
current interest rates.
UNFUNDED LOAN COMMITMENTS AND LETTERS OF CREDIT
Fair values for commitments to extend credit and letters of credit are estimated
based on the amount of deferred fees and the creditworthiness of the
counterparties.
FINANCIAL AND OTHER DERIVATIVES
The fair value of derivatives is estimated based on the
discounted value of the expected net cash flows. These fair values represent the
estimated amounts the Corporation would receive or pay to terminate the
contracts, taking into account current interest rates.
NOTE 27 OTHER FINANCIAL
INFORMATION
Summarized financial information of the parent company is as follows:
PARENT COMPANY ONLY
STATEMENT OF INCOME
YEAR ENDED DECEMBER 31 - IN MILLIONS 1999 1998 1997
- ----------------------------------------------------------------------
OPERATING REVENUE
Dividends from:
Bank subsidiaries ................. $1,139 $774 $852
Nonbank subsidiaries .............. 80 21 9
Interest income ...................... 9 5 14
Noninterest income ................... 4 1 2
- ----------------------------------------------------------------------
Total operating revenue ........ 1,232 801 877
======================================================================
OPERATING EXPENSE
Interest expense ..................... 86 92 76
Other expense ........................ 52 7 11
- ----------------------------------------------------------------------
Total operating expense ........ 138 99 87
- ----------------------------------------------------------------------
Income before income taxes and
equity in undistributed
net income of subsidiaries ........ 1,094 702 790
Income tax benefits .................. (47) (35) (32)
- ----------------------------------------------------------------------
Income before equity in
undistributed net income
of subsidiaries ................... 1,141 737 822
Net equity in undistributed
net income
(excess dividends):
Bank subsidiaries ................. (7) 312 144
Nonbank subsidiaries .............. 130 66 86
- ----------------------------------------------------------------------
Net income $1,264 $1,115 $1,052
======================================================================
PARENT COMPANY ONLY
BALANCE SHEET
DECEMBER 31 - IN MILLIONS 1999 1998
- ---------------------------------------------------------------
ASSETS
Cash and due from banks .................... $1
Short-term investments with subsidiary
banks ................................... $16 9
Securities available for sale 27
Investments in:
Bank subsidiaries ....................... 6,016 6,737
Nonbank subsidiaries .................... 734 740
Other assets ............................... 154 164
- ---------------------------------------------------------------
Total assets .......................... $6,920 $7,678
===============================================================
LIABILITIES
Borrowed funds ............................. $100 $300
Nonbank affiliate borrowings ............... 613 1,006
Accrued expenses and other liabilities ..... 261 329
- ---------------------------------------------------------------
Total liabilities ..................... 974 1,635
- ---------------------------------------------------------------
SHAREHOLDERS' EQUITY ....................... 5,946 6,043
- ---------------------------------------------------------------
Total liabilities and shareholders'
equity ............................. $6,920 $7,678
===============================================================
At December 31, 1999, borrowed funds are scheduled for repayment in 2001.
Commercial paper and all other debt issued by PNC Funding Corp., a
wholly-owned subsidiary, is guaranteed by the parent company. In addition, in
connection with certain affiliates' mortgage servicing operations, the parent
company has committed to maintain such affiliates' net worth above minimum
requirements.
During 1999, 1998 and 1997, the parent company received net income tax
refunds of $44 million, $42 million and $35 million, respectively. Such refunds
represent the parent company's portion of consolidated income taxes. During
1999, 1998 and 1997, the parent company paid interest of $96 million, $95
million and $65 million, respectively.
PARENT COMPANY ONLY
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31 - IN MILLIONS 1999 1998 1997
- ------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income ....................... $1,264 $1,115 $1,052
Adjustments to reconcile net
income to net cash provided
by operating activities:
Equity in undistributed
net earnings of
subsidiaries .............. (123) (378) (230)
Other ...................... (14) 19 19
- ------------------------------------------------------------------------------
Net cash provided by
operating activities ....... 1,127 756 841
- ------------------------------------------------------------------------------
INVESTING ACTIVITIES
Net change in short-term
investments with subsidiary
bank ....................... (7) 1
Net capital returned from
(contributed to)
subsidiaries ............... 631 (261) 57
Securities available for sale
Sales ......................... 1,592 1,170 3,321
Purchases ..................... (1,565) (1,129) (2,787)
Cash paid in acquisitions ........ (2) (83)
Other ............................ (17) (22) (8)
- ------------------------------------------------------------------------------
Net cash provided (used)
by investing activities 632 (325) 584
- ------------------------------------------------------------------------------
FINANCING ACTIVITIES
Borrowings from nonbank
subsidiary .................... 687 297 656
Repayments on borrowings from
nonbank subsidiary ............ (1,080) (14) (222)
Acquisition of treasury
stock ......................... (803) (342) (1,532)
Cash dividends paid
to shareholders ............... (520) (495) (488)
Issuance of stock ................ 141 123 155
Repayments on borrowings ......... (200)
Other ............................ 15 3
- ------------------------------------------------------------------------------
Net cash used by financing
activities .................... (1,760) (431) (1,428)
- ------------------------------------------------------------------------------
Decrease in cash and
due from banks ................ (1) (3)
Cash and due from banks at
beginning of year ............. $1 1 4
- ------------------------------------------------------------------------------
Cash and due from banks
at end of year ................ $1 $1
==============================================================================
NOTE 28 UNUSED LINE OF CREDIT
At December 31, 1999, the Corporation maintained a line of credit in the amount
of $500 million, none of which was drawn. This line is available for general
corporate purposes and expires in 2002.
82|83
STATISTICAL INFORMATION
SELECTED QUARTERLY FINANCIAL DATA
1999 1998
---------------------------------------- -----------------------------------------
QUARTER - DOLLARS IN MILLIONS,
EXCEPT PER SHARE DATA FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
- ---------------------------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS
Interest income .................... $1,215 $1,212 $1,204 $1,290 $1,354 $1,354 $1,314 $1,291
Interest expense ................... 641 618 597 632 695 708 683 654
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income ................ 574 594 607 658 659 646 631 637
Provision for credit losses ........ 30 30 25 78 115 45 35 30
Noninterest income before
net securities (losses) gains ... 721 649 622 731 696 528 569 493
Net securities (losses) gains ...... (22) 2 42 2 1 13
Noninterest expense ................ 810 724 767 823 797 696 739 708
- ---------------------------------------------------------------------------------------------------------------------------------
Income before income taxes ......... 433 491 479 488 445 434 426 405
Income taxes ....................... 129 171 164 163 160 153 146 136
- ---------------------------------------------------------------------------------------------------------------------------------
Net income ......................... $304 $320 $315 $325 $285 $281 $280 $269
=================================================================================================================================
PER COMMON SHARE DATA
Book value ......................... $19.23 $18.90 $18.40 $18.78 $18.86 $18.21 $17.64 $17.20
Earnings
Basic ........................... 1.02 1.07 1.04 1.06 .93 .92 .92 .88
Diluted ......................... 1.01 1.06 1.03 1.05 .92 .91 .90 .87
Cash* ........................... 1.09 1.12 1.10 1.11 .98 .97 .96 .91
*EXCLUDES AMORTIZATION OF GOODWILL.
=================================================================================================================================
AVERAGE BALANCE SHEET
Total assets ....................... $73,548 $73,763 $75,060 $76,958 $77,377 $75,290 $73,632 $72,141
Securities available for sale ...... 8,211 8,803 9,437 7,755 7,323 7,073 7,323 7,784
Loans, net of unearned income ...... 51,070 51,746 52,479 56,695 57,366 55,938 55,348 54,083
Deposits ........................... 44,455 44,899 45,470 46,416 46,250 44,522 44,169 44,630
Borrowed funds ..................... 20,029 20,242 20,544 21,584 22,723 22,642 21,844 19,989
Shareholders' equity ............... 5,904 5,732 5,873 5,975 5,800 5,646 5,476 5,398
=================================================================================================================================
ANALYSIS OF YEAR-TO-YEAR CHANGES IN NET INTEREST INCOME
1999/1998 1998/1997
------------------------------------- -------------------------------------
INCREASE/(DECREASE) IN INCOME/EXPENSE INCREASE/(DECREASE) IN INCOME/EXPENSE
DUE TO CHANGES IN: DUE TO CHANGES IN:
TAXABLE-EQUIVALENT BASIS-- IN MILLIONS VOLUME RATE TOTAL VOLUME RATE TOTAL
- ---------------------------------------------------------------------------------------------------------------------------
INTEREST-EARNING ASSETS
Loans held for sale .................... $44 $14 $58 $135 $(6) $129
Securities available for sale
U.S. Treasury, government agencies
and corporations .................... (25) (18) (43) (67) (25) (92)
Other debt .......................... 96 (2) 94 (12) (5) (17)
Other ............................... 8 (2) 6 (2) (5) (7)
------------- -------------
Total securities available for sale 67 (10) 57 (83) (33) (116)
Loans, net of unearned income
Consumer ............................ (63) (33) (96) (19) 1 (18)
Credit card ......................... (471) 33 (438) 40 39 79
Residential mortgage ................ (3) (31) (34) (44) (27) (71)
Commercial .......................... 25 (27) (2) 296 4 300
Commercial real estate .............. 7 (19) (12) (68) (14) (82)
Other ............................... 63 2 65 25 2 27
------------- -------------
Total loans, net of unearned income (219) (298) (517) 230 5 235
Other .................................. 7 (1) 6 5 6 11
------------- -------------
Total interest-earning assets ..... (63) (333) $(396) 265 (6) $259
============= =============
INTEREST-BEARING LIABILITIES
Interest-bearing deposits
Demand and money market ............. 80 (26) $54 40 8 $48
Savings ............................. (4) (8) (12) (5) (1) (6)
Other time .......................... (76) (60) (136) (12) (7) (19)
Deposits in foreign offices ......... (4) (4) (8) (9) (9)
------------- -------------
Total interest-bearing deposits ... 45 (147) (102) 31 (17) 14
Borrowed funds
Federal funds purchased ............. (45) (10) (55) (17) (2) (19)
Repurchase agreements ............... 13 (13) 38 (6) 32
Bank notes and senior debt .......... (116) (32) (148) 86 (4) 82
Other borrowed funds ................ 69 (30) 39 56 (2) 54
Subordinated debt ................... 19 (5) 14 22 (1) 21
------------- -------------
Total borrowed funds .............. (68) (82) (150) 187 (17) 170
------------- -------------
Total interest-bearing liabilities .. (5) (247) $(252) 189 (5) $184
------------- -------------
Change in net interest income ..... (31) (113) $(144) 134 (59) $75
============= =============
CHANGES ATTRIBUTABLE TO RATE/VOLUME ARE PRORATED INTO RATE AND VOLUME
COMPONENTS.
84|85
STATISTICAL INFORMATION
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses is based on periodic evaluations of the credit
portfolio by management. These evaluations consider, among other factors,
historic losses within specific industries, current economic conditions, loan
portfolio trends, specific credit reviews and estimates based on subjective
factors.
SUMMARY OF LOAN LOSS EXPERIENCE
YEAR ENDED DECEMBER 31 - DOLLARS IN MILLIONS 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
Allowance at beginning of year ............. $753 $972 $1,166 $1,259 $1,352
Charge-offs
Consumer ................................ 63 83 104 100 76
Credit card ............................. 60 297 208 66 31
Residential mortgage .................... 8 7 9 9 10
Commercial .............................. 72 122 48 52 84
Commercial real estate
Commercial mortgage ................... 1 6 8 10 23
Real estate project ................... 3 2 4 8 14
Other ................................... 9 7 4 2 2
- -----------------------------------------------------------------------------------------------------------------------------
Total charge-offs ..................... 216 524 385 247 240
Recoveries
Consumer ................................ 25 34 36 34 33
Credit card ............................. 2 17 25 7 6
Residential mortgage .................... 1 1 1 2 2
Commercial .............................. 22 20 38 28 49
Commercial real estate
Commercial mortgage ................... 1 2 10 6 9
Real estate project ................... 3 1 2 4 6
Other ................................... 1 2 1 2 2
- -----------------------------------------------------------------------------------------------------------------------------
Total recoveries ...................... 55 77 113 83 107
- -----------------------------------------------------------------------------------------------------------------------------
Net charge-offs ....................... 161 447 272 164 133
Provision for credit losses ................ 163 225 70 6
(Divestitures)/acquisitions ................ (81) 3 8 71 34
- -----------------------------------------------------------------------------------------------------------------------------
Allowance at end of year .............. $674 $753 $972 $1,166 $1,259
=============================================================================================================================
Allowance as a percent of period-end
Loans ................................. 1.35% 1.31% 1.79% 2.25% 2.59%
Nonperforming loans ................... 225.42 255.25 351.79 334.40 351.68
As a percent of average loans
Net charge-offs ....................... .30 .80 .51 .33 .29
Provision for credit losses ........... .31 .40 .13 .01
Allowance for credit losses ........... 1.27 1.35 1.84 2.37 2.76
Allowance as a multiple of net charge-offs . 4.19x 1.68x 3.57x 7.11x 9.47x
=============================================================================================================================
The following table presents the allocation of allowance for credit losses and
the categories of loans as a percentage of total loans. For purposes of this
presentation, the unallocated portion of the allowance for credit losses has
been assigned to loan categories based on the relative specific and pool
allocation amounts.
ALLOCATION OF ALLOWANCE FOR CREDIT LOSSES
1999 1998 1997 1996 1995
------------------------------------------------------------------------------------------------------------
LOANS TO LOANS TO LOANS TO LOANS TO LOANS TO
DECEMBER 31 TOTAL TOTAL TOTAL TOTAL TOTAL
DOLLARS IN MILLIONS ALLOWANCE LOANS ALLOWANCE LOANS ALLOWANCE LOANS ALLOWANCE LOANS ALLOWANCE LOANS
- ------------------------------------------------------------------------------------------------------------------------------------
Consumer ............... $58 18.6% $74 19.0% $107 20.7% $139 23.3% $158 25.8%
Credit card ............ 136 5.1 258 7.0 141 5.4 45 2.1
Residential mortgage ... 11 25.7 8 21.3 42 23.6 80 24.5 112 24.0
Commercial ............. 510 42.9 446 43.7 406 36.9 606 35.9 585 34.5
Commercial real estate.. 63 5.5 59 6.0 141 7.3 173 7.9 332 10.1
Other .................. 32 7.3 30 4.9 18 4.5 27 3.0 27 3.5
- ------------------------------------------------------------------------------------------------------------------------------------
Total ............... $674 100.0% $753 100.0% $972 100.0% $1,166 100.0% $1,259 100.0%
====================================================================================================================================
STATISTICAL INFORMATION
AVERAGE CONSOLIDATED BALANCE SHEET AND NET INTEREST ANALYSIS
1999 1998
---------------------------------- ------------------------------
AVERAGE
YEAR ENDED DECEMBER 31 AVERAGE AVERAGE AVERAGE YIELDS/
TAXABLE-EQUIVALENT BASIS, DOLLARS IN MILLIONS BALANCES INTEREST YIELDS/RATES BALANCES INTEREST RATES
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS
Interest-earning assets
Loans held for sale..................................... $3,986 $291 7.30% $3,371 $233 6.91%
Securities available for sale
U.S. Treasury, government agencies
and corporations.................................. 4,440 229 5.16 4,910 272 5.54
Other debt.......................................... 3,441 216 6.28 1,913 122 6.38
Other............................................... 673 42 6.24 551 36 6.53
- --------------------------------------------------------------------------------- ----------------------
Total securities available for sale............... 8,554 487 5.70 7,374 430 5.83
Loans, net of unearned income
Consumer............................................ 10,314 844 8.18 11,073 940 8.49
Credit card......................................... 672 100 14.88 3,849 538 13.98
Residential mortgage................................ 12,451 871 7.00 12,496 905 7.24
Commercial ......................................... 23,084 1,792 7.76 22,773 1,794 7.88
Commercial real estate.............................. 3,362 265 7.88 3,279 277 8.45
Other............................................... 3,096 222 7.17 2,223 157 7.06
- --------------------------------------------------------------------------------- ----------------------
Total loans, net of unearned income............... 52,979 4,094 7.73 55,693 4,611 8.28
Other................................................... 1,117 71 6.36 1,001 65 6.49
- --------------------------------------------------------------------------------- ----------------------
Total interest-earning
assets/interest income............................ 66,636 4,943 7.42 67,439 5,339 7.92
Noninterest-earning assets
Allowance for credit losses............................. (695) (863)
Cash and due from banks................................. 2,103 2,227
Other assets............................................ 6,776 5,823
- ---------------------------------------------------------------------- ------------
Total assets........................................ $74,820 $74,626
====================================================================== ============
LIABILITIES, CAPITAL SECURITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities
Interest-bearing deposits
Demand and money market............................. $17,698 493 2.79 $14,820 439 2.96
Savings............................................. 2,390 39 1.63 2,620 51 1.95
Other time.......................................... 15,734 793 5.04 17,206 929 5.40
Deposits in foreign offices......................... 872 44 5.05 935 52 5.56
- --------------------------------------------------------------------------------- ----------------------
Total interest-bearing deposits................... 36,694 1,369 3.73 35,581 1,471 4.13
Borrowed funds
Federal funds purchased............................. 1,662 84 5.05 2,526 139 5.50
Repurchase agreements............................... 1,890 75 3.97 1,592 75 4.71
Bank notes and senior debt.......................... 8,517 457 5.37 10,657 605 5.68
Other borrowed funds................................ 6,474 349 5.39 5,235 310 5.92
Subordinated debt................................... 2,051 154 7.51 1,799 140 7.78
- --------------------------------------------------------------------------------- ----------------------
Total borrowed funds.............................. 20,594 1,119 5.43 21,809 1,269 5.82
- --------------------------------------------------------------------------------- ----------------------
Total interest-bearing
liabilities/interest expense...................... 57,288 2,488 4.34 57,390 2,740 4.77
Noninterest-bearing liabilities and shareholders' equity
Demand and other noninterest-bearing
deposits............................................ 8,610 9,315
Accrued expenses and other liabilities.................. 2,204 1,578
Mandatorily redeemable capital securities
of subsidiary trusts................................ 848 762
Shareholders' equity.................................... 5,870 5,581
- ---------------------------------------------------------------------- ------------
Total liabilities, capital securities and
shareholders' equity............................ $74,820 $74,626
====================================================================================================================================
Interest rate spread 3.08 3.15
Impact of noninterest-bearing sources .60 .70
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income/margin.......................... $2,455 3.68% $2,599 3.85%
====================================================================================================================================
LOAN FEES FOR EACH OF THE FIVE YEARS ENDED DECEMBER 31, 1999, 1998, 1997, 1996
AND 1995 WERE $120 MILLION, $107 MILLION, $89 MILLION, $93 MILLION AND $82
MILLION, RESPECTIVELY.
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).
1997 1996 1995
- -------------------------------------------- ------------------------------------- -------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCES INTEREST YIELDS/RATES BALANCES INTEREST YIELDS/RATES BALANCES INTEREST YIELDS/RATES
- --------------------------------------------------------------------------------------------------------------------------------
$1,417 $104 7.31% $1,095 $78 7.09% $725 $54 7.50%
6,101 364 5.97 10,225 635 6.21 17,706 982 5.55
2,094 139 6.62 2,719 184 6.78 3,757 259 6.90
579 43 7.45 606 48 7.91 677 58 8.46
- ----------------------------- ---------------------- -------------------------
8, 774 546 6.22 13,550 867 6.40 22,140 1,2999 5.87
11,291 958 8.48 12,192 1,028 8.43 11,142 958 8.60
3,558 459 12.92 1,165 163 13.94 871 120 13.76
13,105 976 7.45 12,049 898 7.45 10,812 808 7.47
19,014 1,494 7.86 17,727 1,388 7.83 16,562 1,347 8.13
4,068 359 8.82 4,186 373 8.92 4,304 410 9.54
1,871 130 6.94 1,797 119 6.63 1,933 130 8.27
- ----------------------------- ---------------------- -------------------------
52,907 4,376 8.27 49,116 3,969 8.08 45,624 3,773 6.64
919 54 5.88 964 59 6.12 1,046 70
- ----------------------------- ---------------------- -------------------------
64,017 5,080 7.93 64,725 4,973 7.68 69,535 5,196 7.47
(1,077) (1,197) (1,319)
2,920 3,163 3,044
4,784 4,116 3,871
----------- ------------- -----------
$70,644 $70,807 $75,131
=========== ============= ===========
$13,477 391 2.90 $12,619 332 2.63 $12,254 357 2.91
2,852 57 1.97 3,445 69 2.02 3,732 90 2.40
17,441 948 5.44 18,307 981 5.36 17,758 984 5.54
1,094 61 5.58 846 46 5.44 1,974 121 6.13
- ----------------------------- ---------------------- -------------------------
34,864 1,457 4.18 35,217 1,428 4.06 35,718 1,552 4.34
2,834 158 5.57 3,157 171 5.41 5,200 315 6.06
812 43 5.36 2,030 110 5.41 6,514 398 6.11
9,130 523 5.72 8,139 454 5.57 6,326 384 6.07
4,304 256 5.96 3,630 223 6.14 4,138 282 6.81
1,514 119 7.87 1,358 108 7.98 998 76 7.64
- ----------------------------- ---------------------- -------------------------
18,594 1,099 5.91 18,314 1,066 5.82 23,176 1,455 6.28
- ----------------------------- ---------------------- -------------------------
53,458 2,556 4.78 53,531 2,494 4.66 58,894 3,007 5.10
9,670 9,900 9,112
1,501 1,529 1,341
537 19
5,478 5,828 5,784
----------- ------------- -----------
$70,644 $70,807 $75,131
================================================================================================================================
3.15 3.02 2.37
.79 .81 .78
- --------------------------------------------------------------------------------------------------------------------------------
$2,524 3.94% $2,479 3.83% $2,189 3.15%
================================================================================================================================
86|87
SHORT-TERM BORROWINGS
Federal funds purchased include overnight borrowings and term federal funds,
which are payable on demand. Repurchase agreements generally have maturities of
18 months or less. Presented below are total bank notes of the Corporation, of
which approximately 58.1% mature in 2000. Other short-term borrowings consist
primarily of U.S. Treasury, tax and loan borrowings which are payable on demand
and commercial paper which is issued in maturities not to exceed nine months. At
December 31, 1999, 1998 and 1997, $3.1 billion, $3.4 billion and $997 million,
respectively, notional value of interest rate swaps were designated to borrowed
funds. The effect of these swaps is included in the rates set forth in the
table.
SHORT-TERM BORROWINGS
1999 1998 1997
---------------------- ---------------------- -------------------
DOLLARS IN MILLIONS AMOUNT RATE AMOUNT RATE AMOUNT RATE
- ------------------------------------------------------------------------------------------------------------------
Federal funds purchased
Year-end balance ........ $1,281 4.05% $390 5.17% $3,632 6.30%
Average during year ..... 1,662 5.05 2,526 5.50 2,834 5.57
Maximum month-end
balance during year ... 2,671 3,139 4,459
Repurchase agreements
Year-end balance ........ 1,122 4.77 1,669 3.47 714 6.03
Average during year ..... 1,890 3.97 1,592 4.71 812 5.36
Maximum month-end balance
during year ........... 2,785 2,015 946
Bank notes
Year-end balance ........ 6,354 6.25 10,234 5.32 9,656 5.75
Average during year ..... 8,224 5.29 10,505 5.65 9,068 5.61
Maximum month-end balance
during year ........... 9,775 12,008 10,391
Other
Year-end balance ........ 956 5.64 513 4.16 946 5.81
Average during year ..... 654 6.00 1,047 5.84 1,671 5.65
Maximum month-end balance
during year ........... 1,192 2,069 2,574
- ------------------------------------------------------------------------------------------------------------------
LOAN MATURITIES AND INTEREST SENSITIVITY
DECEMBER 31, 1999 1 YEAR 1 THROUGH AFTER 5 GROSS
IN MILLIONS OR LESS 5 YEARS YEARS LOANS
- ----------------------------------------------------------------------------
Commercial .......... $7,937 $10,304 $3,227 $21,468
Real estate project . 889 930 150 1,969
- ----------------------------------------------------------------------------
Total ............ $8,826 $11,234 $3,377 $23,437
- ----------------------------------------------------------------------------
Loans with
Predetermined rate $834 $1,453 $875 $3,162
Floating rate .... 7,992 9,781 2,502 20,275
- ----------------------------------------------------------------------------
Total ............ $8,826 $11,234 $3,377 $23,437
============================================================================
At December 31, 1999, $9.7 billion of interest rate swaps, caps and floors
designated to commercial and commercial real estate loans altered the interest
rate characteristics of such loans, the impact of which is not reflected in the
above table.
TIME DEPOSITS OF $100,000 OR MORE
Time deposits in foreign offices totaled $3.2 billion, substantially all of
which are in denominations of $100,000 or more. The following table sets forth
maturities of domestic time deposits of $100,000 or more:
CERTIFICATES
DECEMBER 31, 1999 - IN MILLIONS OF DEPOSIT
- ----------------------------------------------------------
Three months or less ....................... $1,512
Over three through six months .............. 614
Over six through twelve months ............. 497
Over twelve months ......................... 1,017
- ----------------------------------------------------------
Total ................................... $3,640
==========================================================
88|89
EXECUTIVE MANAGEMENT
OFFICE OF THE CHAIRMAN
THOMAS H. O'BRIEN (1)
Chairman and
Chief Executive Officer
37 years of service
JAMES E. ROHR (1)
President and
Chief Operating Officer
27 years of service
WALTER E. GREGG, JR. (1)
Vice Chairman
25 years of service
BUSINESS CEOS
J. RICHARD CARNALL
Chairman and
Chief Executive Officer
PFPC
30 years of service
LAURENCE D. FINK
Chairman and
Chief Executive Officer
BlackRock
5 years of service
JOSEPH C. GUYAUX (1)
Chief Executive Officer
PNC Bank
Regional Community Banking
Executive Vice President*
27 years of service
RALPH S. MICHAEL, III (1)
Chief Executive Officer
PNC Bank-Corporate Banking
Executive Vice President*
20 years of service
SAIYID T. NAQVI
President and
Chief Executive Officer
PNC Mortgage
14 years of service
BRUCE E. ROBBINS (1)
Chief Executive Officer
PNC Secured Finance
Executive Vice President*
26 years of service
THOMAS K. WHITFORD (1)
Chief Executive Officer
PNC Advisors
Executive Vice President*
16 years of service
CORPORATE OFFICERS*
EVA T. BLUM
Senior Vice President
and Director
Comprehensive Risk
Management and Compliance
22 years of service
ROBERT L. HAUNSCHILD (1)
Senior Vice President and
Chief Financial Officer
9 years of service
DENISE THORNE JOHNSON
Senior Vice President and
Chief Marketing Officer
2 years of service
RANDALL C. KING
Senior Vice President and
Treasurer
17 years of service
THOMAS S. KUNZ
Senior Vice President
Director of e-Commerce
16 years of service
THOMAS E. PAISLEY, III (1)
Senior Vice President and
Chairman
Corporate Credit Policy Committee
28 years of service
SAMUEL R. PATTERSON (1)
Controller
13 years of service
HELEN P. PUDLIN (1)
Senior Vice President and
General Counsel
10 years of service
WILLIAM E. ROSNER
Senior Vice President
Corporate Human Resources
5 years of service
Timothy G. Shack
Executive Vice President and
Chief Information Officer
23 years of service
REGIONAL PRESIDENTS
DENNIS P. BRENCKLE
President
Central PA Region
PNC Bank, N.A.
30 years of service
PETER K. CLASSEN
President
Northeast PA and
New Jersey Regions
PNC Bank, N.A.
14 years of service
JOHN C. HALLER
President
Ohio/N. Kentucky Region
PNC Bank, N.A.
24 years of service
MICHAEL N. HARRELD
President
Kentucky/Indiana Region
PNC Bank, N.A.
31 years of service
SY HOLZER
President
Pittsburgh Region
PNC Bank, N.A.
29 years of service
CALVERT A. MORGAN, JR.
Chairman, President and
Chief Executive Officer
PNC Bank, Delaware
29 years of service
MARLENE D. MOSCO
President
Northwest PA Region
PNC Bank, N.A.
32 years of service
RICHARD L. SMOOT
President and
Chief Executive Officer
Philadelphia/S. Jersey Region
PNC Bank, N.A.
13 years of service
WILLIAM H. TURNER
Chairman
New Jersey Region
PNC Bank, N.A.
3 years of service
1 EXECUTIVE OFFICER
* OF THE PNC FINANCIAL
SERVICES GROUP, INC.
CORPORATE INFORMATION
CORPORATE HEADQUARTERS
The PNC Financial Services Group, Inc.
One PNC Plaza
249 Fifth Avenue
Pittsburgh, Pennsylvania 15222-2707
STOCK LISTING
The PNC Financial Services Group, Inc. common stock is listed on the New York
Stock Exchange ("NYSE") under the symbol PNC. At the close of business on
February 17, 2000, there were 60,543 common shareholders of record.
INTERNET INFORMATION
Information on The PNC Financial Services Group, Inc.'s financial results and
its products and services is 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 also may be obtained without charge by writing to Lynn Fox
Evans, Director of Financial Reporting, at corporate headquarters, by calling
(412) 762-1553 or via e-mail to financial.reporting@pncbank.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
investor.relations@pncbank.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@pncbank.com.
TRUST PROXY VOTING
Reports of 1999 nonroutine proxy voting by the trust divisions of The PNC
Financial Services Group, Inc. are available by writing to Thomas R. Moore,
Corporate Secretary, at corporate headquarters.
ANNUAL SHAREHOLDERS MEETING
All shareholders are invited to attend the PNC Financial Services Group, Inc.
Annual Meeting on Tuesday, April 25, 2000, at 11 a.m., eastern standard time, on
the 15th floor of One PNC Plaza, 249 Fifth Avenue, Pittsburgh, Pennsylvania.
COMMON STOCK PRICES/DIVIDENDS DECLARED
The table below sets forth by quarter the range of high 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
1999 QUARTER HIGH LOW CLOSE DECLARED
- ------------------------------------------------------------------
First $59.750 $47.000 $55.563 $ .41
Second 60.125 54.375 57.625 .41
Third 58.063 49.688 52.688 .41
Fourth 62.000 43.000 44.500 .45
- ------------------------------------------------------------------
Total $1.68
- ------------------------------------------------------------------
CASH
DIVIDENDS
1998 QUARTER HIGH LOW CLOSE DECLARED
- ------------------------------------------------------------------
First $61.625 $49.500 $59.938 $ .39
Second 66.750 53.813 53.875 .39
Third 60.000 41.625 45.000 .39
Fourth 54.625 38.750 54.000 .41
- ------------------------------------------------------------------
Total $1.58
- ------------------------------------------------------------------
DIVIDEND POLICY
Holders of The PNC Financial Services Group, Inc. common stock are entitled to
receive dividends when declared by the Board of Directors out of funds legally
available. The Board presently intends to continue the policy of paying
quarterly cash dividends. However, future dividends will depend on earnings, the
financial condition of The PNC Financial Services Group, Inc. and other factors
including applicable government regulations and policies and contractual
restrictions.
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
P.O. Box 590
Ridgefield Park, New Jersey 07660
(800) 982-7652