THE PNC FINANCIAL SERVICES GROUP, INC. Quarterly Report on Form 10-Q For the quarterly period ended March 31, 2000 Page 1 represents a portion of the first quarter 2000 Financial Review which is not required by the Form 10-Q report and is not "filed" as part of the Form 10-Q. The Quarterly Report on Form 10-Q and cross reference index is on page ___. CONSOLIDATED FINANCIAL HIGHLIGHTS
1999 1999 Three months ended March 31 - dollars in millions, except per share data 2000 Core Reported - -------------------------------------------------------------------------------------------------------------------------- FINANCIAL PERFORMANCE Revenue Net interest income (taxable-equivalent basis) $565 $664 $664 Noninterest income 789 583 731 Total revenue 1,354 1,247 1,395 Net income 308 293 325 Cash earnings* 337 312 344 Per common share Basic earnings 1.04 .95 1.06 Diluted earnings 1.03 .94 1.05 Diluted cash earnings* 1.13 1.01 1.11 Cash dividends declared .45 .41 .41 *Excluding amortization of goodwill - -------------------------------------------------------------------------------------------------------------------------- SELECTED RATIOS Return on Average common shareholders' equity 21.71% 20.63% 22.94% Average assets 1.66 1.54 1.71 Net interest margin 3.46 3.86 3.86 Noninterest income to total revenue 58.27 46.75 52.40 Efficiency ** 57.36 52.06 53.45 ** Excluding amortization, distributions on capital securities and residential mortgage banking risk management activities ==========================================================================================================================
March 31 December 31 March 31 Dollars in millions, except per share data 2000 1999 1999 - -------------------------------------------------------------------------------------------------------------------------- PERIOD-END BALANCE SHEET DATA Assets $74,307 $75,413 $74,868 Earning assets 64,065 64,671 66,710 Loans, net of unearned income 50,653 50,046 52,800 Securities available for sale 7,666 7,611 9,170 Loans held for sale 4,648 5,798 3,599 Deposits 46,701 46,668 45,799 Borrowed funds 18,094 19,347 19,935 Shareholders' equity 6,039 5,946 5,931 Common shareholders' equity 5,726 5,633 5,617 Book value per common share 19.68 19.23 18.78 CAPITAL RATIOS Leverage 6.67% 6.61% 7.28% Common shareholders' equity to total assets 7.71 7.47 7.50 ASSET QUALITY RATIOS Nonperforming assets to total loans, loans held for sale and foreclosed assets .64% .61% .58% Allowance for credit losses to total loans 1.33 1.35 1.27 Allowance for credit losses to nonaccrual loans 219.54 225.42 230.93 Net charge-offs to average loans .25 .23 .56 ==========================================================================================================================
THE PNC FINANCIAL SERVICES GROUP, INC. ---- 1 Financial Review This Financial Review should be read in conjunction with The PNC Financial Services Group, Inc. and subsidiaries' ("Corporation" or "PNC") unaudited Consolidated Financial Statements included herein and the Financial Review and audited Consolidated Financial Statements included in the Corporation's 1999 Annual Report. 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, corporate banking, secured finance, asset management and mortgage banking 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 part of this transition, the Corporation implemented a number of initiatives designed to reshape the traditional bank franchise as well as grow non-traditional, largely fee-based businesses with greater growth potential that are national in scope. These include the sale of the credit card business, exiting certain non-strategic wholesale lending businesses and the continued downsizing of the indirect automobile lending portfolio. PNC also acquired Investor Services Group ("ISG"). The combination of ISG with PFPC, the Corporation's investment servicing subsidiary, created one of the nation's leading full-service processors for pooled investment products. As a result, PNC's noninterest income increased to 58% of total revenue for the first quarter of 2000. These actions have also resulted in a reduction in the loan to deposit ratio to 108% at March 31, 2000 from 121% prior to the implementation of these initiatives at September 30, 1998. SUMMARY FINANCIAL RESULTS Consolidated net income for the first three months of 2000 was $308 million or $1.03 per diluted share, a 10% increase compared with core earnings per diluted share for the first quarter of 1999. Return on average common shareholders' equity was 21.71% and return on average assets was 1.66% for the first quarter of 2000 compared with core returns of 20.63% and 1.54%, respectively, a year ago. Cash earnings per diluted share, which exclude goodwill amortization, were $1.13 for the first quarter of 2000, a 12% increase compared with core cash earnings per diluted share a year ago. Reported earnings for the first quarter of 1999 were $325 million or $1.05 per diluted share. Core earnings per diluted share were $.94 and core cash earnings per diluted share were $1.01 in the first quarter of 1999. Core earnings exclude $290 million of gains on the sales of the credit card business and an equity interest in Electronic Payment Services, Inc. ("EPS") that were partially offset by $142 million of valuation adjustments associated with exiting certain non-strategic wholesale lending businesses and $98 million of costs related to efficiency initiatives in 1999. Taxable-equivalent net interest income was $565 million for the first quarter of 2000, a $99 million decrease compared with the first quarter of 1999. The net interest margin was 3.46% for the first quarter of 2000 compared with 3.86% in the first quarter of 1999. The decreases were primarily due to the downsizing of certain credit-related businesses in 1999 and funding costs related to the ISG acquisition. The provision for credit losses of $31 million in the first quarter of 2000 was equal to net charge-offs. Noninterest income was $789 million for the first quarter of 2000, a $206 million or 35% increase in the quarter-to-quarter comparison, excluding noncore items in 1999. The increase was primarily driven by strong growth in fee-based businesses, the impact of the ISG acquisition and higher equity management revenue. Noninterest expense was $847 million and the efficiency ratio was 57.4% in the first quarter of 2000 compared with $725 million and 52.1%, respectively, in the first quarter of 1999, excluding noncore items. The quarter-to-quarter increases were primarily related to the ISG acquisition and higher expenses commensurate with fee-based revenue growth. Total assets were $74.3 billion at March 31, 2000 compared with $75.4 billion at December 31, 1999. The decrease was primarily due to lower commercial and residential mortgage loans held for sale. THE PNC FINANCIAL SERVICES GROUP, INC. ---- 2 Financial Review Shareholders' equity totaled $6.0 billion, the leverage ratio was 6.67% and Tier I and total risk-based capital ratios were 7.25% and 11.34%, respectively, at March 31, 2000. Overall asset quality remained relatively stable during the first quarter of 2000. The ratio of nonperforming assets to total loans, loans held for sale and foreclosed assets was .64% at March 31, 2000 compared with .61% at December 31, 1999. Nonperforming assets were $355 million at March 31, 2000 compared with $338 million at December 31, 1999. The allowance for credit losses was $674 million and represented 1.33% of period-end loans and 220% of nonaccrual loans at March 31, 2000. The comparable amounts were 1.35% and 225%, respectively, at December 31, 1999. Net charge-offs were $31 million or .25% of average loans in the first quarter of 2000 compared with $30 million or .23%, respectively, in the fourth quarter of 1999. 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 and future results could differ from historic performance. 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 or historic performance: increased credit risk; the introduction, withdrawal, success and timing of business initiatives and strategies; 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; economic conditions; changes in interest rates and financial and capital markets; inflation; investment performance; customer disintermediation; customer borrowing, repayment, investment and deposit practices; customer acceptance of PNC products and services; and the impact, extent and timing of technological changes, capital management activities, and actions of the Federal Reserve Board and legislative and regulatory actions and reforms. THE PNC FINANCIAL SERVICES GROUP, INC. ---- 3 REVIEW OF BUSINESSES PNC operates eight major businesses engaged in regional banking, corporate banking, secured finance, asset management, and mortgage banking activities: Regional Banking, Corporate Banking, PNC Real Estate Finance, PNC Business Credit, PNC Advisors, BlackRock, PFPC and PNC Mortgage. 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 business 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 presentation of business results was changed during the first quarter of 2000 to reflect the Corporation's current operating strategy and recent organizational changes. Middle market and equipment leasing activities (previously included in Regional Banking) are reported in Corporate Banking. In addition, PNC Real Estate Finance and PNC Business Credit are reported separately within PNC Secured Finance. Regional real estate lending activities (previously included in Regional Banking) are reported in PNC Real Estate Finance. Business financial results for the first quarter of 2000 and 1999 are presented consistent with this structure. The management accounting process uses various balance sheet and income statement assignments and transfers to measure performance of the businesses. Methodologies change from time to time as management accounting practices are enhanced and businesses change. Securities or borrowings and related net interest income are assigned based on the net asset or liability position of each business. Capital is assigned based on management's assessment of inherent risks and equity levels at independent companies providing similar products and services. The allowance for credit losses is allocated to the businesses based on risk inherent in the loan portfolios. Support areas not directly aligned with the businesses are allocated primarily based on the utilization of services. Total business financial results differ from consolidated financial results primarily due to differences between management accounting practices and generally accepted accounting principles, divested and exited businesses, equity management activities, minority interests, residual asset and liability management activities, eliminations and unassigned items, the impact of which is reflected in Other.
RESULTS OF BUSINESSES Return on Earnings Revenue * Assigned Capital Average Assets ----------------------- --------------------- --------------------- ---------------------- Three months ended March 31 - dollars 2000 1999 2000 1999 2000 1999 2000 1999 in millions - ----------------------------------------- --------- ------------ ---------- ---------- --------- ----------- ----------- ---------- PNC Bank Regional Banking $129 $116 $477 473 20% 19% $37,866 $37,525 Corporate Banking 64 54 214 172 22 19 15,950 15,679 - ---------------------------------------- ---------- ------------ ---------- ---------- ----------- ---------- Total PNC Bank 193 170 691 645 21 19 53,816 53,204 PNC Secured Finance PNC Real Estate Finance 13 15 46 48 14 15 5,382 5,634 PNC Business Credit 13 8 28 18 38 30 2,084 1,597 - ---------------------------------------- ---------- ------------ ---------- ---------- ----------- ---------- Total PNC Secured Finance 26 23 74 66 20 18 7,466 7,231 Asset Management PNC Advisors 41 36 204 179 30 26 3,598 3,249 BlackRock 19 12 108 88 26 43 388 400 PFPC 6 11 165 54 12 44 1,603 268 - ---------------------------------------- ---------- ------------ ---------- ---------- ----------- ---------- Total Asset Management 66 59 477 321 25 31 5,589 3,917 PNC Mortgage 6 11 76 101 6 10 6,333 7,084 - ---------------------------------------- ---------- ------------ ---------- ---------- ----------- ---------- Total businesses 291 263 1,318 1,133 20 20 73,204 71,436 Other 17 30 36 114 1,473 5,522 - ---------------------------------------- ---------- ------------ ---------- ---------- ----------- ---------- Total consolidated - core 308 293 1,354 1,247 22 21 74,677 76,958 Gain on sale of credit card business 125 193 Gain on sale of equity interest in EPS 63 97 Wholesale lending repositioning (92) (142) Costs related to efficiency initiatives (64) - ---------------------------------------- ---------- ------------ ---------- ---------- --------- ----------- ----------- ---------- Total consolidated - reported $308 $ 325 $1,354 $1,395 22 23 $74,677 $76,958 - ---------------------------------------- ---------- ------------ ---------- ---------- --------- ----------- ----------- ----------
* Taxable-equivalent basis THE PNC FINANCIAL SERVICES GROUP, INC. ---- 4 Financial Review REGIONAL BANKING Three months ended March 31 - dollars in millions 2000 1999 - ------------------------------------------------------------------ INCOME STATEMENT Net interest income $344 $352 Noninterest income 133 121 - ------------------------------------------------------------------ Total revenue 477 473 Provision for credit losses 12 18 Noninterest expense 264 271 - ------------------------------------------------------------------ Pretax earnings 201 184 Income taxes 72 68 - ------------------------------------------------------------------ Earnings $129 $116 - ------------------------------------------------------------------ AVERAGE BALANCE SHEET Loans Consumer Home equity $5,252 $5,055 Indirect 1,435 2,287 Education 97 1,348 Other consumer 786 672 - ------------------------------------------------------------------ Total consumer 7,570 9,362 Commercial 3,725 3,771 Residential mortgage 11,603 11,125 Other 1,320 1,188 - ------------------------------------------------------------------ Total loans 24,218 25,446 Securities available for sale 5,676 4,822 Loans held for sale 1,429 Assigned assets and other assets 6,543 7,257 - ------------------------------------------------------------------ Total assets $37,866 $37,525 - ------------------------------------------------------------------ Deposits Noninterest-bearing demand $4,594 $5,224 Interest-bearing demand 5,274 4,607 Money market 9,482 8,422 Savings 2,077 2,460 Certificates 13,611 13,679 - ------------------------------------------------------------------ Total net deposits 35,038 34,392 Other liabilities 274 601 Assigned capital 2,554 2,532 - ------------------------------------------------------------------ Total funds $37,866 $37,525 - ------------------------------------------------------------------ PERFORMANCE RATIOS Return on assigned capital 20% 19% Noninterest income to total revenue 28 26 Efficiency 53 55 ================================================================== Regional Banking provides credit, deposit, branch-based brokerage and electronic banking products and services to retail customers as well as credit, treasury management and capital markets products and services to small businesses primarily within PNC's geographic footprint. Regional Banking's strategic focus is 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 45% of total business earnings for the first three months of 2000 compared with 44% for the first three months of 1999. Earnings increased 11% to $129 million for the first three months of 2000 and performance ratios improved. Total revenue was $477 million for the first three months of 2000 compared with $473 million for the first three months of 1999. The increase was primarily due to a $12 million or 10% increase in noninterest income that was driven by higher consumer service and brokerage fees, partially offset by the downsizing of the indirect automobile lending portfolio and the comparative impact of branch sales in 1999. Consumer loans declined primarily due to the continued downsizing of the indirect automobile lending portfolio as well as the decision to sell education loans in repayment that were reclassified to held for sale. Interest-bearing demand and money market deposits increased $1.7 billion or 13% primarily due to the impact of strategic marketing initiatives, which reflects PNC's focus on deepening customer relationships. 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. THE PNC FINANCIAL SERVICES GROUP, INC. ---- 5 CORPORATE BANKING Three months ended March 31 - dollars in millions 2000 1999 - ----------------------------------------------------------------- INCOME STATEMENT Credit-related revenue $99 $88 Noncredit revenue 115 84 - ----------------------------------------------------------------- Total revenue 214 172 Provision for credit losses 15 3 Noninterest expense 101 84 - ----------------------------------------------------------------- Pretax earnings 98 85 Income taxes 34 31 - ----------------------------------------------------------------- Earnings $64 $54 - ----------------------------------------------------------------- AVERAGE BALANCE SHEET Loans Middle market $5,545 $5,469 Specialized industries 3,814 4,064 Large corporate 2,684 2,573 Leasing 1,719 1,288 Other 247 430 - ----------------------------------------------------------------- Total loans 14,009 13,824 Other assets 1,941 1,855 - ----------------------------------------------------------------- Total assets $15,950 $15,679 - ----------------------------------------------------------------- Net deposits $4,526 $4,371 Assigned funds and other liabilities 10,228 10,132 Assigned capital 1,196 1,176 - ----------------------------------------------------------------- Total funds $15,950 $15,679 - ----------------------------------------------------------------- PERFORMANCE RATIOS Return on assigned capital 22% 19% Noncredit revenue to total revenue 54 49 Efficiency 47 48 ================================================================= Corporate Banking provides specialized credit, equipment leasing, treasury management and capital markets products and services to large and mid-sized corporations, institutions and government entities primarily within PNC's geographic region. The strategic focus for Corporate Banking is to emphasize higher-margin noncredit products and services, especially treasury management and capital markets, as well as disciplined balance sheet growth primarily driven through the expansion of equipment leasing. 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 and reported in Other. Corporate Banking contributed 22% of total business earnings for the first three months of 2000 compared with 21% for the first three months of 1999. Earnings increased $10 million or 19% to $64 million for the first three months of 2000 and performance ratios improved. Total revenue of $214 million for the first three months of 2000 increased $42 million or 24% compared with the first three months of 1999. Credit-related revenue increased 13% in the quarter-to-quarter comparison driven by higher loans in the middle market, large corporate and leasing segments. Noncredit revenue, which includes noninterest income and the benefit of compensating balances received in lieu of fees, was $115 million for the first three months of 2000, a $31 million or 37% increase compared with the first three months of 1999 primarily driven by increases in treasury management and capital markets fees, as well as revenue associated with equity investments. Noncredit revenue comprised 54% of total revenue for the first three months of 2000 reflecting the emphasis on sales of fee-based products. The provision for credit losses was $15 million for the first three months of 2000, a $12 million increase compared with the prior-year quarter due to a higher level of net charge-offs. The increase in noninterest expense in the quarter-to-quarter comparison was commensurate with revenue growth. 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 $85 million for the first three months of 2000, a 20% increase compared with the first three months of 1999. Consolidated revenue from capital markets was $34 million for the first three months of 2000, a 34% increase compared with the first three months of 1999. 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. THE PNC FINANCIAL SERVICES GROUP, INC. ---- 6 Financial Review PNC REAL ESTATE FINANCE Three months ended March 31 - dollars in millions 2000 1999 - ---------------------------------------------------------------- INCOME STATEMENT Net interest income $27 $30 Noninterest income Net commercial mortgage banking 12 9 Other 7 9 - ---------------------------------------------------------------- Total noninterest income 19 18 - ---------------------------------------------------------------- Total revenue 46 48 Provision for credit losses Noninterest expense 35 29 - ---------------------------------------------------------------- Pretax earnings 11 19 Income taxes (2) 4 - ---------------------------------------------------------------- Earnings $13 $15 - ---------------------------------------------------------------- AVERAGE BALANCE SHEET Loans Commercial - real estate related $2,019 $2,390 Commercial real estate 2,438 2,530 - ---------------------------------------------------------------- Total loans 4,457 4,920 Commercial mortgages held for sale 99 62 Other assets 826 652 - ---------------------------------------------------------------- Total assets $5,382 $5,634 - ---------------------------------------------------------------- Deposits $226 $199 Assigned funds and other liabilities 4,770 5,035 Assigned capital 386 400 - ---------------------------------------------------------------- Total funds $5,382 $5,634 - ---------------------------------------------------------------- PERFORMANCE RATIOS Return on assigned capital 14% 15% Noninterest income to total revenue 41 38 Efficiency 61 48 ================================================================ PNC Real Estate Finance provides credit, capital markets, treasury management and loan servicing products and services to private developers, real estate investment trusts, pension funds and the affordable housing market nationally. Over the past several years, through customer segmentation and strategic acquisitions, PNC 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. PNC Real Estate Finance made the decision to exit the cyclical mortgage warehouse lending business and certain non-strategic commercial real estate portfolios at the end of 1999. These activities are excluded from business results in both periods and reported in Other. PNC Real Estate Finance contributed 4% of total business earnings for the first three months of 2000 compared with 6% for the first three months of 1999. Earnings were $13 million for the first three months of 2000 compared with $15 million for the first three months of 1999. Total revenue was $46 million for the first three months of 2000 compared with $48 million for the first three months of 1999 as increases in treasury management, affordable housing and commercial mortgage servicing fees in 2000 were more than offset by the comparative impact of gains from workout activities in 1999. There were no gains from commercial mortgage-backed securitizations in the first quarter of 2000 or 1999. Noninterest expense was $35 million for the first three months of 2000 compared with $29 million in the same period last year. The increase was primarily due to passive losses on low income housing equity investments, the comparative impact of legal expense recoveries from loan workout activities in 1999 and investments in technology to support the loan servicing platform. The increase in passive losses on low income housing investments was more than offset by related tax credits that resulted in an income tax benefit for the first three months of 2000. COMMERCIAL MORTGAGE SERVICING PORTFOLIO In billions 2000 1999 - ---------------------------------------------------------------- January 1 $45 $39 Acquisitions/additions 3 4 Repayments/transfers (2) (3) - ---------------------------------------------------------------- March 31 $46 $40 ================================================================ At March 31, 2000, the commercial mortgage servicing portfolio was $46 billion, a 15% increase compared with March 31, 1999. PNC Real Estate 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. THE PNC FINANCIAL SERVICES GROUP, INC. ---- 7 PNC BUSINESS CREDIT Three months ended March 31 - dollars in millions 2000 1999 - ---------------------------------------------------------------- INCOME STATEMENT Net interest income $24 $16 Noninterest income 4 2 - ---------------------------------------------------------------- Total revenue 28 18 Provision for credit losses Noninterest expense 7 6 - ---------------------------------------------------------------- Pretax earnings 21 12 Income taxes 8 4 - ---------------------------------------------------------------- Earnings $13 $8 - ---------------------------------------------------------------- AVERAGE BALANCE SHEET Loans $1,999 $1,565 Other assets 85 32 - ---------------------------------------------------------------- Total assets $2,084 $1,597 - ---------------------------------------------------------------- Deposits $44 $41 Assigned funds and other liabilities 1,902 1,447 Assigned capital 138 109 - ---------------------------------------------------------------- Total funds $2,084 $1,597 - ---------------------------------------------------------------- PERFORMANCE RATIOS Return on assigned capital 38% 30% Noninterest income to total revenue 14 11 Efficiency 21 28 ================================================================ PNC Business Credit provides asset-based lending, capital markets and treasury management products and services to middle market customers on a national basis. PNC Business Credit's strategic focus is to build scale in this business through the disciplined expansion of existing offices as well as the addition of new marketing locations. PNC Business Credit contributed 4% of total business earnings for the first three months of 2000 compared with 3% for the first three months of 1999. Earnings increased $5 million or 63% to $13 million for the first three months of 2000 compared with the first three months of 1999. Revenue was $28 million for the first three months of 2000, a $10 million or 56% increase compared with the first three months of 1999 primarily due to the impact of higher loan outstandings associated with the strategic expansion of this business. Noninterest expense was $7 million and the efficiency ratio improved to 21% for the first three months of 2000 compared with $6 million and 28%, respectively, in the same period last year. The return on assigned capital improved to 38% for the first three months of 2000 due to strong revenue growth and improved efficiency. PNC Business Credit 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. THE PNC FINANCIAL SERVICES GROUP, INC. ---- 8 Financial Review PNC ADVISORS Three months ended March 31 - dollars in millions 2000 1999 - ---------------------------------------------------------------- INCOME STATEMENT Net interest income $35 $33 Noninterest income Investment management and trust 100 94 Brokerage 50 36 Other 19 16 - ---------------------------------------------------------------- Total noninterest income 169 146 - ---------------------------------------------------------------- Total revenue 204 179 Provision for credit losses 3 1 Noninterest expense 135 120 - ---------------------------------------------------------------- Pretax earnings 66 58 Income taxes 25 22 - ---------------------------------------------------------------- Earnings $41 $36 - ---------------------------------------------------------------- AVERAGE BALANCE SHEET Loans Residential mortgage $978 $1,004 Consumer 954 952 Commercial 658 621 Other 552 255 - ---------------------------------------------------------------- Total loans 3,142 2,832 Other assets 456 417 - ---------------------------------------------------------------- Total assets $3,598 $3,249 - ---------------------------------------------------------------- Deposits $2,084 $2,431 Assigned funds and other liabilities 967 262 Assigned capital 547 556 - ---------------------------------------------------------------- Total funds $3,598 $3,249 - ---------------------------------------------------------------- PERFORMANCE RATIOS Return on assigned capital 30% 26% Noninterest income to total revenue 83 82 Efficiency 65 66 ================================================================ 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 pension funds, 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. PNC Advisors continues to expand Hilliard Lyons, PNC's high-end brokerage company that serves the affluent, throughout the Corporation's geographic region, which includes some of the nation's wealthiest metropolitan areas. PNC Advisors contributed 14% of total business earnings for the first three months of 2000 and 1999. Earnings of $41 million for the first three months of 2000 increased $5 million or 14% compared with the same period last year. Revenue increased $25 million or 14% for the first three months of 2000 compared with the first three months of 1999. The increase was primarily driven by higher brokerage revenue resulting from the expansion of PNC Advisors' brokerage distribution network and significant activity in the equity markets. Higher investment management and trust revenue, primarily resulting from new business, also contributed to higher noninterest income. Noninterest expense increased in the quarter-to-quarter comparison commensurate with revenue growth. ASSETS UNDER MANAGEMENT* March 31 - in billions 2000 1999 - ---------------------------------------------------------------- Personal investment management and trust $59 $57 Institutional trust 11 9 - ---------------------------------------------------------------- Total $70 $66 ================================================================ * Assets under management do not include brokerage assets administered. At March 31, 2000, PNC Advisors managed $70 billion of assets, a 6% increase compared with March 31, 1999 primarily due to new business. Brokerage assets administered by PNC Advisors increased $3 billion in the period-to-period comparison to $28 billion at March 31, 2000 reflecting increased asset gathering at Hilliard Lyons. PNC Advisors revenue and financial results are affected by, among other things, the relative investment performance of assets under management, the appreciation or depreciation in the net asset values of assets under management and financial market conditions. Accordingly, future results could differ materially from historic performance. THE PNC FINANCIAL SERVICES GROUP, INC. ---- 9 BLACKROCK Three months ended March 31 - dollars in millions 2000 1999 - ---------------------------------------------------------------- INCOME STATEMENT Investment advisory and administrative fees $102 $83 Other income 6 5 - ---------------------------------------------------------------- Total revenue 108 88 Operating expense 54 44 Fund administration and servicing costs - affiliates 20 18 Goodwill amortization 2 2 - ---------------------------------------------------------------- Total expense 76 64 Operating income 32 24 Nonoperating income (expense) 1 (3) - ---------------------------------------------------------------- Pretax earnings 33 21 Income taxes 14 9 - ---------------------------------------------------------------- Earnings $19 $12 - ---------------------------------------------------------------- PERIOD-END BALANCE SHEET Goodwill $192 $201 Other assets 196 199 - ---------------------------------------------------------------- Total assets $388 $400 - ---------------------------------------------------------------- Borrowings $178 Other liabilities $88 104 Shareholders' equity 300 118 - ---------------------------------------------------------------- Total funds $388 $400 - ---------------------------------------------------------------- PERFORMANCE RATIOS Return on equity 26% 43% Operating margin* 36 34 Diluted earnings per share $.30 $.22 ================================================================ * Excludes the impact of 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 contributed 7% of total business earnings for the first three months of 2000 compared with 4% for the first three months of 1999. Earnings of $19 million for the first three months of 2000 increased 57% compared with the same period last year. Total revenue for the first three months of 2000 increased $20 million or 23% compared with the first three months of 1999 primarily due to strong growth in investment advisory and administrative fees resulting from new asset management mandates, which represented $27 billion of the $32 billion or 23% increase in assets under management. The increase in operating expense in the quarter-to-quarter comparison supported revenue growth. At March 31, 2000, BlackRock managed $172 billion of assets for individual and institutional investors. ASSETS UNDER MANAGEMENT March 31 - in billions 2000 1999 - ---------------------------------------------------------------- Separate Accounts Fixed income* $80 $64 Liquidity 19 14 Equity 6 2 - ---------------------------------------------------------------- Total Separate Accounts 105 80 Mutual Funds Fixed income 14 14 Liquidity 37 34 Equity 16 12 - ---------------------------------------------------------------- Total Mutual Funds 67 60 - ---------------------------------------------------------------- Total assets under management $172 $140 - ---------------------------------------------------------------- Proprietary mutual funds BlackRock Funds $29 $25 Provident Institutional Funds 26 23 - ---------------------------------------------------------------- Total proprietary mutual funds $55 $48 ================================================================ * Includes alternative investment products. BlackRock revenue and financial results are impacted by, among other things, the relative investment performance of BlackRock's sponsored investment products and separately managed accounts, the appreciation or depreciation in the net asset values of assets under management and financial market conditions. Accordingly, future results could differ materially from historic performance. BlackRock, Inc. is a publicly traded company that is 70% owned by PNC. 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. THE PNC FINANCIAL SERVICES GROUP, INC. ---- 10 Financial Review PFPC Three months ended March 31 - dollars in millions 2000 1999 - ---------------------------------------------------------------- INCOME STATEMENT Revenue $165 $54 Operating expense 128 35 - ---------------------------------------------------------------- Operating income 37 19 Debt financing 20 Amortization 7 1 - ---------------------------------------------------------------- Pretax earnings 10 18 Income taxes 4 7 - ---------------------------------------------------------------- Earnings $6 $11 - ---------------------------------------------------------------- AVERAGE BALANCE SHEET Total assets $1,603 $268 - ---------------------------------------------------------------- Deposits $136 $149 Assigned funds and other liabilities 1,261 18 Assigned capital 206 101 - ---------------------------------------------------------------- Total funds $1,603 $268 - ---------------------------------------------------------------- PERFORMANCE RATIOS Return on assigned capital 12% 44% Operating margin 22 35 ================================================================ PFPC, the Corporation's investment servicing 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 Investor Services Group ("ISG"), one of the nation's leading providers of back-office services to mutual funds and retirement plans. The acquisition added two key related businesses, as well as retirement plan servicing, to PFPC's expanding operations. The integration of ISG into PFPC continues as scheduled. PFPC contributed 2% of total business earnings for the first three months of 2000 compared with 4% for the first three months of 1999. Earnings decreased $5 million in the quarter-to-quarter comparison primarily due to the impact of the ISG acquisition. Excluding the net impact of ISG, earnings increased 23% in the quarter-to-quarter comparison. Revenue increased $111 million to $165 million for the first three months of 2000 compared with the first three months of 1999. The acquisition of ISG accounted for $97 million of the increase in revenue. The remaining increase was driven by new business, existing client growth and market appreciation. Operating expense increased in the quarter-to-quarter comparison and performance ratios were impacted by the ISG acquisition and infrastructure costs associated with business expansion. SERVICING STATISTICS March 31 2000 1999 - ---------------------------------------------------------------- Accounting/administration ($ in billions) $448 $266 Custody ($ in billions) $425 $338 Transfer agency shareholder accounts (in millions) 39 3 ================================================================ The increases in accounting/administration assets serviced and transfer agency shareholder accounts were primarily due to the ISG acquisition. PFPC revenue and financial results are affected by, among other things, the number and value of customer accounts serviced and financial market conditions. Accordingly, future results could differ materially from historic performance. THE PNC FINANCIAL SERVICES GROUP, INC. ---- 11 PNC MORTGAGE Three months ended March 31 - dollars in millions 2000 1999 - ---------------------------------------------------------------- INCOME STATEMENT Net mortgage banking revenue Residential mortgage servicing $99 $75 Origination and securitization 12 58 MSR amortization, net of servicing hedge (40) (57) - ---------------------------------------------------------------- Net mortgage banking revenue 71 76 Net interest income 5 25 - ---------------------------------------------------------------- Total revenue 76 101 Operating expense 65 83 - ---------------------------------------------------------------- Pretax earnings 11 18 Income taxes 5 7 - ---------------------------------------------------------------- Earnings $6 $11 - ---------------------------------------------------------------- AVERAGE BALANCE SHEET Residential mortgages held for sale $2,115 $2,948 Securities available for sale 1,883 2,669 Mortgage servicing rights and other assets 2,335 1,467 - ---------------------------------------------------------------- Total assets $6,333 $7,084 - ---------------------------------------------------------------- Escrow deposits $959 $1,220 Assigned funds and other liabilities 4,962 5,404 Assigned capital 412 460 - ---------------------------------------------------------------- Total funds $6,333 $7,084 - ---------------------------------------------------------------- PERFORMANCE RATIOS Return on assigned capital 6% 10% Net mortgage banking revenue to total revenue 93 75 Efficiency 56 53 ================================================================ 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 2% of total business earnings for the first three months of 2000 compared with 4% for the first three months of 1999. Earnings decreased in the comparison due to lower origination and related securitization volume resulting from lower refinancing activity. The decrease in origination and securitization income was partially offset by higher residential mortgage servicing revenue due to the impact of a larger servicing portfolio. Operating expense decreased $18 million or 21% in the quarter-to-quarter comparison due to operating expense reduction initiatives associated with lower origination volume. During the first three months of 2000, PNC Mortgage funded $2 billion of residential mortgages, with 38% consisting of retail originations. The comparable amounts were $6 billion and 40%, respectively, for the first three months of 1999. Production volume for the first three months of 2000 consisted of $1 billion of originated loans and $1 billion of mortgages acquired through correspondent and contractual flow agreements. The corresponding amounts for the first three months of 1999 were $2 billion and $4 billion, respectively. RESIDENTIAL MORTGAGE SERVICING PORTFOLIO In billions 2000 1999 - ---------------------------------------------------------------- January 1 $75 $62 Production volume 2 6 Acquisitions 3 2 Repayments (2) (4) - ---------------------------------------------------------------- March 31 $78 $66 ================================================================ At March 31, 2000, the residential mortgage servicing portfolio totaled $78 billion. Loans included in this portfolio that were serviced for others totaled $70 billion and had a weighted-average coupon of 7.61%. Capitalized residential mortgage servicing rights ("MSR") totaled $1.6 billion at March 31, 2000, and had an estimated fair value of $1.8 billion. The master servicing portfolio grew 18% in the quarter-to-quarter comparison to $36 billion at March 31, 2000. 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. THE PNC FINANCIAL SERVICES GROUP, INC. ---- 12 Financial Review CONSOLIDATED INCOME STATEMENT REVIEW
NET INTEREST INCOME ANALYSIS Taxable-equivalent basis Average Balances Interest Income/Expense Average Yields/Rates Three months ended March 31 - ------------------------------ -------------------------- ----------------------------- dollars in millions 2000 1999 Change 2000 1999 Change 2000 1999 Change - ------------------------------------------------------------------------------------------------------------------------------------ Interest-earning assets Loans held for sale $5,434 $3,383 $2,051 $107 $56 $51 7.86% 6.68% 118bp Securities available for sale 8,011 7,755 256 118 107 11 5.91 5.55 36 Loans, net of unearned income Consumer 9,261 10,955 (1,694) 192 222 (30) 8.33 8.21 12 Credit card 2,724 (2,724) 100 (100) 14.91 NM Residential mortgage 12,947 12,184 763 229 216 13 7.07 7.09 (2) Commercial 21,793 24,574 (2,781) 447 462 (15) 8.12 7.52 60 Commercial real estate 2,698 3,398 (700) 59 65 (6) 8.60 7.70 90 Lease financing 2,958 2,443 515 54 44 10 7.33 7.17 16 Other 688 417 271 14 8 6 8.09 7.69 40 - ------------------------------------------------------------------------------------------------------ Total loans, net of unearned income 50,345 56,695 (6,350) 995 1,117 (122) 7.87 7.91 (4) Other 1,173 1,005 168 22 16 6 7.60 6.19 141 - ------------------------------------------------------------------------------------------------------ Total interest-earning assets/ interest income 64,963 68,838 (3,875) 1,242 1,296 (54) 7.62 7.56 6 Noninterest-earning assets 9,714 8,120 1,594 - -------------------------------------------------------------------------- Total assets $74,677 $76,958 $(2,281) ========================================================================== Interest-bearing liabilities Deposits Demand and money market $18,355 $16,825 $1,530 138 113 25 3.03 2.73 30 Savings 2,138 2,535 (397) 9 10 (1) 1.64 1.63 1 Retail certificates of deposit 14,591 14,652 (61) 191 184 7 5.25 5.08 17 Other time 637 2,610 (1,973) 10 35 (25) 6.36 5.35 101 Deposits in foreign offices 1,489 759 730 21 9 12 5.63 4.78 85 - ------------------------------------------------------------------------------------------------------ Total interest-bearing deposits 37,210 37,381 (171) 369 351 18 3.98 3.80 18 Borrowed funds 20,096 21,584 (1,488) 308 281 27 6.08 5.21 87 - ------------------------------------------------------------------------------------------------------ Total interest-bearing liabilities/ interest expense 57,306 58,965 (1,659) 677 632 45 4.72 4.31 41 -------------------------------------------------------- Noninterest-bearing liabilities, capital securities and shareholders' equity 17,371 17,993 (622) - -------------------------------------------------------------------------- Total liabilities, capital securities and shareholders' equity $74,677 $76,958 $(2,281) ========================================================================== Interest rate spread 2.90 3.25 (35) Impact of noninterest-bearing sources .56 .61 (5) ----------------------------- Net interest income/margin $565 $664 $(99) 3.46% 3.86% (40)bp ====================================================================================================================================
NM - not meaningful 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 $565 million for the first quarter of 2000, a $99 million decrease compared with the first quarter of 1999. The net interest margin was 3.46% for the first quarter of 2000 compared with 3.86% in the first quarter of 1999. The decreases were primarily due to the sale of the credit card business in 1999 and the impact of funding cost associated with the ISG acquisition. As a result of the credit card sale and the exit and downsizing of certain credit-related businesses in 1999, loans represented 77% of average earning assets for the first three months of 2000 compared with 82% for the prior-year period. Average loans held for sale increased $2.1 billion in the quarter-to-quarter comparison, reflecting the decision to exit certain non-strategic wholesale lending businesses during 1999. Securities available for sale represented 10% of average earning assets in the first quarter of 2000 compared with 8% in the first quarter of 1999, excluding securities used to hedge residential mortgage servicing rights. 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 the first three months of 2000 and 1999, respectively, with the remainder primarily comprised of wholesale funding obtained at prevailing market rates. The average loan to deposit ratio declined to 111% for the first three months of 2000 compared with 122% for the first three months of 1999. THE PNC FINANCIAL SERVICES GROUP, INC. ---- 13 Average demand and money market deposits increased $1.5 billion or 9% to $18.4 billion for the first three months of 2000, primarily reflecting the impact of strategic marketing initiatives to grow more valuable transaction accounts, while other time deposits decreased in the quarter-to-quarter comparison. Average borrowed funds for the first three months of 2000 decreased $1.5 billion compared with the first three months of 1999 as lower bank notes and repurchase agreements more than offset increases in Federal Home Loan Bank borrowings and subordinated debt. The increase in subordinated debt was related to funding the ISG acquisition. PROVISION FOR CREDIT LOSSES The provision for credit losses was $31 million for the first three months of 2000 compared with $78 million for the first three months of 1999. Net charge-offs were $31 million or .25% of average loans for the first three months of 2000 compared with $78 million or .56%, respectively, for the first three months of 1999. 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 .15% of average loans for the first three months of 1999. NONINTEREST INCOME Noninterest income was $789 million for the first three months of 2000 and represented 58% of total revenue. Noninterest income increased $206 million or 35% in the quarter-to-quarter comparison, excluding $290 million of gains on the sales of the credit card business and an equity interest in EPS that were partially offset by $142 million of valuation adjustments associated with exiting certain non-strategic wholesale lending businesses in 1999. The increase was primarily driven by strong growth in fee-based businesses, the impact of the ISG acquisition and equity management revenue. Asset management fees of $186 million for the first three months of 2000 increased $25 million or 16% driven by new business and market appreciation. Assets under management were $220 billion at March 31, 2000, a 21% increase compared with March 31, 1999. Fund servicing fees were $155 million for the first quarter of 2000, a $103 million increase compared with the first quarter of 1999 primarily driven by the ISG acquisition, new business and market appreciation. Brokerage fees of $71 million for the first three months of 2000 increased $15 million or 27% reflecting the expansion of Hilliard Lyons' distribution network and the impact of significant activity in the equity markets. Consumer services revenue of $51 million for the first three months of 2000 remained consistent in the quarter-to-quarter comparison, excluding credit card fees in the first three months of 1999. Corporate services revenue of $82 million for the first three months of 2000 increased $10 million or 14% in the quarter-to-quarter comparison, excluding valuation adjustments related to the exit of certain non-strategic wholesale lending businesses in 1999. The increase included, among other things, double-digit increases in capital markets and treasury management fees. Net residential mortgage banking revenue of $54 million for the first three months of 2000 decreased $6 million compared with the prior-year quarter as an increase in net servicing revenue was more than offset by the impact of lower refinancing activity. Equity management revenue was $87 million for the first three months of 2000 compared with $9 million in the first three months of 1999. The majority of the revenue in the first three months of 2000 resulted from realized gains. Other noninterest income of $56 million for the first three months of 2000 increased $7 million in the quarter-to-quarter comparison, excluding non-core items in the first quarter of 1999. NONINTEREST EXPENSE Noninterest expense was $847 million in the first three months of 2000 compared with $725 million in the first three months of 1999, excluding $98 million of costs related to efficiency initiatives last year. The efficiency ratio was 57.4% in the first three months of 2000 compared with 52.1% in the prior-year quarter, excluding non-core items. The quarter-to-quarter increases were primarily related to the ISG acquisition and higher expenses commensurate with fee-based revenue growth. Average full-time equivalent employees totaled approximately 26,100 and 25,500 for the first three months of 2000 and 1999, respectively. The increase was primarily due to the net impact of the ISG acquisition, partially offset by the impact of efficiency initiatives in the traditional banking and mortgage banking businesses. THE PNC FINANCIAL SERVICES GROUP, INC. ---- 14 Financial Review CONSOLIDATED BALANCE SHEET REVIEW LOANS Loans outstanding of $50.7 billion at March 31, 2000 increased $.6 billion from year-end 1999 primarily due to an increase in commercial and residential mortgage loans. Total outstandings and exposure designated for exit during 1999 totaled $3.7 billion and $10.5 billion, respectively. At March 31, 2000, the remaining outstandings and exposure associated with this initiative totaled $2.1 billion and $6.2 billion, respectively. Loans that were designated for exit in 1999 and reclassified to held for sale are excluded from the following table. DETAILS OF LOANS March 31 December 31 In millions 2000 1999 - ----------------------------------------------------------------- Consumer Home equity $6,126 $6,068 Automobile 1,530 1,691 Other 1,536 1,598 - ----------------------------------------------------------------- Total consumer 9,192 9,357 Residential mortgage 13,085 12,869 Commercial Manufacturing 5,430 5,355 Retail/wholesale 4,417 4,301 Service providers 3,021 3,208 Real estate related 2,815 2,862 Communications 1,341 1,370 Health care 798 772 Financial services 1,291 1,300 Other 2,920 2,300 - ----------------------------------------------------------------- Total commercial 22,033 21,468 Commercial real estate Mortgage 717 761 Real estate project 1,948 1,969 - ----------------------------------------------------------------- Total commercial real estate 2,665 2,730 Lease financing 3,701 3,663 Other 701 683 Unearned income (724) (724) - ----------------------------------------------------------------- Total, net of unearned income $50,653 $50,046 ================================================================= Loan portfolio composition continued to be geographically diversified among numerous industries and types of businesses. NET UNFUNDED COMMITMENTS March 31 December 31 In millions 2000 1999 - --------------------------------------------------------------------- Consumer $4,672 $4,603 Residential mortgage 1,520 648 Commercial 24,151 23,953 Commercial real estate 397 38 Lease financing 103 136 Other 308 1,513 - --------------------------------------------------------------------- Total $31,151 $30,891 ===================================================================== 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 $7.0 billion and $7.2 billion at March 31, 2000 and December 31, 1999, respectively. Unfunded commitments related to loans designated for exit totaling $4.1 billion at March 31, 2000 and $4.8 billion at December 31, 1999, are excluded from the above table. Net outstanding letters of credit totaled $4.2 billion and $4.6 billion at March 31, 2000 and December 31, 1999, 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. SECURITIES AVAILABLE FOR SALE The fair value of the securities available for sale portfolio increased $55 million from December 31, 1999 to $7.7 billion at March 31, 2000. Total securities used to hedge residential MSR were $1.8 billion at March 31, 2000. Portfolio securities represented 8% of total assets at March 31, 2000. The expected weighted-average life of the portfolio securities decreased to 4 years and 3 months at March 31, 2000, compared with 4 years and 7 months at year-end 1999. The expected weighted-average life of total securities available for sale decreased to 5 years and 4 months at March 31, 2000 compared with 5 years and 7 months at year-end 1999. DETAILS OF SECURITIES AVAILABLE FOR SALE Amortized Fair In millions Cost Value - ---------------------------------------------------------------- March 31, 2000 PORTFOLIO SECURITIES Debt securities U.S. Treasury and government agencies $159 $153 Mortgage-backed 3,777 3,613 Asset-backed 1,320 1,286 State and municipal 135 132 Other debt 39 38 Corporate stocks and other 673 684 - ---------------------------------------------------------------- Total $6,103 $5,906 ================================================================ MORTGAGE BANKING RISK MANAGEMENT Debt securities U.S. Treasury and government agencies $1,885 $1,698 Mortgage-backed 66 62 - ---------------------------------------------------------------- Total $1,951 $1,760 - ---------------------------------------------------------------- Total securities available for sale $8,054 $7,666 ================================================================ December 31, 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 ================================================================ THE PNC FINANCIAL SERVICES GROUP, INC. ---- 15 FUNDING SOURCES Total funding sources were $64.8 billion at March 31, 2000, a decrease of $1.2 billion compared with December 31, 1999, primarily resulting from reduced deposits in foreign offices and Federal Home Loan Bank ("FHLB") borrowings. DETAILS OF FUNDING SOURCES March 31 December 31 In millions 2000 1999 - ---------------------------------------------------------------- Deposits Demand, savings and money market $29,280 $28,689 Retail certificates of deposit 14,552 14,153 Other time 645 633 Deposits in foreign offices 2,224 3,193 - ---------------------------------------------------------------- Total deposits 46,701 46,668 Borrowed funds Federal funds purchased 909 1,281 Repurchase agreements 770 1,122 Bank notes and senior debt 7,001 6,975 Federal Home Loan Bank borrowings 6,156 6,656 Subordinated debt 2,425 2,327 Other borrowed funds 833 986 - ---------------------------------------------------------------- Total borrowed funds 18,094 19,347 - ---------------------------------------------------------------- Total $64,795 $66,015 ================================================================ CAPITAL The access to and cost of funding new business initiatives including acquisitions, the ability to engage in expanded activities, the ability to pay dividends, deposit insurance costs, and the level and nature of regulatory oversight depend, in large part, on a financial institution's capital strength. At March 31, 2000, the Corporation and each bank subsidiary were considered well capitalized based on regulatory capital ratio requirements. RISK-BASED CAPITAL March 31 - dollars in millions 2000 1999 - ---------------------------------------------------------------- Capital components Shareholders' equity Common $5,726 $5,617 Preferred 313 314 Trust preferred capital securities 848 848 Goodwill and other (2,278) (1,348) Net unrealized securities losses 251 82 - ---------------------------------------------------------------- Tier I risk-based capital 4,860 5,513 Subordinated debt 2,080 1,780 Eligible allowance for credit losses 662 672 - ---------------------------------------------------------------- Total risk-based capital $7,602 $7,965 ================================================================ Assets Risk-weighted assets and off-balance-sheet instruments $67,049 $67,056 Average tangible assets 72,872 75,770 ================================================================ Capital ratios Tier I risk-based 7.25% 8.22% Total risk-based 11.34 11.88 Leverage 6.67 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 the first quarter of 2000, PNC repurchased 2.7 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. Approximately 8.3 million shares remain under this authorization. RISK MANAGEMENT In the normal course of business, the Corporation assumes various types of risk, the most significant of which are credit, liquidity, 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 other things, diversification, limiting exposure to any single industry or customer, requiring collateral or selling participations to third parties, and purchasing credit-related derivatives. NONPERFORMING ASSETS March 31 December 31 Dollars in millions 2000 1999 - ------------------------------------------------------------------ Nonaccrual loans Commercial $240 $219 Residential mortgage 49 56 Commercial real estate Real estate project 7 13 Mortgage 6 8 Consumer 3 2 Lease financing 2 1 - ------------------------------------------------------------------ Total nonaccrual loans 307 299 Foreclosed and other assets Residential mortgage 12 12 Commercial real estate 5 5 Other 31 22 - ------------------------------------------------------------------ Total foreclosed and other assets 48 39 - ------------------------------------------------------------------ Total nonperforming assets $355 $338 ================================================================== Nonaccrual loans to total loans .61% .60% Nonperforming assets to total loans, loans held for sale and foreclosed .64 .61 assets Nonperforming assets to total assets .48 .45 ================================================================== The above table excludes $18 million and $13 million of equity management assets at March 31, 2000 and December 31, 1999, respectively, carried at fair value. The amount of nonperforming loans that were current as to principal and interest was $25 million at March 31, 2000, and $42 million at December 31, 1999. There were no troubled debt restructured loans outstanding as of either period end. THE PNC FINANCIAL SERVICES GROUP, INC. ---- 16 Financial Review CHANGE IN NONPERFORMING ASSETS In millions 2000 1999 - ---------------------------------------------------------------- January 1 $338 $332 Transferred from accrual 117 74 Returned to performing (2) (1) Principal reductions (46) (53) Sales (9) (10) Charge-offs and other (43) (14) - ---------------------------------------------------------------- March 31 $355 $328 ================================================================ ACCRUING LOANS PAST DUE 90 DAYS OR MORE Amount Percent of Loans ------------------------------------------------ March 31 December 31 March 31 December 31 Dollars in millions 2000 1999 2000 1999 - --------------------------------------------------------------------- Consumer $20 $25 .22% .27% Residential mortgage 41 34 .31 .26 Commercial 42 30 .19 .14 Commercial real estate 3 5 .11 .18 Lease financing 4 2 .13 .05 - --------------------------------------------- Total $110 $96 .22 .19 ====================================================================== ALLOWANCE FOR CREDIT LOSSES In determining the adequacy of the allowance for credit losses, the Corporation makes specific allocations to impaired loans and to pools of watchlist and nonwatchlist loans for various credit risk factors. Allocations to loan pools are developed by business segment and risk rating and are based on historical loss trends and management's judgment concerning those trends and other relevant factors. Those factors may include, among other things, actual versus estimated losses, 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 for the first quarter of 2000 and the evaluation of the allowance for credit losses as of March 31, 2000 reflected changes in loan portfolio composition and changes in asset quality. The unallocated portion of the allowance for credit losses at March 31, 2000 represented 20% of the total allowance and .26% of total loans compared with 20% and .27%, respectively, at December 31, 1999. ROLLFORWARD OF ALLOWANCE FOR CREDIT LOSSES In millions 2000 1999 - ---------------------------------------------------------------- January 1 $674 $753 Charge-offs (45) (97) Recoveries 14 19 - ---------------------------------------------------------------- Net charge-offs (31) (78) Provision for credit losses 31 78 Divestitures (81) - ---------------------------------------------------------------- March 31 $674 $672 ================================================================ The allowance as a percent of nonaccrual loans and period-end loans was 220% and 1.33%, respectively, at March 31, 2000. The comparable year-end 1999 amounts were 225% and 1.35%, respectively. CHARGE-OFFS AND RECOVERIES Three months ended Percent of March 31 Net Average Dollars in millions Charge-offs Recoveries Charge-offs Loans - ---------------------------------------------------------------------- 2000 Consumer $12 $6 $ 6 .26% Residential mortgage 2 2 .06 Commercial 29 7 22 .41 Lease financing 2 1 1 .14 - --------------------------------------------------------- Total $45 $14 $31 .25 - ---------------------------------------------------------------------- 1999 Consumer $18 $7 $11 .41% Credit card 60 2 58 8.64 Residential mortgage 4 1 3 .10 Commercial 12 7 5 .08 Commercial real estate 1 1 Lease financing 2 1 1 .17 - --------------------------------------------------------- Total $97 $19 $78 .56 ====================================================================== 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. THE PNC FINANCIAL SERVICES GROUP, INC. ---- 17 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 and sell various types of loans. Liquidity can also be provided through the sale of liquid assets, which consist of short-term investments, loans held for sale and securities available for sale. At March 31, 2000, such assets totaled $13.3 billion with $4.1 billion pledged as collateral for borrowing, trust and other commitments. Liquidity can also be obtained through secured advances from the FHLB, of which PNC is a member. These borrowings are generally secured by residential mortgages and mortgage-backed securities. At March 31, 2000, approximately $8.0 billion of residential mortgages were available as collateral for borrowings from the FHLB. Funding can also be obtained through alternative forms of borrowing, including Federal funds purchased, repurchase agreements and short-term and long-term debt issuances. Liquidity for the parent company and subsidiaries is also generated through the issuance of securities in public or private markets and lines of credit. During the first quarter of 2000, the Corporation issued $100 million of subordinated debt. At March 31, 2000, the Corporation had unused capacity under effective shelf registration statements of approximately $1.4 billion of debt and equity securities and $400 million of trust preferred capital securities. In addition, the Corporation had an unused line of credit of $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 $130 million at March 31, 2000. Dividends may also be impacted by capital needs, regulatory requirements, corporate policies, contractual restrictions and other factors. Management believes the Corporation has sufficient liquidity to meet current obligations to borrowers, depositors, debt holders and others. The impact of replacing maturing liabilities is reflected in the income simulation model in the overall asset and liability management process. INTEREST RATE RISK Interest rate risk arises primarily through the Corporation's traditional business activities of extending loans and accepting deposits. Many factors, including economic and financial conditions, movements in market interest rates and consumer preferences, affect the spread between interest earned on assets and interest paid on liabilities. In managing interest rate risk, the Corporation seeks to minimize its reliance on a particular interest rate scenario as a source of earnings while maximizing net interest income and net interest margin. To further 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 PNC FINANCIAL SERVICES GROUP, INC. ---- 18 Financial Review 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 March 31, 2000, if interest rates were to gradually increase by 100 basis points over the next twelve months, the model indicated that net interest income would decrease by .6%. If interest rates were to gradually decrease by 100 basis points over the next twelve months, the model indicated that net interest income would increase by .8%. 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. An economic value of equity model is used by the Corporation to value all current on-balance-sheet and off-balance-sheet positions under a range of instantaneous interest rate changes. The resulting change in the value of equity is 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 March 31, 2000, if interest rates were to instantaneously increase by 200 basis points, the model indicated that the economic value of existing on-balance-sheet and off-balance-sheet positions would decline by 1.0% of assets. If interest rates were to instantaneously decrease by 200 basis points, the model indicated that the economic value of existing on-balance-sheet and off-balance-sheet positions would increase by .2% of assets. MARKET RISK Most of PNC's trading activities are designed to provide capital markets services for customers. 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 March 31, 2000. THE PNC FINANCIAL SERVICES GROUP, INC. ---- 19 FINANCIAL DERIVATIVES A variety of off-balance-sheet financial derivatives are used as part of the overall risk management process to manage the 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. 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 residential 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 the first three months of 2000, financial derivatives used in interest rate risk management decreased net interest income by $5 million compared with a $16 million increase in the prior-year period. The following table sets forth changes in the notional value of off-balance-sheet financial derivatives used for risk management during the first three months of 2000.
FINANCIAL DERIVATIVES ACTIVITY Weighted- Average 2000 - dollars in millions January 1 Additions Maturities Terminations March 31 Maturity - ----------------------------------------------------------------------------------------------------------------------------------- Interest rate risk management Interest rate swaps Receive fixed $7,413 $350 $(1,050) $6,713 2 yrs. 9 mos. Pay fixed 5 5 9 mos. Basis swaps 1,650 23 1,673 3 yrs. 3 mos. Interest rate caps 474 (43) $(9) 422 4 yrs. Interest rate floors 3,311 (13) (7) 3,291 2 yrs. 2 mos. - ------------------------------------------------------------------------------------------------------------------- Total interest rate risk management 12,853 373 (1,106) (16) 12,104 Mortgage banking risk management Residential Forward contracts Commitments to purchase loans 304 6,023 (5,708) 619 2 mos. Commitments to sell loans 1,194 7,051 (6,628) 1,617 2 mos. Options 96 132 (122) 106 2 mos. Options - MSR 7,675 7,675 3 yrs. 5 mos. - ------------------------------------------------------------------------------------------------------------------- Total residential 9,269 13,206 (12,458) 10,017 Commercial - interest rate swaps 643 693 (85) (445) 806 7 yrs. 1 mo. - ------------------------------------------------------------------------------------------------------------------- Total mortgage banking risk management 9,912 13,899 (12,543) (445) 10,823 Student lending activities Forward contracts 681 67 (321) 427 2 yrs. 1 mo. Credit-related activities Credit default swaps 4,315 10 4,325 1 yr. 5 mos. - ------------------------------------------------------------------------------------------------------------------- Total $27,761 $14,349 $(13,649) $(782) $27,679 ===================================================================================================================================
THE PNC FINANCIAL SERVICES GROUP, INC. ---- 20 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 March 31, 2000. FINANCIAL DERIVATIVES
Weighted-Average Interest Rates Notional Estimated ------------------------------- March 31, 2000 - dollars in millions Value Fair Value Paid Received - -------------------------------------------------------------------------------------------------------------------------------- Interest rate risk management Asset rate conversion Interest rate swaps (1) Receive fixed designated to loans $5,000 $(67) 6.96% 5.52% Basis swaps designated to other earning assets 249 3 6.44 6.95 Interest rate caps designated to loans (2) 422 12 NM NM Interest rate floors designated to loans (3) 3,291 (1) NM NM - ---------------------------------------------------------------------------------------------------- Total asset rate conversion 8,962 (53) Liability rate conversion Interest rate swaps (1) Receive fixed designated to: Interest-bearing deposits 150 (2) 7.01 6.65 Borrowed funds 1,563 (35) 7.02 6.49 Pay fixed designated to borrowed funds 5 2 6.09 7.36 Basis swaps designated to borrowed funds 1,424 6 6.93 7.01 - ---------------------------------------------------------------------------------------------------- Total liability rate conversion 3,142 (29) - ---------------------------------------------------------------------------------------------------- Total interest rate risk management 12,104 (82) Mortgage banking risk management Residential Forward contracts Commitments to purchase loans 619 5 NM NM Commitments to sell loans 1,617 (6) NM NM Options 106 2 NM NM Options - MSR (3) 7,675 34 NM NM - ---------------------------------------------------------------------------------------------------- Total residential 10,017 35 Commercial Pay fixed interest rate swaps designated to securities (1) 444 26 6.09 7.13 Pay fixed interest rate swaps designated to loans (1) 362 16 6.51 6.81 - ---------------------------------------------------------------------------------------------------- Total commercial 806 42 - ---------------------------------------------------------------------------------------------------- Total mortgage banking risk management 10,823 77 Student lending activities Forward contracts 427 NM NM Credit-related activities Credit default swaps 4,325 (3) NM NM - ---------------------------------------------------------------------------------------------------- Total financial derivatives $27,679 $(8) ================================================================================================================================
(1) The floating rate portion of interest rate contracts is based on money-market indices. As a percent of notional value, 24% were based on 1-month LIBOR, 72% on 3-month LIBOR and the remainder on other short-term indices. (2) Interest rate caps with notional values of $117 million, $120 million and $183 million require the counterparty to pay the Corporation the excess, if any, of 3-month LIBOR over a weighted-average strike of 6.14%, 1-month LIBOR over a weighted-average strike of 5.71% and Prime over a weighted-average strike of 8.76%, respectively. At March 31, 2000, 3-month LIBOR was 6.29%, 1-month LIBOR was 6.13% and Prime was 9.00%. (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 March 31, 2000, 3-month LIBOR was 6.29%, 10-year CMT was 6.03% and 10-year CMS was 7.28%. NM - Not meaningful THE PNC FINANCIAL SERVICES GROUP, INC. ---- 21 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 March 31, 2000 --------------------------------------------- Positive Negative Average Notional Fair Fair Net Asset Fair In millions Value Value Value (Liability) Value* - ----------------------------------------------------------------------------------- Customer-related Interest rate Swaps $12,770 $127 $(133) $(6) $(7) Caps/floors Sold 4,080 (26) (26) (27) Purchased 3,926 25 25 25 Foreign exchange 4,242 51 (45) 6 6 Other 1,912 10 (11) (1) 2 - ----------------------------------------------------------------------------------- Total customer-related 26,930 213 (215) (2) (1) Other 1,421 6 (1) 5 5 =================================================================================== Total other derivatives $28,351 $219 $(216) $3 $4 ===================================================================================
* For the three months ended March 31, 2000 THE PNC FINANCIAL SERVICES GROUP, INC. ---- 22 CONSOLIDATED STATEMENT OF INCOME
Three months ended March 31 - in millions, except per share data 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------ INTEREST INCOME Loans and fees on loans $991 $1,112 Securities available for sale 117 106 Loans held for sale 107 56 Other 22 16 - ------------------------------------------------------------------------------------------------------------------------------ Total interest income 1,237 1,290 - ------------------------------------------------------------------------------------------------------------------------------ INTEREST EXPENSE Deposits 369 351 Borrowed funds 308 281 - ------------------------------------------------------------------------------------------------------------------------------ Total interest expense 677 632 - ------------------------------------------------------------------------------------------------------------------------------ Net interest income 560 658 Provision for credit losses 31 78 - ------------------------------------------------------------------------------------------------------------------------------ Net interest income less provision for credit losses 529 580 - ------------------------------------------------------------------------------------------------------------------------------ NONINTEREST INCOME Asset management 186 161 Fund servicing 155 52 Service charges on deposits 50 50 Brokerage 71 56 Consumer services 51 74 Corporate services 82 (63) Net residential mortgage banking 54 60 Equity management 87 9 Net securities losses (3) Other 56 332 - ------------------------------------------------------------------------------------------------------------------------------ Total noninterest income 789 731 - ------------------------------------------------------------------------------------------------------------------------------ NONINTEREST EXPENSE Staff expense 444 412 Net occupancy 57 87 Equipment 60 88 Amortization 28 28 Marketing 15 15 Distributions on capital securities 16 16 Other 227 177 - ------------------------------------------------------------------------------------------------------------------------------ Total noninterest expense 847 823 - ------------------------------------------------------------------------------------------------------------------------------ Income before income taxes 471 488 Income taxes 163 163 - ------------------------------------------------------------------------------------------------------------------------------ Net income $308 $325 - ------------------------------------------------------------------------------------------------------------------------------ Net income applicable to diluted earnings $303 $321 EARNINGS PER COMMON SHARE Basic $1.04 $1.06 Diluted 1.03 1.05 CASH DIVIDENDS DECLARED PER COMMON SHARE .45 .41 AVERAGE COMMON SHARES OUTSTANDING Basic 291.9 302.3 Diluted 294.1 305.5 ==============================================================================================================================
See accompanying Notes to Consolidated Financial Statements. THE PNC FINANCIAL SERVICES GROUP, INC. ---- 23 CONSOLIDATED BALANCE SHEET
March 31 December 31 In millions, except par value 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------ ASSETS Cash and due from banks $2,190 $3,097 Short-term investments 1,032 1,148 Loans held for sale 4,648 5,798 Securities available for sale 7,666 7,611 Loans, net of unearned income of $724 50,653 50,046 Allowance for credit losses (674) (674) - ------------------------------------------------------------------------------------------------------------------------------ Net loans 49,979 49,372 Goodwill and other amortizable assets 4,155 4,123 Other 4,637 4,264 - ------------------------------------------------------------------------------------------------------------------------------ Total assets $74,307 $75,413 ============================================================================================================================== LIABILITIES Deposits Noninterest-bearing $8,292 $8,441 Interest-bearing 38,409 38,227 - ------------------------------------------------------------------------------------------------------------------------------ Total deposits 46,701 46,668 Borrowed funds Federal funds purchased 909 1,281 Repurchase agreements 770 1,122 Bank notes and senior debt 7,001 6,975 Federal Home Loan Bank borrowings 6,156 6,656 Subordinated debt 2,425 2,327 Other borrowed funds 833 986 - ------------------------------------------------------------------------------------------------------------------------------ Total borrowed funds 18,094 19,347 Other 2,625 2,604 - ------------------------------------------------------------------------------------------------------------------------------ Total liabilities 67,420 68,619 - ------------------------------------------------------------------------------------------------------------------------------ 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 1,285 1,276 Retained earnings 6,178 6,006 Deferred benefit expense (18) (17) Accumulated other comprehensive loss (264) (267) Common stock held in treasury at cost: 62 and 60 shares (2,913) (2,823) - ------------------------------------------------------------------------------------------------------------------------------ Total shareholders' equity 6,039 5,946 - ------------------------------------------------------------------------------------------------------------------------------ Total liabilities, capital securities and shareholders' equity $74,307 $75,413 ==============================================================================================================================
See accompanying Notes to Consolidated Financial Statements. THE PNC FINANCIAL SERVICES GROUP, INC. ---- 24 CONSOLIDATED STATEMENT OF CASH FLOWS
Three months ended March 31 - in millions 2000 1999 - ----------------------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $308 $325 Adjustments to reconcile net income to net cash provided by operating activities Provision for credit losses 31 78 Depreciation, amortization and accretion 131 130 Deferred income taxes 119 43 Net securities losses 3 17 Gain on sale of businesses (290) Valuation adjustments 17 142 Change in Loans held for sale 1,133 521 Other (442) (165) - ----------------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 1,300 801 - ----------------------------------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Net change in loans (652) 218 Repayment of securities available for sale 187 403 Sales Securities available for sale 1,427 1,659 Loans 38 Foreclosed assets 8 10 Purchases Securities available for sale (1,690) (3,504) Net cash received for divestitures 3,261 Other (70) 17 - ----------------------------------------------------------------------------------------------------------------------------------- Net cash (used) provided by investing activities (790) 2,102 - ----------------------------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Net change in Noninterest-bearing deposits (149) (873) Interest-bearing deposits 182 (824) Federal funds purchased (372) (145) Sale/issuance Repurchase agreements 35,099 33,667 Bank notes and senior debt 1,050 820 Federal Home Loan Bank borrowings 1,500 250 Subordinated debt 99 254 Other borrowed funds 10,399 7,786 Common stock 31 16 Repayment/maturity Repurchase agreements (35,451) (33,020) Bank notes and senior debt (1,025) (1,305) Federal Home Loan Bank borrowings (2,000) (1,450) Subordinated debt (5) Other borrowed funds (10,528) (7,860) Acquisition of treasury stock (116) (297) Cash dividends paid (136) (129) - ----------------------------------------------------------------------------------------------------------------------------------- Net cash used by financing activities (1,417) (3,115) - ----------------------------------------------------------------------------------------------------------------------------------- DECREASE IN CASH AND DUE FROM BANKS (907) (212) Cash and due from banks at beginning of year 3,097 2,534 - ----------------------------------------------------------------------------------------------------------------------------------- Cash and due from banks at end of period $2,190 $2,322 =================================================================================================================================== CASH PAID FOR Interest $705 $667 Income taxes 90 8 NONCASH ITEMS Transfer from loans to loans held for sale 1,018 Transfer from loans to other assets 9 11 ===================================================================================================================================
See accompanying Notes to Consolidated Financial Statements. THE PNC FINANCIAL SERVICES GROUP, INC. ---- 25 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, corporate banking, secured finance, asset management and mortgage banking businesses that provide products and services nationally and in PNC's primary geographic markets in Pennsylvania, New Jersey, Delaware, Ohio and Kentucky. The Corporation is subject to intense competition from other financial services companies and is subject to the regulations of certain federal and state agencies and undergoes periodic examinations by those authorities. ACCOUNTING POLICIES BASIS OF FINANCIAL STATEMENT PRESENTATION The unaudited consolidated interim financial statements include the accounts of The PNC Financial Services Group, Inc. and its subsidiaries, most of which are wholly owned. Such statements have been prepared in accordance with generally accepted accounting principles. All significant intercompany accounts and transactions have been eliminated. In the opinion of management, the financial statements reflect all adjustments of a normal recurring nature necessary for a fair statement of results for the interim periods presented. Certain prior-period amounts have been reclassified to conform to reporting classifications utilized for the current reporting period. These classifications did not impact the Corporation's financial condition or results of operations. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the amounts reported. Actual results will differ from such estimates and the differences may be material to the consolidated financial statements. The notes included herein should be read in conjunction with the audited consolidated financial statements included in The PNC Financial Services Group, Inc.'s 1999 Annual Report. RECENT ACCOUNTING PRONOUNCEMENTS Statement of Financial Accounting Standards ("SFAS") No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133" (an amendment of SFAS No. 133), issued in June 1999, defers the effective date of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," until fiscal years beginning after June 15, 2000. The Corporation expects to adopt SFAS No. 133, as amended by SFAS No. 137, effective January 1, 2001, 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. CASH FLOWS The Corporation did not have any acquisition or divestiture activity that affected cash flows during the first three months of 2000. During the first three months of 1999, divestiture activity that affected cash flow consisted of $3.1 billion of divested assets and cash receipts of $3.3 billion in cash and due from banks. TRADING ACTIVITIES PNC engages in trading activities as part of the Corporation's 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 for the first three months of 2000 totaled $35 million compared with a net trading loss of $14 million for the prior-year period that were included in noninterest income as follows:
Three months ended March 31 - in millions 2000 1999 - ---------------------------------------------------------------- Net residential mortgage banking Risk management $15 $(28) Other income Securities trading 12 8 Derivatives trading 3 2 Foreign exchange 5 4 - ---------------------------------------------------------------- Net trading income (loss) $35 $(14) ================================================================
THE PNC FINANCIAL SERVICES GROUP, INC. ---- 26 SECURITIES AVAILABLE FOR SALE
Unrealized Amortized --------------------------------- Fair In millions Cost Gains Losses Value - --------------------------------------------------------------------------------------------------------------------------------- MARCH 31, 2000 PORTFOLIO SECURITIES Debt securities U.S. Treasury and government agencies $159 $(6) $153 Mortgage-backed 3,777 $1 (165) 3,613 Asset-backed 1,320 (34) 1,286 State and municipal 135 2 (5) 132 Other debt 39 (1) 38 - --------------------------------------------------------------------------------------------------------------------------------- Total debt securities 5,430 3 (211) 5,222 Corporate stocks and other 673 12 (1) 684 - --------------------------------------------------------------------------------------------------------------------------------- Total 6,103 15 (212) 5,906 - --------------------------------------------------------------------------------------------------------------------------------- MORTGAGE BANKING RISK MANAGEMENT Debt securities U.S. Treasury and government agencies 1,885 (187) 1,698 Mortgage-backed 66 (4) 62 - --------------------------------------------------------------------------------------------------------------------------------- Total 1,951 (191) 1,760 - --------------------------------------------------------------------------------------------------------------------------------- Total securities available for sale $8,054 $15 $(403) $7,666 ================================================================================================================================= DECEMBER 31, 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 - --------------------------------------------------------------------------------------------------------------------------------- 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 =================================================================================================================================
The fair value of the securities available for sale portfolio increased $55 million from December 31, 1999 to $7.7 billion at March 31, 2000. Total securities used to hedge residential mortgage servicing rights were $1.8 billion at March 31, 2000. Portfolio securities represented 8% of total assets at March 31, 2000. The expected weighted-average life of the portfolio securities decreased to 4 years and 3 months at March 31, 2000 compared with 4 years and 7 months at year-end 1999. The expected weighted-average life of total securities available for sale decreased to 5 years and 4 months at March 31, 2000 compared with 5 years and 7 months at year-end 1999. Net securities losses were $3 million for the first three months of 2000. In comparison, net securities losses for the first three months of 1999 were $17 million and were reported in net residential mortgage hedging activities. During the first three months of 2000, no securities held for mortgage banking risk management purposes were sold. THE PNC FINANCIAL SERVICES GROUP, INC. ---- 27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NONPERFORMING ASSETS Nonperforming assets were as follows:
March 31 December 31 In millions 2000 1999 - ------------------------------------------------------------------ Nonaccrual loans $307 $299 Foreclosed and other assets 48 39 - ------------------------------------------------------------------ Total nonperforming assets $355 $338 ==================================================================
The above table excludes $18 million and $13 million of equity management assets at March 31, 2000 and December 31, 1999, respectively, carried at fair value. ALLOWANCE FOR CREDIT LOSSES Changes in the allowance for credit losses were as follows:
In millions 2000 1999 - ------------------------------------------------------------------ Allowance at January 1 $674 $753 Charge-offs Consumer (12) (18) Credit card (60) Residential mortgage (2) (4) Commercial (29) (12) Commercial real estate (1) Lease financing (2) (2) - ------------------------------------------------------------------ Total charge-offs (45) (97) Recoveries Consumer 6 7 Credit card 2 Residential mortgage 1 Commercial 7 7 Commercial real estate 1 Lease financing 1 1 - ------------------------------------------------------------------ Total recoveries 14 19 - ------------------------------------------------------------------ Net charge-offs Consumer (6) (11) Credit card (58) Residential mortgage (2) (3) Commercial (22) (5) Lease financing (1) (1) - ------------------------------------------------------------------ Total net charge-offs (31) (78) Provision for credit losses 31 78 Divestitures (81) - ------------------------------------------------------------------ Allowance at March 31 $674 $672 ==================================================================
FINANCIAL DERIVATIVES FAIR VALUE OF FINANCIAL DERIVATIVES The notional and fair values of financial derivatives used for risk management were as follows:
Positive Negative Notional Fair Notional Fair In millions Value Value Value Value - ------------------------------------------------------------------ MARCH 31, 2000 Interest rate Swaps $2,939 $20 $5,452 $(113) Caps 422 12 Floors 3,000 291 (1) - ------------------------------------------------------------------ Total interest rate risk management 6,361 32 5,743 (114) Mortgage banking risk management 8,578 86 2,245 (9) Forward contract 427 Credit default swaps 70 4,255 (3) - ------------------------------------------------------------------ Total $15,436 $118 $12,243 $(126) ================================================================== DECEMBER 31, 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 contract 681 Credit default swaps 60 4,255 (4) - ------------------------------------------------------------------ Total $16,628 $139 $11,133 $(114) ==================================================================
THE PNC FINANCIAL SERVICES GROUP, INC. ---- 28 OTHER DERIVATIVES The following schedule sets forth information relating to positions associated with customer-related and other derivatives.
At March 31 ---------------------------------------- Positive Negative Average Notional Fair Fair Net Asset Fair In millions Value Value Value (Liability) Value* - ---------------------------------------------------------------------- 2000 Customer-related Interest rate Swaps $12,770 $127 $(133) $(6) $(7) Caps/floors Sold 4,080 (26) (26) (27) Purchased 3,926 25 25 25 Foreign exchange 4,242 51 (45) 6 6 Other 1,912 10 (11) (1) 2 - ---------------------------------------------------------------------- Total customer-related 26,930 213 (215) (2) (1) Other 1,421 6 (1) 5 5 - ---------------------------------------------------------------------- Total other derivatives $28,351 $219 $(216) $3 $4 ======================================================================
At December 31 ---------------------------------------- 1999 Positive Negative Average Notional Fair Fair Net 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) ======================================================================
* For the three months ended March 31, 2000 LITIGATION The Corporation and persons to whom the Corporation may have indemnification obligations, in the normal course of business, are subject to various pending and threatened lawsuits in which claims for monetary damages are asserted. Management, after consultation with legal counsel, does not at the present time anticipate the ultimate aggregate liability, if any, arising out of such lawsuits will have a material adverse effect on the Corporation's financial position. At the present time, management is not in a position to determine whether any such pending or threatened litigation will have a material adverse effect on the Corporation's results of operations in any future reporting period. COMPREHENSIVE INCOME Total comprehensive income was $311 million and $279 million for the first three months of 2000 and 1999, respectively. THE PNC FINANCIAL SERVICES GROUP, INC. ---- 29 EARNINGS PER SHARE The following table sets forth basic and diluted earnings per share calculations.
Three months ended March 31 - in millions, except share and per share data 2000 1999 - --------------------------------------------------------------------------------------------------------------------- CALCULATION OF BASIC EARNINGS PER COMMON SHARE Net income $308 $325 Less: Preferred dividends declared 5 5 - --------------------------------------------------------------------------------------------------------------------- Net income applicable to basic earnings per common share $303 $320 - --------------------------------------------------------------------------------------------------------------------- Basic weighted-average common shares outstanding (in thousands) 291,891 302,303 - --------------------------------------------------------------------------------------------------------------------- Basic Earnings Per Common Share $1.04 $1.06 ===================================================================================================================== CALCULATION OF DILUTED EARNINGS PER COMMON SHARE Net income $308 $325 Less: Dividends declared on nonconvertible preferred stock Series F 5 4 - --------------------------------------------------------------------------------------------------------------------- Net income applicable to diluted earnings per common share $303 $321 - --------------------------------------------------------------------------------------------------------------------- Basic weighted-average common shares outstanding (in thousands) 291,891 302,303 Weighted-average common shares to be issued using average market price and assuming: Conversion of preferred stock Series A and B 122 138 Conversion of preferred stock Series C and D 1,028 1,099 Conversion of debentures 22 25 Exercise of stock options 699 1,558 Incentive share awards 368 373 - --------------------------------------------------------------------------------------------------------------------- Diluted weighted-average common shares outstanding (in thousands) 294,130 305,496 - --------------------------------------------------------------------------------------------------------------------- Diluted Earnings Per Common Share $1.03 $1.05 =====================================================================================================================
THE PNC FINANCIAL SERVICES GROUP, INC. ---- 30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEGMENT REPORTING PNC operates eight major businesses engaged in regional banking, corporate banking, secured finance, asset management and mortgage banking activities: Regional Banking, Corporate Banking, PNC Real Estate Finance, PNC Business Credit, PNC Advisors, BlackRock, PFPC and PNC Mortgage. 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 business 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 presentation of business results was changed during the first quarter of 2000 to reflect the Corporation's current operating strategy and recent management changes. Middle market and equipment leasing activities (previously included in Regional Banking) are reported in Corporate Banking. In addition, PNC Real Estate Finance and PNC Business Credit are reported separately within PNC Secured Finance. Regional real estate lending activities (previously included in Regional Banking) are reported in PNC Real Estate Finance. Business financial results for the first quarter of 2000 and 1999 are presented consistent with this structure. The management accounting process uses various balance sheet and income statement assignments and transfers to measure performance of the businesses. Methodologies change from time to time as management accounting practices are enhanced and businesses change. Securities or borrowings and related net interest income are assigned based on the net asset or liability position of each business. Capital is assigned based on management's assessment of inherent risks and equity levels at independent companies providing similar products and services. The allowance for credit losses is allocated to the businesses based on risk inherent in the loan portfolios. Support areas not directly aligned with the businesses are allocated primarily based on the utilization of services. Total business financial results differ from consolidated 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. BUSINESS SEGMENT PRODUCTS AND SERVICES Regional Banking provides credit, deposit, branch-based brokerage and electronic banking products and services to retail customers as well as credit, treasury management and capital markets products and services to small businesses primarily within PNC's geographic footprint. Corporate Banking provides specialized credit, equipment leasing, treasury management and capital markets products and services to large and mid-sized corporations, institutions and government entities primarily within PNC's geographic region. PNC Real Estate Finance provides credit, capital markets, treasury management and loan servicing products and services to private developers, real estate investment trusts, pension funds and the affordable housing market nationally. PNC Business Credit provides asset-based lending, capital markets and treasury management products and services to middle market customers on a national basis. 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 pension funds, 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 investment servicing 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. 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. THE PNC FINANCIAL SERVICES GROUP, INC. ---- 31 RESULTS OF BUSINESSES
PNC PNC Three months ended March 31 Regional Corporate Real Estate Business PNC Total In millions Banking Banking Finance Credit Advisors BlackRock PFPC Mortgage Other PNC - ------------------------------------------------------------------------------------------------------------------------------ 2000 INCOME STATEMENT Net interest income* $344 $134 $27 $24 $35 $1 $(10) $5 $5 $565 Noninterest income 133 80 19 4 169 108 155 71 50 789 - ------------------------------------------------------------------------------------------------------------------------------ Total revenue 477 214 46 28 204 109 145 76 55 1,354 Provision for credit losses 12 15 3 1 31 Depreciation and amortization 21 3 5 1 4 5 13 2 14 68 Other noninterest expense 243 98 30 6 131 71 122 63 15 779 - ------------------------------------------------------------------------------------------------------------------------------ Pretax earnings 201 98 11 21 66 33 10 11 25 476 Income taxes 72 34 (2) 8 25 14 4 5 8 168 - ------------------------------------------------------------------------------------------------------------------------------ Earnings $129 $64 $13 $13 $41 $19 $6 $6 $17 $308 ============================================================================================================================== Inter-segment revenue $(4) $2 $2 $2 $21 $9 $(32) ============================================================================================================================== Average assets $37,866 $15,950 $5,382 $2,084 $3,598 $388 $1,603 $6,333 $1,473 $74,677 ============================================================================================================================== 1999 INCOME STATEMENT Net interest income * $352 $114 $30 $16 $33 $(3) $3 $25 $94 $664 Noninterest income 121 58 18 2 146 88 51 76 171 731 - ------------------------------------------------------------------------------------------------------------------------------ Total revenue 473 172 48 18 179 85 54 101 265 1,395 Provision for credit losses 18 3 1 56 78 Depreciation and amortization 23 3 5 1 3 5 2 3 88 133 Other noninterest expense 248 81 24 5 117 59 34 80 42 690 - ------------------------------------------------------------------------------------------------------------------------------ Pretax earnings 184 85 19 12 58 21 18 18 79 494 Income taxes 68 31 4 4 22 9 7 7 17 169 - ------------------------------------------------------------------------------------------------------------------------------ Earnings $116 $54 $15 $8 $36 $12 $11 $11 $62 $325 ============================================================================================================================== Inter-segment revenue $1 $(1) $1 $2 $19 $9 $(31) ============================================================================================================================== Average assets $37,525 $15,679 $5,634 $1,597 $3,249 $400 $268 $7,084 $5,522 $76,958 ==============================================================================================================================
* Taxable-equivalent basis THE PNC FINANCIAL SERVICES GROUP, INC. ---- 32 Statistical Information CONSOLIDATED AVERAGE BALANCE SHEET AND NET INTEREST ANALYSIS
----------------------------------------------------------------------------- First Quarter 2000 Fourth Quarter 1999 ----------------------------------------------------------------------------- Dollars in millions Average Average Average Average Taxable-equivalent basis Balances Interest Yields/Rates Balances Interest Yields/Rates - ---------------------------------------------------------------------------------------------------------------------------------- ASSETS Interest-earning assets Loans held for sale $5,434 $107 7.86% $4,427 $86 7.79% Securities available for sale U.S. Treasury and government agencies and corporations 3,819 50 5.24 3,844 51 5.28 Other debt 3,578 58 6.45 3,676 59 6.44 Other 614 10 6.92 691 11 6.45 - ---------------------------------------------------------------------------------- ------------------------- Total securities available for sale 8,011 118 5.91 8,211 121 5.90 Loans, net of unearned income Consumer 9,261 192 8.33 9,421 197 8.28 Credit card Residential mortgage 12,947 229 7.07 12,667 222 7.00 Commercial 21,793 447 8.12 22,318 448 7.85 Commercial real estate 2,698 59 8.60 3,265 66 7.98 Lease financing 2,958 54 7.33 2,786 50 7.17 Other 688 14 8.09 613 13 7.80 - ---------------------------------------------------------------------------------- ------------------------- Total loans, net of unearned income 50,345 995 7.87 51,070 996 7.69 Other 1,173 22 7.60 1,132 18 6.41 - ---------------------------------------------------------------------------------- ------------------------- Total interest-earning assets/interest income 64,963 1,242 7.62 64,840 1,221 7.45 Noninterest-earning assets Allowance for credit losses (683) (681) Cash and due from banks 2,324 2,347 Other assets 8,073 7,042 - ----------------------------------------------------------------- ------------ Total assets $74,677 $73,548 - ----------------------------------------------------------------- ------------ LIABILITIES, CAPITAL SECURITIES AND SHAREHOLDERS' EQUITY Interest-bearing liabilities Interest-bearing deposits Demand and money market $18,355 138 3.03 $18,226 136 2.95 Savings 2,138 9 1.64 2,212 9 1.63 Retail certificates of deposit 14,591 191 5.25 14,007 177 5.03 Other time 637 10 6.36 621 10 6.47 Deposits in foreign offices 1,489 21 5.63 976 13 5.11 - ---------------------------------------------------------------------------------- ------------------------- Total interest-bearing deposits 37,210 369 3.98 36,042 345 3.80 Borrowed funds Bank notes and senior debt 6,976 107 6.10 7,253 108 5.83 Federal funds purchased 2,279 33 5.67 1,922 26 5.26 Repurchase agreements 1,272 16 5.04 1,207 14 4.54 Federal Home Loan Bank borrowings 6,417 96 5.89 6,724 96 5.61 Other borrowed funds 775 12 6.31 668 10 5.83 Subordinated debt 2,377 44 7.43 2,255 42 7.48 - ---------------------------------------------------------------------------------- ------------------------- Total borrowed funds 20,096 308 6.08 20,029 296 5.81 - ---------------------------------------------------------------------------------- ------------------------- Total interest-bearing liabilities/interest expense 57,306 677 4.72 56,071 641 4.52 Noninterest-bearing liabilities and shareholders' equity Demand and other noninterest-bearing deposits 8,004 8,413 Accrued expenses and other liabilities 2,592 2,312 Mandatorily redeemable capital securities of subsidiary trusts 848 848 Shareholders' equity 5,927 5,904 - ----------------------------------------------------------------- ------------ Total liabilities, capital securities and shareholders' equity $74,677 $73,548 - ---------------------------------------------------------------------------------------------------------------------------------- Interest rate spread 2.90 2.93 Impact of noninterest-bearing sources .56 .61 - ---------------------------------------------------------------------------------------------------------------------------------- Net interest income/margin $565 3.46% $580 3.54% - ----------------------------------------------------------------------------------------------------------------------------------
Nonaccrual loans are included in loans, net of unearned income. The impact of financial derivatives used in interest rate risk management is included in the interest income/expense and average yields/rates of the related assets and liabilities. Average balances of securities available for sale are based on amortized historical cost (excluding SFAS No. 115 adjustments to fair value). Loan fees for each of the three months ended March 31, 2000, December 31, 1999, September 30, 1999, June 30, 1999 and March 31, 1999 were $29 million, $29 million, $30 million, $30 million, and $30 million, respectively. THE PNC FINANCIAL SERVICES GROUP, INC. ---- 33
- -------------------------------------------------------------------------------------------------------------------------------- Third Quarter 1999 Second Quarter 1999 First Quarter 1999 - -------------------------------------------------------------------------------------------------------------------------------- Average Average Average Average Average Average Balances Interest Yields/Rates Balances Interest Yields/Rates Balances Interest Yields/Rates - --------------------------------------------------------------------------------------------------------------------------------- $4,385 $82 7.51% $3,727 $67 7.07% $3,383 $56 6.68% 4,484 58 5.20 5,187 66 5.12 4,248 54 5.10 3,705 59 6.33 3,521 55 6.19 2,848 43 6.11 614 11 6.89 729 10 5.70 659 10 5.98 - --------------------------- -------------------------- ------------------------- 8,803 128 5.79 9,437 131 5.56 7,755 107 5.55 10,171 207 8.08 10,729 218 8.16 10,955 222 8.21 2,724 100 14.91 12,451 216 6.94 12,496 218 6.97 12,184 216 7.09 22,631 444 7.68 22,846 438 7.58 24,574 462 7.52 3,389 67 7.67 3,396 66 7.66 3,398 65 7.70 2,543 44 7.02 2,478 43 6.98 2,443 44 7.17 561 11 7.57 534 9 6.99 417 8 7.69 - --------------------------- -------------------------- ------------------------- 51,746 989 7.55 52,479 992 7.53 56,695 1,117 7.91 1,102 18 6.26 1,236 19 6.37 1,005 16 6.19 - --------------------------- -------------------------- ------------------------- 66,036 1,217 7.29 66,879 1,209 7.20 68,838 1,296 7.56 (677) (678) (744) 1,959 2,038 2,066 6,445 6,821 6,798 - ------------- ------------ ------------ $73,763 $75,060 $76,958 - ------------- ------------ ------------ $18,034 127 2.80 $17,686 118 2.66 $16,825 113 2.73 2,345 10 1.59 2,472 10 1.60 2,535 10 1.63 14,114 174 4.89 14,114 172 4.91 14,652 184 5.08 1,022 15 5.99 1,832 25 5.47 2,610 35 5.35 1,066 14 5.16 682 8 4.83 759 9 4.78 - --------------------------- -------------------------- ------------------------- 36,581 340 3.69 36,786 333 3.63 37,381 351 3.80 7,823 103 5.28 9,214 117 5.03 9,814 125 5.10 1,828 24 5.07 1,230 15 4.77 1,663 20 4.81 1,892 20 4.17 2,629 25 3.62 1,841 16 3.57 5,876 78 5.21 4,727 59 4.92 5,810 73 5.05 792 12 5.66 714 10 5.92 570 11 7.13 2,031 41 7.48 2,030 38 7.50 1,886 36 7.58 - --------------------------- -------------------------- ------------------------- 20,242 278 5.40 20,544 264 5.08 21,584 281 5.21 - --------------------------- -------------------------- ------------------------- 56,823 618 4.30 57,330 597 4.15 58,965 632 4.31 8,318 8,684 9,035 2,042 2,325 2,135 848 848 848 5,732 5,873 5,975 - ------------- ------------ ------------ $73,763 $75,060 $76,958 - --------------------------------------------------------------------------------------------------------------------------------- 2.99 3.05 3.25 .60 .59 .61 - --------------------------------------------------------------------------------------------------------------------------------- $599 3.59% $612 3.64% $664 3.86% - ---------------------------------------------------------------------------------------------------------------------------------
THE PNC FINANCIAL SERVICES GROUP, INC. ---- 34 Quarterly Report on Form 10-Q Securities and Exchange Commission Washington, D.C. 20549 Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended March 31, 2000. Commission File Number 1-9718 THE PNC FINANCIAL SERVICES GROUP, INC. Incorporated in the Commonwealth of Pennsylvania IRS Employer Identification No. 25-1435979 Address: One PNC Plaza 249 Fifth Avenue Pittsburgh, Pennsylvania 15222-2707 Telephone: (412) 762-2000 As of April 28, 2000, The PNC Financial Services Group, Inc. had 290,402,857 shares of common stock ($5 par value) outstanding. The PNC Financial Services Group, Inc. (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. The following sections of the Financial Review set forth in the cross-reference index are incorporated in the Quarterly Report on Form 10-Q. Cross-Reference Page(s) ----------------------------------------------------- PART I FINANCIAL INFORMATION Item 1 Consolidated Statement of Income for the three months ended March 31, 2000 and 1999 23 Consolidated Balance Sheet as of March 31, 2000 and December 31, 1999 24 Consolidated Statement of Cash Flows for the three months ended March 31, 2000 and 1999 25 Notes to Consolidated Financial Statements 26 - 32 Consolidated Average Balance Sheet and Net Interest Analysis 33 - 34 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 2 - 22 Item 3 Quantitative and Qualitative Disclosures About Market Risk 18 - 19 - ---------------------------------------------------------------- PART II OTHER FINANCIAL INFORMATION Item 4. Submission of Matters for a Vote of Security Holders An annual meeting of shareholders of the Corporation was held on April 25, 2000 for the purpose of electing 17 directors. All 17 nominees were elected and the votes cast for and against/withheld were as follows:
Aggregate Votes ------------------------------- Nominee For Against/Withheld - ---------------------------------------------------------------- Paul W. Chellgren 253,246,931 2,448,330 Robert N. Clay 253,217,580 2,477,681 Thomas A. Corcoran 252,741,135 2,954,127 George A. Davidson, Jr. 253,274,134 2,421,129 David F. Girard-diCarlo 250,936,628 4,758,635 Walter E. Gregg, Jr. 253,172,069 2,523,192 William R. Johnson 252,886,173 2,809,089 Bruce C. Lindsay 253,237,435 2,457,826 W. Craig McClelland 253,167,366 2,527,895 Thomas H. O'Brien 252,970,736 2,724,526 Jane G. Pepper 252,767,909 2,927,354 Jackson H. Randolph 253,176,721 2,518,541 James E. Rohr 253,071,352 2,623,909 Roderic H. Ross 253,161,697 2,533,565 Thomas J. Usher 253,216,014 2,479,247 Milton A. Washington 253,170,453 2,524,808 Helge H. Wehmeier 253,246,008 2,449,253 ===============================================================
THE PNC FINANCIAL SERVICES GROUP, INC. ---- 35 With respect to the preceding matter, holders of the Corporation's common and preferred stock voted together as a single class. The following table sets forth as of the February 28, 2000 record date the number of shares of each class or series of stock that were issued and outstanding and entitled to vote, the voting power per share and the aggregate voting power of each class or series:
Number of Voting Shares Rights Entitled Aggregate Title of Class or Series Per Share to Vote Voting Power - ---------------------------------------------------------------------------- Common Stock 1 292,548,003 292,548,003 $1.80 Cumulative Convertible Preferred Stock - Series A 8 11,901 95,208 $1.80 Cumulative Convertible Preferred Stock - Series B 8 3,348 26,784 $1.60 Cumulative Convertible Preferred Stock - Series C 4/2.4 252,206 420,343* $1.80 Cumulative Convertible Preferred Stock - Series D 4/2.4 363,467 605,778* ------------- Total possible votes 293,696,116* ============================================================================
* Represents greatest number of votes possible. Actual aggregate voting power was less since each holder of such preferred stock was entitled to a number of votes equal to the number of full shares of common stock into which such holder's preferred stock was convertible. Holders of the Corporation's 6,000,000 issued and outstanding shares of Fixed/Adjustable Rate Noncumulative Preferred Stock-Series F were not entitled to vote with respect to the matters presented at the meeting. ITEM 5. OTHER INFORMATION The Board of Directors adopted a shareholder rights plan effective as of May 15, 2000 providing for the distribution of one right for each share of common stock outstanding on May 25, 2000. The rights become exercisable only in the event, with certain exceptions, that an acquiring party accumulates 10% or more of the Corporation's voting stock or a party announces an offer to acquire 10% or more of the voting stock. The rights have an exercise price of $180 per right and expire on May 25, 2010. Upon the occurrence of certain events, holders of the rights will be entitled to purchase either PNC common or common equivalent preferred shares or shares in an acquiring entity at half of market value. The Corporation is entitled to redeem the rights at a value of $0.01 per right at any time until the acquisition of a 10% position in its voting stock. A copy of the Rights Agreement providing for the issuance of the rights is filed as an exhibit to this Quarterly Report on Form 10-Q. This description should be read together with the Rights Agreement and is qualified in its entirety by reference to that agreement. Item 6. Exhibits and Reports on Form 8-K The following exhibit index lists Exhibits filed with this Quarterly Report on Form 10-Q: 3.1 Articles of Incorporation of the Corporation, as amended and restated as of May 15, 2000 3.2 By-laws of The PNC Financial Services Group, Inc., as amended 4.7 Terms of Series G Junior Participating Preferred Stock (included as part of exhibit 3.1) 4.8 Rights Agreement between the Corporation and The Chase Manhattan Bank dated May 15, 2000 10.5 The PNC Financial Services Group, Inc. 1997 Long-Term Incentive Award Plan, as amended 12.1 Computation of Ratio of Earnings to Fixed Charges 12.2 Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends 27 Financial Data Schedule ================================================================== Copies of these Exhibits may be obtained electronically at the Securities and Exchange Commission's home page at www.sec.gov. Copies may also be obtained without charge by writing to Lynn Fox Evans, Director of Financial Reporting, at corporate headquarters, by calling (412) 762-1553 or via e-mail at financial.reporting@pncbank.com. The following Reports on Form 8-K were filed by the Corporation during the quarter ended March 31, 2000: Form 8-K dated January 13, 2000, filing an earnings release reporting the Corporation's consolidated financial results for the three months and year ended December 31, 1999, and financial information on the Corporation's businesses for the years ended December 31, 1999 and 1998. Form 8-K dated February 15, 2000, reporting on entering into an underwriting agreement with respect to the public offering of $100,000,000 of 7.50% Subordinated Notes due 2009, and on the form of the Notes and related guarantee. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on May 15, 2000, on its behalf by the undersigned thereunto duly authorized. The PNC Financial Services Group, Inc. Robert L. Haunschild Senior Vice President and Chief Financial Officer THE PNC FINANCIAL SERVICES GROUP, INC. ---- 36 CORPORATE INFORMATION CORPORATE HEADQUARTERS The PNC Financial Services Group, Inc. One PNC Plaza 249 Fifth Avenue Pittsburgh, Pennsylvania 15222-2707 (412) 762-2000 STOCK LISTING The PNC Financial Services Group, Inc. common stock is listed on the New York Stock Exchange under the symbol PNC. INTERNET INFORMATION Information about 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 may also be obtained without charge by writing to Lynn Fox Evans, Director of Financial Reporting, at corporate headquarters, by calling (412) 762-1553 or via e-mail at financial.reporting@pncbank.com. INQUIRIES For financial services call 1-888-PNC-2265. Individual shareholders should contact Shareholder Relations at (800) 982-7652. Analysts and institutional investors should contact William H. Callihan, Vice President, Investor Relations, at (412) 762-8257 or via e-mail at investor.relations@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. COMMON STOCK PRICES/DIVIDENDS DECLARED The table below sets forth by quarter the range of high and low sale and quarter-end closing prices for The PNC Financial Services Group, Inc. common stock and the cash dividends declared per common share.
Cash Dividends High Low Close Declared ===================================================================== 2000 QUARTER - --------------------------------------------------------------------- First $48.500 $36.000 $45.063 $.45 ===================================================================== 1999 QUARTER - --------------------------------------------------------------------- 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 =====================================================================
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 THE PNC FINANCIAL SERVICES GROUP, INC. ---- 37