THE PNC FINANCIAL SERVICES GROUP, INC. Quarterly Report on Form 10-Q For the quarterly period ended March 31, 2001 Page 1 represents a portion of the third quarter 2001 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 40. FINANCIAL REVIEW THE PNC FINANCIAL SERVICES GROUP, INC.
March 31 March 31 For the three months ended - dollars in millions, except per share data 2001 2000 - --------------------------------------------------------------------------------------------------------------------- FINANCIAL PERFORMANCE Revenue Net interest income (taxable-equivalent basis) $559 $560 Noninterest income 701 728 ------------------------- Total revenue 1,260 1,288 Income from continuing operations 265 302 Discontinued operations 40 6 ------------------------- Income before cumulative effect of accounting change 305 308 Cumulative effect of accounting change (5) ------------------------- Net income $300 $308 ========================= CASH EARNINGS (a) Continuing operations $294 $331 Discontinued operations 40 6 ------------------------- Before cumulative effect of accounting change 334 337 Cumulative effect of accounting change (5) ------------------------- Net income from cash earnings $329 $337 ========================= Per common share DILUTED EARNINGS Continuing operations $.89 $1.01 Discontinued operations .14 .02 ------------------------- Before cumulative effect of accounting change 1.03 1.03 Cumulative effect of accounting change (.02) ------------------------- Net income $1.01 $1.03 ========================= DILUTED CASH EARNINGS (a) Continuing operations $1.00 $1.11 Discontinued operations .14 .02 ------------------------- Before cumulative effect of accounting change 1.14 1.13 Cumulative effect of accounting change (.02) ------------------------- Net income from cash earnings $1.12 $1.13 ========================= Cash dividends declared $.48 $.45 - --------------------------------------------------------------------------------------------------------------------- SELECTED RATIOS FROM CONTINUING OPERATIONS Return on Average common shareholders' equity 16.59% 21.29% Average assets 1.49 1.77 Net interest margin 3.62 3.68 Noninterest income to total revenue 55.63 56.52 Efficiency (b) 57.91 57.85 FROM NET INCOME Return on Average common shareholders' equity 18.82% 21.71% Average assets 1.62 1.66 Net interest margin 3.53 3.46 Noninterest income to total revenue 57.13 58.27 Efficiency (c) 56.18 57.36 =====================================================================================================================
(a) Excludes amortization of goodwill. (b) Excludes amortization and distributions on capital securities. (c) Excludes amortization, distributions on capital securities and residential mortgage banking risk management activities. 1
March 31 December 31 March 31 Dollars in millions, except per share data 2001 2000 2000 - -------------------------------------------------------------------------------------------------------------------- BALANCE SHEET DATA Assets $70,966 $69,844 $68,474 Earning assets 60,548 59,373 59,986 Loans, net of unearned income 45,626 50,601 50,259 Securities available for sale 11,976 5,902 5,906 Loans held for sale 1,765 1,655 2,799 Investment in discontinued operations 356 274 Deposits 47,189 47,664 45,767 Borrowed funds 12,279 11,718 13,362 Shareholders' equity 6,781 6,656 6,039 Common shareholders' equity 6,470 6,344 5,726 Book value per common share 22.39 21.88 19.68 Loans to deposits 97% 106% 110% CAPITAL RATIOS Leverage 7.8% 8.0% 6.7% Common shareholders' equity to total assets 9.12 9.08 8.36 ASSET QUALITY RATIOS Nonperforming assets to total loans, loans held for sale and foreclosed assets .81% .71% .65% Allowance for credit losses to total loans 1.48 1.33 1.34 Allowance for credit losses to nonperforming loans 200.89 208.98 224.67 Net charge-offs to average loans .65 .32 .25 ====================================================================================================================
2 FINANCIAL REVIEW THE PNC FINANCIAL SERVICES GROUP, INC. This Financial Review should be read in conjunction with The PNC Financial Services Group, Inc. ("Corporation" or "PNC") unaudited Consolidated Financial Statements and Statistical Information included herein and the Financial Review and audited Consolidated Financial Statements included in the Corporation's 2000 Annual Report. For information regarding business risks, see the Risk Management and Risk Factors sections in this Financial Review. Also, see the Forward-Looking Statements section in this Financial Review for other factors that could cause actual results to differ materially from forward-looking statements or historical performance. OVERVIEW THE PNC FINANCIAL SERVICES GROUP, INC. The Corporation is one of the largest diversified financial services companies in the United States, operating businesses engaged in community banking, corporate banking, real estate finance, asset-based lending, wealth management, asset management and global fund services. The Corporation provides certain products and services nationally and others in PNC's primary geographic markets in Pennsylvania, New Jersey, Delaware, Ohio and Kentucky. The Corporation also provides certain asset management and processing products and services internationally. Financial services organizations today are challenged to demonstrate that they can generate high-quality earnings growth in an increasingly competitive and weakening economic environment. As a result, PNC has been aggressively pursuing strategies to create a more diverse and valuable business mix by increasing the contribution from more highly-valued businesses such as asset management, processing and treasury management decreasing the contribution from lending- based traditional banking businesses. Earnings from asset management and processing businesses increased to nearly 30% of total business earnings for the first three months of 2001 and noninterest income was approximately 60% of total revenue. At the same time, PNC sold its residential mortgage banking business and has been downsizing certain institutional lending portfolios resulting in a reduction of the loan to deposit ratio to below 100%. On January 31, 2001, PNC closed the sale of its residential mortgage banking business. The gain on sale and earnings from operations for the first three months of 2001 totaled $40 million or $.14 per diluted share. These earnings were mostly offset by a $32 million or $.11 per diluted share charge related to the charge-off of loans in the communications and energy, metals and mining portfolios that PNC has designated for exit or downsizing and severance costs. Certain closing date adjustments are currently in dispute between PNC and the buyer. The disputed matters will be resolved in accordance with procedures provided for in the purchase agreement. The ultimate financial impact of the sale will not be determined until final settlement is completed. Return on average common shareholders' equity was 18.82% and return on average assets was 1.62% for the first three months of 2001 compared with 21.71% and 1.66%, respectively, for the first three months of 2000. Returns during the first three months of 2001 reflect PNC's stronger capital position that resulted from balance sheet downsizing initiatives. SUMMARY FINANCIAL RESULTS Consolidated net income for the first three months of 2001 was $300 million or $1.01 per diluted share. Excluding the effect of adopting the new accounting standard for financial derivatives, net income was $305 million or $1.03 per diluted share compared with $308 million or $1.03 per diluted share for the first three months of 2000. These results include the negative impact of a $27 million or $.09 per diluted share net loss from venture capital activities. Excluding this loss and the effect of the accounting change, results for the first three months of 2001 were $332 million or $1.12 per diluted share. The residential mortgage banking business, which was sold in January 2001, is reflected in discontinued operations throughout the Corporation's consolidated financial statements. Accordingly, the earnings and net assets of the residential mortgage banking business are shown separately on one line in the income statement and balance sheet, respectively, for all periods presented. The remainder of the discussion and information in this Financial Review reflects continuing operations, unless otherwise noted. Income from continuing operations for the first three months of 2001 was $265 million or $.89 per diluted share. Excluding the $27 million net loss from venture capital activities and a $32 million charge related to loans designated for exit or downsizing and severance costs, income from continuing operations was $324 million or $1.09 per diluted share for the first three months of 2001. Income from continuing operations was $302 million or $1.01 per diluted share during the same period a year ago. Taxable-equivalent net interest income of $559 million for the first three months of 2001 remained relatively unchanged compared with the first three months of 2000. The net interest margin was 3.62% for the first three months of 2001 compared with 3.68% for the first three months of 2000. The narrowing of the net interest margin was primarily due to a higher proportion of securities available for sale in the mix of earning assets. 3 The provision for credit losses was $80 million for the first three months of 2001 and net charge-offs were $80 million or .65% of average loans. The provision for credit losses was $31 million and net charge-offs were $31 million or .25% of average loans for the same period in 2000. The increases were primarily due to $41 million of provision for credit losses related to charge-offs of loans in the communications and energy, metals and mining portfolios that PNC has designated for exit or downsizing. Excluding this amount, net charge-offs were $39 million or .32% of average loans for the first three months of 2001. Noninterest income was $701 million for the first three months of 2001 and included $39 million of equity management losses from venture capital activities. Excluding equity management gains and losses from both years, noninterest income increased 15% compared with the first three months of 2000 primarily due to growth in asset management and processing revenue. Noninterest expense was $775 million for the first three months of 2001 compared with $792 million for the first three months of 2000 and the efficiency ratio remained flat at 58% during both periods. Total assets were $71.0 billion at March 31, 2001 compared with $69.8 billion at December 31, 2000. Average interest-earning assets were $61.5 billion for the first three months of 2001 compared with $60.5 billion for the first three months of 2000. The increase was primarily due to a higher level of securities available for sale that resulted from balance sheet and interest rate risk management activities. Shareholders' equity totaled $6.8 billion at March 31, 2001. The regulatory capital ratios were 7.8% for leverage, 8.7% for tier I risk-based and 12.6% for total risk-based capital. During the first three months of 2001, PNC repurchased 2.3 million shares of common stock. The ratio of nonperforming assets to total loans, loans held for sale and foreclosed assets was .81% at March 31, 2001 compared with .71% at December 31, 2000 and .65% at March 31, 2000. The increase primarily resulted from a decrease in loans. Nonperforming assets were $386 million at March 31, 2001 compared with $372 million and $344 million at December 31, 2000 and March 31, 2000, respectively. The allowance for credit losses was $675 million and represented 1.48% of total loans and 201% of nonperforming loans at March 31, 2001. The comparable ratios were 1.33% and 209%, respectively, at December 31, 2000 and 1.34% and 225%, respectively, at March 31, 2000. 4 FINANCIAL REVIEW THE PNC FINANCIAL SERVICES GROUP, INC. REVIEW OF BUSINESSES PNC operates seven major businesses engaged in community banking, corporate banking, real estate finance, asset-based lending, wealth management, asset management and global fund services. Business results are presented based on PNC's management accounting practices and the Corporation's management structure. There is no comprehensive, authoritative body of guidance for management accounting equivalent to generally accepted accounting principles; therefore, PNC's business results are not necessarily comparable with similar information for any other financial services institution. Financial results are presented, to the extent practicable, as if each business operated on a stand-alone basis. The management accounting process uses various balance sheet and income statement assignments and transfers to measure performance of the businesses. Methodologies change from time to time as management accounting practices are enhanced and businesses change. Securities available for sale or borrowings and related net interest income are assigned based on the net asset or liability position of each business. Capital is assigned based on management's assessment of inherent risks and equity levels at independent companies providing similar products and services. The allowance for credit losses is allocated based on management's assessment of risk inherent in the loan portfolios. Support areas not directly aligned with the businesses are allocated primarily based on the utilization of services. Total business financial results differ from consolidated results from continuing operations primarily due to differences between management accounting practices and generally accepted accounting principles, loan portfolios and businesses that have been divested or designated for exit during 2000 or earlier, equity management activities, minority interests, residual asset and liability management activities, eliminations and unassigned items, the impact of which is reflected in the "Other" category. The operating results and financial impact of the disposition of the residential mortgage banking business, previously PNC Mortgage, are included in discontinued operations. RESULTS OF BUSINESSES
Revenue Return on Earnings (taxable-equivalent basis) Assigned Capital Average Assets Three months ended March 31 --------------------------------------------------------------------------------------- Dollars in millions 2001 2000 2001 2000 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ PNC Bank Community Banking $162 $129 $542 $477 24% 20% $40,617 $37,866 Corporate Banking 24 64 192 214 8 22 16,939 15,950 - ------------------------------------------------------------------------------------ -------------------- Total PNC Bank 186 193 734 691 19 21 57,556 53,816 - ------------------------------------------------------------------------------------ -------------------- Secured Finance PNC Real Estate Finance 20 13 53 46 21 14 5,378 5,382 PNC Business Credit 16 13 38 28 41 38 2,377 2,084 - ------------------------------------------------------------------------------------ -------------------- Total Secured Finance 36 26 91 74 26 20 7,755 7,466 - ------------------------------------------------------------------------------------ -------------------- Total Banking 222 219 825 765 20 21 65,311 61,282 Asset Management and Processing PNC Advisors 44 41 199 204 32 30 3,505 3,598 BlackRock 25 19 134 108 26 26 500 388 PFPC 17 6 184 161 33 12 1,735 1,603 - ------------------------------------------------------------------------------------ -------------------- Total Asset Management and Processing 86 66 517 473 30 25 5,740 5,589 - ------------------------------------------------------------------------------------ -------------------- Total business results 308 285 1,342 1,238 22 22 71,051 66,871 Other (43) 17 (82) 50 734 1,473 - ------------------------------------------------------------------------------------ -------------------- Results from continuing operations 265 302 1,260 1,288 17 21 71,785 68,344 Discontinued operations 40 6 207 412 Cumulative effect of accounting change (5) - ------------------------------------------------------------------------------------ -------------------- Total Consolidated $300 $308 $1,260 $1,288 19 22 $71,992 $68,756 ===================================================================================================================================
5 COMMUNITY BANKING Three months ended March 31 Dollars in millions 2001 2000 - ----------------------------------------------------------------- INCOME STATEMENT Net interest income $354 $344 Other noninterest income 161 137 Net securities gains (losses) 27 (4) - ----------------------------------------------------------------- Total revenue 542 477 Provision for credit losses 10 12 Noninterest expense 279 264 - ----------------------------------------------------------------- Pretax earnings 253 201 Income taxes 91 72 - ----------------------------------------------------------------- Earnings $162 $129 - ----------------------------------------------------------------- AVERAGE BALANCE SHEET Loans Consumer Home equity $5,932 $5,252 Indirect 943 1,435 Education 135 97 Other consumer 917 786 - ----------------------------------------------------------------- Total consumer 7,927 7,570 Commercial 3,611 3,725 Residential mortgage 11,701 11,603 Leasing 1,703 1,179 Other 140 141 - ----------------------------------------------------------------- Total loans 25,082 24,218 Securities available for sale 7,551 5,676 Loans held for sale 1,324 1,429 Assigned assets and other assets 6,660 6,543 - ----------------------------------------------------------------- Total assets $40,617 $37,866 - ----------------------------------------------------------------- Deposits Noninterest-bearing demand $4,476 $4,594 Interest-bearing demand 5,506 5,274 Money market 11,769 9,482 Savings 1,860 2,077 Certificates 13,256 13,611 - ----------------------------------------------------------------- Total deposits 36,867 35,038 Other liabilities 1,010 274 Assigned capital 2,740 2,554 - ----------------------------------------------------------------- Total funds $40,617 $37,866 - ----------------------------------------------------------------- PERFORMANCE RATIOS Return on assigned capital 24% 20% Noninterest income to total revenue 35 28 Efficiency 50 53 ================================================================= Community Banking provides deposit, branch-based brokerage, electronic banking and credit products and services to retail customers as well as deposit, credit, treasury management and capital markets products and services to small businesses primarily within PNC's geographic region. Community Banking's strategic focus is on driving sustainable revenue growth, aggressively managing the revenue/expense relationship and improving the risk/return dynamic of this business. Community Banking utilizes knowledge-based marketing capabilities to analyze customer demographic information, transaction patterns and delivery preferences to develop customized banking packages focused on improving customer satisfaction and profitability. Community Banking has also invested heavily in building a sales culture and infrastructure while improving efficiency. Capital investments have been strategically directed towards the expansion of multi-channel distribution, consistent with customer preferences, as well as the delivery of relevant customer information to all distribution channels. Community Banking contributed 53% of total business earnings for the first three months of 2001 compared with 45% for the first three months of 2000. Earnings increased $33 million or 26% to $162 million for the first three months of 2001 primarily due to net securities gains and strong business growth. Excluding net securities gains from the first three months of 2001 and net securities losses from the first three months of 2000, earnings increased 11% primarily driven by higher noninterest income, deposit growth and improved efficiency. Total revenue was $542 million for the first three months of 2001 compared with $477 million for the first three months of 2000. The increase was primarily due to net securities gains and higher consumer transaction activity in 2001. Excluding net securities gains and losses from both periods, revenue increased 7% in the period-to-period comparison. The provision for credit losses for the first three months of 2001 decreased $2 million compared with the same period in 2000 primarily due to lower net charge-offs in indirect lending. Total loans increased in the comparison as higher home equity loans and leases that resulted from strategic acquisitions were partially offset by the continued downsizing of the indirect automobile lending portfolio. Total deposits grew 5% in the comparison driven by a $2.3 billion increase in money market deposits. The increase in money market deposits resulted from targeted consumer marketing initiatives to add new accounts and retain existing customers as funds shifted from savings and certificates of deposit. 6 FINANCIAL REVIEW THE PNC FINANCIAL SERVICES GROUP, INC. CORPORATE BANKING Three months ended March 31 Dollars in millions 2001 2000 - ----------------------------------------------------------------- INCOME STATEMENT Credit-related revenue $104 $99 Noncredit revenue 88 115 - ----------------------------------------------------------------- Total revenue 192 214 Provision for credit losses 57 15 Noninterest expense 101 101 - ----------------------------------------------------------------- Pretax earnings 34 98 Income taxes 10 34 - ----------------------------------------------------------------- Earnings $24 $64 - ----------------------------------------------------------------- AVERAGE BALANCE SHEET Loans Middle market $5,969 $6,067 Large corporate 3,199 3,032 Energy, metals and mining 1,383 1,360 Communications 1,262 1,449 Leasing 2,185 1,719 Other 326 382 - ----------------------------------------------------------------- Total loans 14,324 14,009 Other assets 2,615 1,941 - ----------------------------------------------------------------- Total assets $16,939 $15,950 - ----------------------------------------------------------------- Deposits $4,901 $4,526 Assigned funds and other liabilities 10,768 10,228 Assigned capital 1,270 1,196 - ----------------------------------------------------------------- Total funds $16,939 $15,950 - ----------------------------------------------------------------- PERFORMANCE RATIOS Return on assigned capital 8% 22% Noncredit revenue to total revenue 46 54 Efficiency 52 47 ================================================================= Corporate Banking provides credit, equipment leasing, treasury management and capital markets products and services to large and mid-sized corporations, institutions and government entities primarily within PNC's geographic region. The strategic focus for Corporate Banking is to emphasize higher-margin noncredit products and services, especially treasury management and capital markets, and to extend credit to customers as a complement to sales of noncredit products and services. Approximately 40% of the loan portfolio represents syndicated loans. These credits are generally large commitments that are shared by a number of financial institutions to reduce exposure to any one client. During the first quarter of 2001, the Corporation announced the decision to exit the communications lending sector and to reduce portions of the energy, metals and mining and large corporate lending sectors. The designated loans are reported in Corporate Banking business results in both periods presented. Management continues to evaluate opportunities to reduce lending exposure and improve the risk/return characteristics of this business. Corporate Banking contributed 8% of total business earnings for the first three months of 2001 compared with 22% for the first three months of 2000. Earnings declined to $24 million for the first three months of 2001 compared with $64 million for the first three months of 2000 primarily due to $41 million of provision for credit losses in 2001 related to charge-offs in the communications and energy, metals and mining portfolios that PNC has designated for exit or downsizing. Total revenue of $192 million for the first three months of 2001 decreased $22 million compared with the same period in 2000. Average loans and credit-related revenue increased in the period-to-period comparison primarily driven by loans to large corporate customers that utilize higher-margin noncredit products and services and the expansion of equipment leasing. Middle market loans declined in the period-to-period comparison primarily due to strategies to improve the risk profile of this portfolio. Noncredit revenue includes noninterest income and the benefit of compensating balances received in lieu of fees. Noncredit revenue decreased $27 million compared with the first three months of 2000 primarily due to lower capital markets fees and valuation losses associated with equity investments. The decreases were primarily due to weak equity market conditions. The provision for credit losses was $57 million for the first three months of 2001 compared with $15 million for the first three months of 2000. The higher provision was primarily due to $41 million of charge-offs in the communications and energy, metals and mining portfolios that PNC has designated for exit or downsizing. A sustained or further weakening of the economy, or other factors that adversely affect asset quality, could result in an increase in the number of delinquencies, bankruptcies or defaults, and a higher level of nonperforming assets, net charge-offs and provision for credit losses in future periods. See Credit Risk in the Risk Management section of this Financial Review for additional information regarding credit risk. Treasury management and capital markets products offered through Corporate Banking are sold by several businesses across the Corporation and related profitability is included in the results of those businesses. Consolidated revenue from treasury management increased to $88 million for the first three months of 2001 compared with $85 million in the first three months of 2000. The increase was driven by a 7% increase in product revenue that was partially offset by lower income earned on customers' deposit balances resulting from the lower interest rate environment in 2001. Consolidated revenue from capital markets was $23 million for the first three months of 2001, an $11 million decrease compared with the first three months of 2000. The decrease was primarily due to weak equity market conditions as well as the impact of exiting certain lending sectors. 7 PNC REAL ESTATE FINANCE Three months ended March 31 Dollars in millions 2001 2000 - ----------------------------------------------------------------- INCOME STATEMENT Net interest income $29 $27 Noninterest income Commercial mortgage banking 17 12 Other 7 7 - ----------------------------------------------------------------- Total noninterest income 24 19 - ----------------------------------------------------------------- Total revenue 53 46 Provision for credit losses Noninterest expense 36 35 - ----------------------------------------------------------------- Pretax earnings 17 11 Income tax benefit (3) (2) - ----------------------------------------------------------------- Earnings $20 $13 - ----------------------------------------------------------------- AVERAGE BALANCE SHEET Loans Commercial - real estate related $1,852 $2,019 Commercial real estate 2,325 2,438 - ----------------------------------------------------------------- Total loans 4,177 4,457 Commercial mortgages held for sale 236 99 Other assets 965 826 - ----------------------------------------------------------------- Total assets $5,378 $5,382 - ----------------------------------------------------------------- Deposits $338 $226 Assigned funds and other liabilities 4,646 4,770 Assigned capital 394 386 - ----------------------------------------------------------------- Total funds $5,378 $5,382 - ----------------------------------------------------------------- PERFORMANCE RATIOS Return on assigned capital 21% 14% Noninterest income to total revenue 45 41 Efficiency 54 61 ================================================================= PNC Real Estate Finance provides credit, capital markets, treasury management, commercial mortgage loan servicing and other products and services to developers, owners and investors in commercial real estate. PNC's commercial real estate financial services platform includes Midland Loan Services, Inc. ("Midland"), one of the largest national servicers of commercial mortgage loans, and Columbia Housing Partners, LP, a national syndicator of affordable housing equity, among other businesses. On October 27, 2000, Midland acquired Univest Financial Group LLC, a privately held provider of technology and data management services to the commercial real estate finance industry. The combined company created one of the nation's leading providers of Web-enabled loan servicing and asset administration solutions for commercial real estate portfolio lenders, financial institutions and commercial mortgage-backed securities. Over the past three years, PNC Real Estate Finance has been strategically shifting to a more balanced and valuable revenue stream by focusing on real estate processing businesses, including commercial loan servicing. During the first three months of 2001, 45% of total revenue was generated by fee-based activities compared with 41% for the first three months of 2000. Also, management continues to evaluate opportunities to reduce lending exposure and improve the risk/return characteristics of this business. PNC Real Estate Finance contributed 6% of total business earnings for the first three months of 2001 compared with 5% for the first three months of 2000. Earnings increased $7 million or 54% in the period-to-period comparison primarily due to growth in commercial mortgage servicing fees and the affordable housing business. The efficiency ratio improved to 54% for the first three months of 2001 compared with 61% during the same period in 2000. Average loans decreased 6% reflecting management's ongoing strategy to reduce balance sheet leverage. Total revenue was $53 million for the first three months of 2001 compared with $46 million for the first three months of 2000. The increase of $7 million or 15% was primarily due to higher commercial mortgage servicing fees reflecting a larger servicing portfolio. The commercial mortgage servicing portfolio grew 26% in the comparison to $58 billion at March 31, 2001 primarily due to purchased servicing associated with loan securitizations. COMMERCIAL MORTGAGE SERVICING PORTFOLIO In billions 2001 2000 - ----------------------------------------------------------------- January 1 $51 $45 Acquisitions/additions 9 3 Repayments/transfers (2) (2) - ----------------------------------------------------------------- March 31 $58 $46 ================================================================= There was no provision for credit losses in either period presented. 8 FINANCIAL REVIEW THE PNC FINANCIAL SERVICES GROUP, INC. PNC BUSINESS CREDIT Three months ended March 31 Dollars in millions 2001 2000 - ----------------------------------------------------------------- INCOME STATEMENT Net interest income $24 $24 Noninterest income 14 4 - ----------------------------------------------------------------- Total revenue 38 28 Provision for credit losses 5 Noninterest expense 8 7 - ----------------------------------------------------------------- Pretax earnings 25 21 Income taxes 9 8 - ----------------------------------------------------------------- Earnings $16 $13 - ----------------------------------------------------------------- AVERAGE BALANCE SHEET Loans $2,255 $1,999 Other assets 122 85 - ----------------------------------------------------------------- Total assets $2,377 $2,084 - ----------------------------------------------------------------- Deposits $77 $44 Assigned funds and other liabilities 2,142 1,902 Assigned capital 158 138 - ----------------------------------------------------------------- Total funds $2,377 $2,084 - ----------------------------------------------------------------- PERFORMANCE RATIOS Return on assigned capital 41% 38% Noninterest income to total revenue 37 14 Efficiency 18 21 ================================================================= PNC Business Credit provides asset-based lending, capital markets and treasury management products and services to middle market customers nationally. PNC Business Credit's lending services include loans secured by accounts receivable, inventory, machinery and equipment, and other collateral, and its customers include manufacturing, wholesale, distribution, retailing and service industry companies. PNC Business Credit's strategic focus is to build scale through expansion of existing offices as well as the addition of new marketing locations. The loan portfolio grew 13% to $2.4 billion at March 31, 2001 primarily as a result of this expansion. PNC Business Credit currently operates 15 offices in 13 states with a centralized back office to provide consistency to the control environment as well as cost efficiencies. PNC Business Credit contributed 5% of total business earnings for the first three months of both 2001 and 2000. Earnings increased $3 million or 23% in the period-to-period comparison to $16 million for the first three months of 2001 as higher revenue was partially offset by a $5 million provision for credit losses. Revenue was $38 million for the first three months of 2001, a $10 million or 36% increase compared with the first three months of 2000 primarily due to higher noninterest income. The increase in noninterest income primarily resulted from gains on equity interests received as compensation in conjunction with lending relationships. Noninterest expense was $8 million and the efficiency ratio improved to 18% for the first three months of 2001 compared with $7 million and 21%, respectively, for the first three months of 2000. The efficiency ratio improved in the comparison primarily due to higher noninterest income and economies of scale. The return on assigned capital improved to 41% for the first three months of 2001 due to higher revenue and improved efficiency. The provision for credit losses for the first three months of 2001 was $5 million and increased primarily due to one credit. PNC Business Credit loans are secured loans to borrowers with a weaker financial condition. These loans are more susceptible to changes in economic conditions and losses may result from insufficient proceeds from sale of collateral supporting the loans. As a result, the provision for credit losses may be affected by the impact on borrowers of a weak economy and loan portfolio growth, among other factors. See Credit Risk in the Risk Management section of this Financial Review for additional information regarding credit risk. 9 PNC ADVISORS Three months ended March 31 Dollars in millions 2001 2000 - ----------------------------------------------------------------- INCOME STATEMENT Net interest income $32 $35 Noninterest income Investment management and trust 111 100 Brokerage 36 50 Other 20 19 - ----------------------------------------------------------------- Total noninterest income 167 169 - ----------------------------------------------------------------- Total revenue 199 204 Provision for credit losses 3 Noninterest expense 128 135 - ----------------------------------------------------------------- Pretax earnings 71 66 Income taxes 27 25 - ----------------------------------------------------------------- Earnings $44 $41 - ----------------------------------------------------------------- AVERAGE BALANCE SHEET Loans Consumer $1,106 $954 Residential mortgage 930 978 Commercial 564 658 Other 422 552 - ----------------------------------------------------------------- Total loans 3,022 3,142 Other assets 483 456 - ----------------------------------------------------------------- Total assets $3,505 $3,598 - ----------------------------------------------------------------- Deposits $1,981 $2,084 Assigned funds and other liabilities 968 967 Assigned capital 556 547 - ----------------------------------------------------------------- Total funds $3,505 $3,598 - ----------------------------------------------------------------- PERFORMANCE RATIOS Return on assigned capital 32% 30% Noninterest income to total revenue 84 83 Efficiency 63 65 ================================================================= PNC Advisors provides a full range of tailored investment products and services to affluent individuals and families including full-service brokerage through J.J.B. Hilliard, W.L. Lyons, Inc. ("Hilliard Lyons") and investment advisory services to the ultra-affluent through Hawthorn. PNC Advisors also serves as investment manager and trustee for employee benefit plans and charitable and endowment assets. PNC Advisors is focused on expanding Hilliard Lyons and Hawthorn, increasing market share in PNC's geographic region and leveraging its comprehensive distribution platform. PNC Advisors contributed 14% of total business earnings for the first three months of both 2001 and 2000. Earnings of $44 million for the first three months of 2001 increased $3 million or 7% compared with the first three months of 2000. Revenue decreased $5 million in the period-to-period comparison as asset management fees increased 11%, but were more than offset by lower brokerage revenue. The decrease in brokerage revenue was primarily due to a decline in retail investor trading activity as equity markets declined. Management expects that brokerage revenue will continue to be lower than the prior year until market conditions improve. Noninterest expense decreased 5% in the period-to-period comparison primarily due to lower production-based compensation and effective expense management initiatives that resulted in improved operating efficiency. ASSETS UNDER MANAGEMENT (a) March 31 - in billions 2001 2000 - ----------------------------------------------------------------- Personal investment management and trust $47 $51 Institutional trust 14 15 - ----------------------------------------------------------------- Total $61 $66 ================================================================= (a) Assets under management do not include brokerage assets administered. Personal investment management and trust assets under management decreased by approximately $5 billion primarily due to a decline in the value of the equity component of customers' portfolios that resulted from weak equity markets. See Asset Management Performance in the Risk Factors section of this Financial Review for additional information regarding asset management performance. Brokerage assets administered by PNC Advisors were $27 billion at March 31, 2001, compared with $28 billion at March 31, 2000 and also declined due to weak equity market conditions. 10 FINANCIAL REVIEW THE PNC FINANCIAL SERVICES GROUP, INC. BLACKROCK Three months ended March 31 Dollars in millions 2001 2000 - ----------------------------------------------------------------- INCOME STATEMENT Investment advisory and administrative fees $125 $102 Other income 9 6 - ----------------------------------------------------------------- Total revenue 134 108 Operating expense 72 54 Fund administration and servicing costs - affiliates 17 20 Amortization 3 2 - ----------------------------------------------------------------- Total expense 92 76 Operating income 42 32 Nonoperating income 2 1 - ----------------------------------------------------------------- Pretax earnings 44 33 Income taxes 19 14 - ----------------------------------------------------------------- Earnings $25 $19 - ----------------------------------------------------------------- PERIOD-END BALANCE SHEET Intangible assets $190 $192 Other assets 310 196 - ----------------------------------------------------------------- Total assets $500 $388 - ----------------------------------------------------------------- Other liabilities $98 $88 Stockholders' equity 402 300 - ----------------------------------------------------------------- Total liabilities and stockholders' equity $500 $388 - ----------------------------------------------------------------- PERFORMANCE DATA Return on equity 26% 26% Operating margin (a) 36 36 Diluted earnings per share $.39 $.30 ================================================================= (a) Excludes the impact of fund administration and servicing costs - affiliates. BlackRock is one of the largest publicly traded investment management firms in the United States with $202 billion of assets under management at March 31, 2001. BlackRock manages assets on behalf of institutions and individuals through a variety of fixed income, liquidity, equity and alternative investment separate accounts and mutual funds, including its flagship fund families, BlackRock Funds and BlackRock Provident Institutional Funds. In addition, BlackRock provides risk management and technology services to a growing number of institutional investors under the BlackRock Solutions name. BlackRock continues to focus on its objective of delivering superior investment performance to its clients while pursuing strategies to build on its core strengths and to selectively expand the firm's expertise and breadth of distribution. BlackRock contributed 8% of total business earnings for the first three months of 2001 compared with 7% for the first three months of 2000. Earnings increased 33% in the period-to-period comparison primarily due to a 17% increase in assets under management. New client mandates and additional funding from existing clients was $26 billion or 87% of the increase in assets under management. Total revenue for the first three months of 2001 increased $26 million or 24% compared with the first three months of 2000 primarily due to new business and strong fixed-income performance. The increase in operating expense in the period-to-period comparison supported revenue growth and business expansion. ASSETS UNDER MANAGEMENT March 31 - in billions 2001 2000 - ----------------------------------------------------------------- Separate accounts Fixed income $107 $78 Liquidity 6 8 Liquidity - securities lending 8 11 Equity 8 6 Alternative investment products 4 2 - ----------------------------------------------------------------- Total separate accounts 133 105 - ----------------------------------------------------------------- Mutual funds Fixed income 14 14 Liquidity 44 37 Equity 11 16 - ----------------------------------------------------------------- Total mutual funds 69 67 - ----------------------------------------------------------------- Total assets under management $202 $172 - ----------------------------------------------------------------- Proprietary mutual funds BlackRock Funds $24 $29 BlackRock Provident Institutional Funds 37 26 - ----------------------------------------------------------------- Total proprietary mutual funds $61 $55 ================================================================= BlackRock, Inc. is approximately 70% owned by PNC and is listed on the New York Stock Exchange under the symbol BLK. Additional information about BlackRock is available in its filings with the Securities and Exchange Commission ("SEC") and may be obtained electronically at the SEC's home page at www.sec.gov. 11 PFPC Three months ended March 31 Dollars in millions 2001 2000 - ----------------------------------------------------------------- INCOME STATEMENT Fund servicing revenue $184 $161 Operating expense 131 128 Amortization 6 7 - ----------------------------------------------------------------- Operating income 47 26 Nonoperating income 5 8 Debt financing 24 24 - ----------------------------------------------------------------- Pretax earnings 28 10 Income taxes 11 4 - ----------------------------------------------------------------- Earnings $17 $6 - ----------------------------------------------------------------- AVERAGE BALANCE SHEET Intangible assets $1,086 $1,113 Other assets 649 490 - ----------------------------------------------------------------- Total assets $1,735 $1,603 - ----------------------------------------------------------------- Assigned funds and other liabilities $1,527 $1,397 Assigned capital 208 206 - ----------------------------------------------------------------- Total funds $1,735 $1,603 - ----------------------------------------------------------------- PERFORMANCE RATIOS Operating margin 26% 16% Return on assigned capital 33 12 ================================================================= PFPC is the largest full-service mutual fund transfer agent and second largest provider of mutual fund accounting and administration services in the United States, providing a wide range of global fund services to the investment management industry. As an extension of its domestic services, PFPC also provides customized processing services to the international marketplace through its Dublin, Ireland and Luxembourg operations. To meet the growing needs of the European marketplace, PFPC continues its pursuit of offshore expansion. PFPC is also focusing technological resources on targeted Web-based initiatives and exploring strategic alliances. PFPC contributed 6% of total business earnings for the first three months of 2001 and 2% for the first three months of 2000. Earnings increased $11 million, nearly tripling, in the period-to-period comparison and performance ratios improved significantly. The increase was primarily due to strong growth in transfer agency services that resulted from an increase in mutual fund shareholder accounts serviced. Revenue of $184 million for the first three months of 2001 increased $23 million or 14% compared with the first three months of 2000, primarily driven by existing client growth and new business. See Fund Servicing in the Risk Factors section of this Financial Review for additional information regarding fund servicing. Operating expense increased a modest 2% in the period-to-period comparison, as the prior-year quarter included one-time costs related to the integration of Investor Services Group. SERVICING STATISTICS March 31 2001 2000 - ----------------------------------------------------------------- Accounting/administration assets ($ in billions) (a) $472 $448 Custody assets ($ in billions) 435 425 Shareholder accounts (in millions) 44 39 ================================================================= (a) Includes approximately $11 billion and $7 billion of international assets at March 31, 2001 and March 31, 2000, respectively. 12 FINANCIAL REVIEW THE PNC FINANCIAL SERVICES GROUP, INC. CONSOLIDATED INCOME STATEMENT REVIEW NET INTEREST INCOME ANALYSIS
Taxable-equivalent basis Average Balances Interest Income/Expense Average Yields/Rates Three months ended March 31 ------------------------------ -------------------------- ----------------------------- Dollars in millions 2001 2000 Change 2001 2000 Change 2001 2000 Change - ------------------------------------------------------------------------ -------------------------- ----------------------------- Interest-earning assets Loans held for sale $2,005 $3,319 $(1,314) $37 $64 $(27) 7.31% 7.64% (33)bp Securities available for sale 8,061 6,128 1,933 122 95 27 6.08 6.22 (14) Loans, net of unearned income Consumer 9,085 9,247 (162) 194 192 2 8.70 8.35 35 Residential mortgage 12,673 12,584 89 232 222 10 7.32 7.08 24 Commercial 20,882 21,791 (909) 422 447 (25) 8.09 8.12 (3) Commercial real estate 2,580 2,698 (118) 55 59 (4) 8.44 8.60 (16) Lease financing 3,897 2,958 939 71 54 17 7.32 7.33 (1) Other 520 688 (168) 11 14 (3) 7.98 8.09 (11) - ------------------------------------------------------------------------ -------------------------- Total loans, net of unearned income 49,637 49,966 (329) 985 988 (3) 7.96 7.88 8 Other 1,831 1,113 718 33 19 14 7.20 6.92 28 - ------------------------------------------------------------------------ -------------------------- Total interest-earning assets/ interest income 61,534 60,526 1,008 1,177 1,166 11 7.67 7.68 (1) Noninterest-earning assets 10,251 7,818 2,433 Investment in discontinued operations 207 412 (205) - ------------------------------------------------------------------------ Total assets $71,992 $68,756 $3,236 ======================================================================== Interest-bearing liabilities Deposits Demand and money market $20,468 $17,700 $2,768 162 138 24 3.20 3.14 6 Savings 1,919 2,138 (219) 6 9 (3) 1.31 1.64 (33) Retail certificates of deposit 13,724 14,591 (867) 199 191 8 5.90 5.25 65 Other time 565 637 (72) 10 10 6.67 6.36 31 Deposits in foreign offices 1,402 1,489 (87) 20 21 (1) 5.75 5.63 12 - ------------------------------------------------------------------------ -------------------------- Total interest-bearing deposits 38,078 36,555 1,523 397 369 28 4.22 4.05 17 Borrowed funds 14,375 15,333 (958) 221 237 (16) 6.15 6.14 1 - ------------------------------------------------------------------------ -------------------------- Total interest-bearing liabilities/ interest expense 52,453 51,888 565 618 606 12 4.75 4.67 8 -------------------------- ----------------------------- Noninterest-bearing liabilities, capital securities and shareholders' equity 19,539 16,868 2,671 - ------------------------------------------------------------------------ Total liabilities, capital securities and shareholders' equity $71,992 $68,756 $3,236 ======================================================================== Interest rate spread 2.92 3.01 (9) Impact of noninterest-bearing sources .70 .67 3 ----------------------------- Net interest income/margin $559 $560 $(1) 3.62% 3.68% (6)bp ====================================================================================================================================
NET INTEREST INCOME Changes in net interest income and margin result from the interaction between the volume and composition of earning assets, related yields and associated funding costs. Accordingly, portfolio size, composition and yields earned and funding costs can have a significant impact on net interest income and margin. Taxable-equivalent net interest income of $559 million for the first three months of 2001 remained relatively unchanged compared with the first three months of 2000 as the impact of a higher level of interest-earning assets was offset by a narrower net interest margin. The net interest margin was 3.62% for the first three months of 2001 compared with 3.68% for the first three months of 2000. The narrowing of the net interest margin was primarily due to a higher proportion of securities available for sale in the mix of earning assets. Loans represented 81% of average earning assets for the first three months of 2001 compared with 83% for the first three months of 2000. The decrease was primarily due to the ongoing downsizing of certain credit-related businesses and the securitization of residential mortgage loans during the first three months of 2001. Average loans held for sale decreased $1.3 billion in the period-to-period comparison due to a reduction in commercial loans held for sale that were designated for exit in 1999. Securities available for sale represented 13% of average earning assets for the first three months of 2001 compared with 10% for the first three months of 2000. The increase was primarily due to the purchase of U.S. agencies and asset-backed securities and the securitization of residential mortgage loans as part of balance sheet and interest rate risk management activities. 13 Funding cost is affected by the volume and composition of funding sources as well as related rates paid thereon. Average deposits comprised 64% of total sources of funds for the first three months of both 2001 and 2000, with the remainder primarily comprised of wholesale funding obtained at prevailing market rates. Average demand and money market deposits increased $2.8 billion or 16% compared with the first three months of 2000, primarily reflecting the impact of strategic marketing initiatives to grow more valuable transaction accounts, while all other interest-bearing deposit categories decreased in the period-to-period comparison. Average borrowed funds for the first three months of 2001 decreased $1.0 billion compared with the first three months of 2000 as lower bank notes and Federal Home Loan Bank borrowings were partially offset by increases in federal funds purchased and repurchase agreements. The overall decrease in average borrowed funds was primarily due to deposit growth. PROVISION FOR CREDIT LOSSES The provision for credit losses was $80 million for the first three months of 2001 compared with $31 million for the first three months of 2000. Net charge-offs were $80 million or .65% of average loans for the first three months of 2001 compared with $31 million or .25%, respectively, for the first three months of 2000. The increases were primarily due to $41 million of provision for credit losses related to charge-offs in the communications and energy, metals and mining portfolios that PNC has designated for exit or downsizing. Excluding this amount, net charge-offs were $39 million or .32% of average loans for the first three months of 2001. See Credit Risk in the Risk Management section of this Financial Review for additional information regarding credit risk. NONINTEREST INCOME Noninterest income was $701 million for the first three months of 2001 and included $39 million of equity management losses. Excluding equity management gains and losses in both years, noninterest income increased 15% compared with the first three months of 2000 primarily due to growth in asset management and processing revenue. Asset management fees of $223 million for the first three months of 2001 increased $37 million or 20% primarily driven by new business. Assets under management were $248 billion at March 31, 2001, a 13% increase compared with March 31, 2000. Fund servicing fees were $181 million for the first three months of 2001, a $26 million or 17% increase compared with the first three months of 2000 primarily driven by existing client growth and new business. Brokerage fees were $54 million for the first three months of 2001 compared with $71 million for the first three months of 2000. The decrease was primarily due to a decline in equity markets activity. Consumer services revenue of $55 million for the first three months of 2001 increased $8 million or 17% compared with the first three months of 2000 primarily due to an increase in retail transaction volume. Corporate services revenue was $76 million for the first three months of 2001 compared with $82 million for the first three months of 2000. The decrease was primarily due to lower capital markets revenue and other asset write-downs. Equity management, which includes venture capital investment gains and losses, reflected a net loss of $39 million for the first three months of 2001 compared with $87 million of income for the first three months of 2000. The decrease primarily resulted from a decline in the estimated fair value of partnership and direct investments. Equity management investments totaling $678 million had net unrealized appreciation of $74 million at March 31, 2001. These valuations are subject to market conditions and may be volatile. Net securities gains were $29 million for the first three months of 2001 and were mostly offset by write-downs of other assets and e-commerce investments totaling $22 million that are reflected in corporate services and other income. Other noninterest income was $72 million for the first three months of 2001 compared with $53 million for the first three months of 2000. The increase was primarily due to residential mortgage loan securitizations and student loan sales. NONINTEREST EXPENSE Noninterest expense was $775 million for the first three months of 2001 compared with $792 million for the first three months of 2000. The efficiency ratio was 58% for the first three months of both 2001 and 2000. Average full-time equivalent employees totaled approximately 24,800 and 23,900 for the first three months of 2001 and 2000, respectively. The increase was primarily in asset management and processing businesses. 14 FINANCIAL REVIEW THE PNC FINANCIAL SERVICES GROUP, INC. CONSOLIDATED BALANCE SHEET REVIEW LOANS Loans were $45.6 billion at March 31, 2001, a $5 billion decrease from year-end 2000 primarily due to residential mortgage loan securitizations. Most loan categories declined as a result of efforts to reduce balance sheet leverage. DETAILS OF LOANS March 31 December 31 In millions 2001 2000 (a) - ----------------------------------------------------------------- Consumer Home equity $6,592 $6,228 Automobile 1,045 1,166 Other 1,412 1,739 - ----------------------------------------------------------------- Total consumer 9,049 9,133 - ----------------------------------------------------------------- Residential mortgage 8,806 13,264 Commercial Manufacturing 5,446 5,581 Retail/wholesale 4,478 4,413 Service providers 2,835 2,944 Real estate related 1,762 1,783 Communications 1,019 1,296 Health care 688 722 Financial services 1,692 1,726 Other 2,756 2,742 - ----------------------------------------------------------------- Total commercial 20,676 21,207 - ----------------------------------------------------------------- Commercial real estate Mortgage 655 673 Real estate project 1,935 1,910 - ----------------------------------------------------------------- Total commercial real estate 2,590 2,583 - ----------------------------------------------------------------- Lease financing 5,080 4,845 Other 487 568 Unearned income (1,062) (999) - ----------------------------------------------------------------- Total, net of unearned income $45,626 $50,601 ================================================================= (a) Certain amounts have been reclassified to conform to the current year presentation. During 1999, total outstandings and exposure designated for exit totaled $3.7 billion and $10.5 billion, respectively. At March 31, 2001, remaining outstandings associated with this initiative were $800 million, of which $648 million were classified as loans with the remainder included in loans held for sale. Total remaining exposure related to this initiative was $2.5 billion at March 31, 2001. In addition, outstandings and exposure totaling approximately $2.5 billion and $7.0 billion, respectively, were designated for exit or downsizing during the first quarter of 2001, primarily consisting of the communications portfolio and certain portions of the energy, metals and mining and large corporate portfolios in Corporate Banking. Loan portfolio composition continued to be geographically diversified among numerous industries and types of businesses. NET UNFUNDED COMMITMENTS (a) March 31 December 31 In millions 2001 2000 - ----------------------------------------------------------------- Consumer $4,580 $4,414 Commercial 18,669 24,253 Commercial real estate 1,013 1,039 Lease financing 164 123 Other 182 173 - ----------------------------------------------------------------- Total $24,608 $30,002 ================================================================= (a) Excludes unfunded commitments related to loans designated for exit in 1999 and 2001. Commitments to extend credit represent arrangements to lend funds subject to specified contractual conditions. Commercial commitments are reported net of participations, assignments and syndications, primarily to financial institutions, totaling $7.2 billion at both March 31, 2001 and December 31, 2000. Net outstanding letters of credit totaled $4.0 billion at both March 31, 2001 and December 31, 2000 and consisted primarily of standby letters of credit that commit the Corporation to make payments on behalf of customers if certain specified future events occur. Unfunded commitments and letters of credit related to loans designated for exit in 2001 and 1999 totaled $6.2 billion at March 31, 2001 and $1.7 billion at December 31, 2000. SECURITIES AVAILABLE FOR SALE The fair value of securities available for sale at March 31, 2001 was $12.0 billion compared with $5.9 billion at December 31, 2000. Securities represented 17% of total assets at March 31, 2001 compared with 8% at December 31, 2000. The increase was primarily due to $3.8 billion of residential mortgage loan securitizations and purchases of U.S. agencies and asset-backed securities during the first three months of 2001. The expected weighted-average life of securities available for sale was 3 years and 11 months at March 31, 2001 compared with 4 years and 5 months at December 31, 2000. At March 31, 2001, the securities available for sale balance included a net unrealized loss of $6 million, which represented the difference between fair value and amortized cost. The comparable amount at December 31, 2000 was a net unrealized loss of $54 million. Net unrealized gains and losses in the securities available for sale portfolio are included in accumulated other comprehensive income or loss, net of tax or, for the portion attributable to changes in a hedged risk as part of a fair value hedge strategy, in net income. 15 DETAILS OF SECURITIES AVAILABLE FOR SALE Amortized Fair In millions Cost Value - ----------------------------------------------------------------- MARCH 31, 2001 Debt securities U.S. Treasury and government agencies $1,519 $1,522 Mortgage-backed 8,707 8,705 Asset-backed 1,358 1,361 State and municipal 80 83 Other debt 70 71 Corporate stocks and other 248 234 - ----------------------------------------------------------------- Total securities available for sale $11,982 $11,976 ================================================================= DECEMBER 31, 2000 Debt securities U.S. Treasury and government agencies $313 $313 Mortgage-backed 4,037 4,002 Asset-backed 902 893 State and municipal 94 96 Other debt 73 73 Corporate stocks and other 537 525 - ----------------------------------------------------------------- Total securities available for sale $5,956 $5,902 ================================================================= FUNDING SOURCES Total funding sources were $59.5 billion at March 31, 2001 and were essentially flat compared with December 31, 2000 as a decrease in deposits was offset by an increase in borrowed funds. Retail certificates of deposit decreased due to the lower rate environment in 2001, however, money market deposits increased due to ongoing strategic marketing efforts to retain customers and increase these balances. The change in the composition of borrowed funds reflected the impact of closing the sale of the residential mortgage banking business as well as a shift within categories to manage overall funding costs. DETAILS OF FUNDING SOURCES March 31 December 31 In millions 2001 2000 - ----------------------------------------------------------------- Deposits Demand, savings and money market $31,294 $30,686 Retail certificates of deposit 13,278 14,175 Other time 563 567 Deposits in foreign offices 2,054 2,236 - ----------------------------------------------------------------- Total deposits 47,189 47,664 - ----------------------------------------------------------------- Borrowed funds Federal funds purchased 785 1,445 Repurchase agreements 830 607 Bank notes and senior debt 5,362 6,110 Federal Home Loan Bank borrowings 2,623 500 Subordinated debt 2,379 2,407 Other borrowed funds 300 649 - ----------------------------------------------------------------- Total borrowed funds 12,279 11,718 - ----------------------------------------------------------------- Total $59,468 $59,382 ================================================================= CAPITAL The access to and cost of funding new business initiatives including acquisitions, the ability to engage in expanded business activities, the ability to pay dividends, deposit insurance costs, and the level and nature of regulatory oversight depend, in large part, on a financial institution's capital strength. At March 31, 2001, the Corporation and each bank subsidiary were considered well capitalized based on regulatory capital ratio requirements. RISK-BASED CAPITAL March 31 December 31 Dollars in millions 2001 2000 - ----------------------------------------------------------------- Capital components Shareholders' equity Common $6,470 6,344 Preferred 311 312 Trust preferred capital securities 848 848 Goodwill and other (2,189) (2,214) Net unrealized securities losses 2 77 - ----------------------------------------------------------------- Tier I risk-based capital 5,442 5,367 Subordinated debt 1,786 1,811 Eligible allowance for credit losses 675 667 - ----------------------------------------------------------------- Total risk-based capital $7,903 $7,845 ================================================================= Assets Risk-weighted assets and off-balance-sheet instruments $62,563 $62,430 Average tangible assets 69,750 66,809 ================================================================= Capital ratios Tier I risk-based 8.7% 8.6% Total risk-based 12.6 12.6 Leverage 7.8 8.0 ================================================================= The capital position is managed through balance sheet size and composition, issuance of debt and equity instruments, treasury stock activities, dividend policies and retention of earnings. During the first three months of 2001, PNC repurchased 2.3 million shares of its common stock. On February 15, 2001, the Board of Directors authorized the Corporation to purchase up to 15 million shares of its common stock through February 28, 2002. This new program replaces the prior program that was rescinded. On March 6, 2001, the Corporation commenced a cash tender offer for its nonconvertible Series F preferred stock at a price of $50.35 per share plus accrued and unpaid dividends. Approximately 1.9 million shares of a total of 6 million shares outstanding were tendered through this offer and were purchased by the Corporation on April 5, 2001. 16 FINANCIAL REVIEW THE PNC FINANCIAL SERVICES GROUP, INC. RISK FACTORS The Corporation is subject to a number of risk factors including, among others, those described below and in the Risk Management and Forward-Looking Statements sections of this Financial Review. These factors and others could impact the Corporation's business, financial condition and results of operations. BUSINESS AND ECONOMIC CONDITIONS The Corporation's business and results of operations are sensitive to general business and economic conditions in the United States. These conditions include the level and movement of interest rates, inflation, monetary supply, fluctuations in both debt and equity capital markets, and the strength of the U.S. economy, in general, and the regional economies in which the Corporation conducts business. An economic downturn or higher interest rates could decrease the demand for loans and other products and services offered by the Corporation, increase usage of unfunded commitments or increase the number of customers and counterparties who become delinquent, file for protection under bankruptcy laws or default on their loans or other obligations to the Corporation. An increase in the number of delinquencies, bankruptcies or defaults could result in a higher provision for credit losses and a higher level of net charge-offs. Changes in interest rates could affect the value of certain on-balance-sheet and off-balance-sheet financial instruments of the Corporation. Higher interest rates would also increase the Corporation's cost to borrow funds and may increase the rate paid on deposits. Also, changes in equity markets could affect the value of equity investments and the net asset value of assets under management and administration. A decline in the equity markets could negatively affect noninterest revenues. MONETARY AND OTHER POLICIES The financial services industry is subject to various monetary and other policies and regulations of the United States government and its agencies, which include the Federal Reserve Board, the Office of the Comptroller of Currency and the Federal Deposit Insurance Corporation as well as state regulators. The Corporation is particularly affected by the policies of the Federal Reserve Board, which regulates the supply of money and credit in the United States. The Federal Reserve Board's policies influence the rates of interest that PNC charges on loans and pays on interest-bearing deposits and can also affect the value of on-balance-sheet and off-balance-sheet financial instruments. Those policies also influence, to a significant extent, the cost of funding for the Corporation. COMPETITION The Corporation operates in a highly competitive environment, both in terms of the products and services offered and the geographic markets in which PNC conducts business. This environment could become even more competitive in the future. The Corporation competes with local, regional and national banks, thrifts, credit unions and non-bank financial institutions, such as investment banking firms, investment advisory firms, brokerage firms, investment companies, venture capital firms, mutual fund complexes and insurance companies, as well as other entities that offer financial services, and through alternative delivery channels such as the World Wide Web. Technological advances and new legislation, among other changes, have lowered barriers to entry and have made it possible for non-bank institutions to offer products and services that traditionally have been provided by banks. Many of the Corporation's competitors benefit from fewer regulatory constraints and lower cost structures, allowing for more competitive pricing of products and services. The Gramm-Leach-Bliley Act ("the Act"), which was enacted on November 12, 1999, permits affiliations among banks, securities firms and insurance companies. The Act significantly changes the competitive environment in which the Corporation conducts business. This environment could result in a loss of customers and related revenue. DISINTERMEDIATION Disintermediation is the process of eliminating the role of the intermediary in completing a transaction. For the financial services industry, this means eliminating or significantly reducing the role of banks and other depository institutions in completing transactions that have traditionally involved banks. Disintermediation could result in, among others, the loss of customer deposits and decreases in transactions that generate fee income. ASSET MANAGEMENT PERFORMANCE Asset management revenue is primarily based on a percentage of the value of assets under management and performance fees expressed as a percentage of the returns realized on assets under management. A decline in the prices of debt and equity instruments, among other things, could cause asset management revenue to decline. Investment performance is an important factor for the level of assets under management. Poor investment performance could impair revenue and growth as existing clients might withdraw funds in favor of better performing products. Also, performance fees could be lower or nonexistent. Additionally, the ability to attract funds from existing and new clients might diminish. 17 FUND SERVICING Fund servicing fees are primarily based on the market value of the assets and the number of shareholder accounts administered by the Corporation for its clients. A rise in interest rates or a decline in the debt and equity markets could influence an investor's decision to invest or maintain an investment in a mutual fund. As a result, fluctuations may occur in the level or value of assets that the Corporation has under administration. A significant investor migration from mutual fund investments could have a negative impact on the Corporation's revenues by reducing the assets and the number of shareholder accounts it administers. There has been and continues to be merger, acquisition and consolidation activity in the financial services industry. Mergers or consolidations of financial institutions in the future could reduce the number of existing or potential fund servicing clients. ACQUISITIONS The Corporation expands its business from time to time by acquiring other financial services companies. Factors pertaining to acquisitions that could adversely affect the Corporation's business and earnings include, among others: o anticipated cost savings or potential revenue enhancements that may not be fully realized or realized within the expected time frame; o customer loss or revenue loss following an acquisition that may be greater than expected; and o costs or difficulties related to the integration of businesses that may be greater than expected. RISK MANAGEMENT In the normal course of business, the Corporation assumes various types of risk, which include, among others, credit risk, interest rate risk, liquidity risk, and risk associated with trading activities and financial derivatives. PNC has risk management processes designed to provide for risk identification, measurement and monitoring. CREDIT RISK Credit risk represents the possibility that a borrower, counterparty or insurer may not perform in accordance with contractual terms. Credit risk is inherent in the financial services business and results from extending credit to customers, purchasing securities and entering into off-balance-sheet financial derivative transactions. The Corporation seeks to manage credit risk through, among other things, diversification, limiting exposure to any single industry or customer, requiring collateral, selling participations to third parties, and purchasing credit-related derivatives. NONPERFORMING ASSETS BY TYPE March 31 December 31 Dollars in millions 2001 2000 - ----------------------------------------------------------------- Nonaccrual loans Commercial $296 $312 Commercial real estate 21 3 Residential mortgage 4 4 Consumer 3 2 Lease financing 6 2 - ----------------------------------------------------------------- Total nonaccrual loans 330 323 Troubled debt restructured loan 6 - ----------------------------------------------------------------- Total nonperforming loans 336 323 Foreclosed and other assets Commercial real estate 2 3 Residential mortgage 7 8 Other 41 38 - ----------------------------------------------------------------- Total foreclosed and other assets 50 49 - ----------------------------------------------------------------- Total nonperforming assets $386 $372 ================================================================= Nonperforming loans to total loans .74% .64% Nonperforming assets to total loans, loans held for sale and foreclosed assets .81 .71 Nonperforming assets to total assets .54 .53 ================================================================= The above table excludes $24 million and $18 million of equity management assets carried at estimated fair value at March 31, 2001 and December 31, 2000, respectively. The amount of nonperforming loans that were current as to principal and interest was $65 million at March 31, 2001 and $67 million at December 31, 2000. Approximately one-third of nonperforming assets were from portfolios or loans that were designated for exit or downsizing at March 31, 2001. A sustained or further weakening of the economy, or other factors that adversely affect asset quality, could result in an increase in the number of delinquencies, bankruptcies or defaults, and a higher level of nonperforming assets, net charge-offs and provision for credit losses in future periods. See the Forward-Looking Statements section of this Financial Review for additional factors that could cause actual results to differ materially from forward-looking statements or historical performance. 18 FINANCIAL REVIEW THE PNC FINANCIAL SERVICES GROUP, INC. CHANGE IN NONPERFORMING ASSETS In millions 2001 2000 - ----------------------------------------------------------------- January 1 $372 $325 Transferred from accrual 171 114 Returned to performing (13) (2) Principal reductions (38) (45) Sales (17) (5) Charge-offs and other (89) (43) - ----------------------------------------------------------------- March 31 $386 $344 ================================================================= ACCRUING LOANS PAST DUE 90 DAYS OR MORE Amount Percent of Loans ------------------------------------------------------ March 31 December 31 March 31 December 31 Dollars in millions 2001 2000 2001 2000 - --------------------------------------------------------------------------- Commercial $14 $46 .07% .22% Commercial real estate 5 6 .19 .23 Residential mortgage 39 36 .44 .27 Consumer 21 24 .23 .26 Lease financing 1 1 .02 .03 - ----------------------------------------------- Total $80 $113 .18 .22 =========================================================================== Loans not included in nonaccrual or past due categories, but where information about possible credit problems causes management to be uncertain about the borrower's ability to comply with existing repayment terms over the next six months totaled $261 million at March 31, 2001. ALLOWANCE FOR CREDIT LOSSES In determining the adequacy of the allowance for credit losses, the Corporation makes specific allocations to impaired loans and to pools of watchlist and nonwatchlist loans for various credit risk factors. Allocations to loan pools are developed by business segment and risk rating and are based on historical loss trends and management's judgment concerning those trends and other relevant factors. Those factors may include, among other things, actual versus estimated losses, regional and national economic conditions, business segment and portfolio concentrations, industry competition and consolidation, and the impact of government regulations. Consumer and residential mortgage loan allocations are made at a total portfolio level based on historical loss experience adjusted for portfolio activity and economic conditions. While PNC's pool reserve methodologies strive to reflect all risk factors, there continues to be a certain element of risk associated with, but not limited to, potential estimation or judgmental errors. Unallocated reserves are designed to provide coverage for such risks. While allocations are made to specific loans and pools of loans, the total reserve is available for all credit losses. Senior management's Reserve Adequacy Committee provides oversight for the allowance evaluation process, including quarterly evaluations and methodology and estimation changes. The results of the evaluations are reported to the Credit Committee of the Board of Directors. The provision for credit losses for the first three months of 2001 and the evaluation of the allowance for credit losses as of March 31, 2001 reflected changes in loan portfolio composition and changes in asset quality. The unallocated portion of the allowance for credit losses represented 20% of the total allowance and .30% of total loans at March 31, 2001 compared with 20% and .26%, respectively, at December 31, 2000. ROLLFORWARD OF ALLOWANCE FOR CREDIT LOSSES In millions 2001 2000 - ----------------------------------------------------------------- January 1 $675 $674 Charge-offs (91) (45) Recoveries 11 14 - ----------------------------------------------------------------- Net charge-offs (80) (31) Provision for credit losses 80 31 - ----------------------------------------------------------------- March 31 $675 $674 ================================================================= The allowance as a percent of nonaccrual loans and total loans was 201% and 1.48%, respectively, at March 31, 2001. The comparable year-end 2000 percentages were 209% and 1.33%, respectively. CHARGE-OFFS AND RECOVERIES Percent of Three months ended March 31 Net Average Dollars in millions Charge-offs Recoveries Charge-offs Loans - ------------------------------------------------------------------------------- 2001 Commercial $78 $6 $72 1.40% Commercial real estate Residential mortgage Consumer 10 5 5 .22 Lease financing 3 3 .31 - ----------------------------------------------------------------- Total $91 $11 $80 .65 - ------------------------------------------------------------------------------- 2000 Commercial $29 $7 $22 .41% Commercial real estate Residential mortgage 2 2 .06 Consumer 12 6 6 .26 Lease financing 2 1 1 .14 - ----------------------------------------------------------------- Total $45 $14 $31 .25 =============================================================================== CREDIT-RELATED INSTRUMENTS Credit default swaps provide, for a fee, an assumption of a portion of the credit risk associated with the underlying financial instruments. The Corporation primarily uses such contracts to mitigate credit risk and lower the required regulatory capital associated with commercial lending activities. At March 31, 2001, credit default swaps of $4.6 billion in notional value were used by the Corporation to hedge credit risk associated with commercial lending activities. 19 INTEREST RATE RISK Interest rate risk arises primarily through the Corporation's traditional business activities of extending loans and accepting deposits. Many factors, including economic and financial conditions, movements in interest rates and consumer preferences affect the spread between interest earned on assets and interest paid on liabilities. In managing interest rate risk, the Corporation seeks to minimize its reliance on a particular interest rate scenario as a source of earnings while maximizing net interest income and net interest margin. To further these objectives, the Corporation uses securities purchases and sales, short-term and long-term funding, financial derivatives and other capital markets instruments. Interest rate risk is centrally managed by Asset and Liability Management. The Corporation actively measures and monitors components of interest rate risk including term structure or repricing risk, yield curve or nonparallel rate shift risk, basis risk and options risk. The Corporation measures and manages both the short-term and long-term effects of changing interest rates. An income simulation model is designed to measure the sensitivity of net interest income to changing interest rates over the next twenty-four month period. An economic value of equity model is designed to measure the sensitivity of the value of existing on-balance-sheet and off-balance-sheet positions to changing interest rates. The income simulation model is the primary tool used to measure the direction and magnitude of changes in net interest income resulting from changes in interest rates. Forecasting net interest income and its sensitivity to changes in interest rates requires that the Corporation make assumptions about the volume and characteristics of new business and the behavior of existing positions. These business assumptions are based on the Corporation's experience, business plans and published industry experience. Key assumptions employed in the model include prepayment speeds on mortgage-related assets and consumer loans, loan volumes and pricing, deposit volumes and pricing, the expected life and repricing characteristics of nonmaturity loans and deposits, and management's financial and capital plans. Because these assumptions are inherently uncertain, the model cannot precisely estimate net interest income or precisely predict the effect of higher or lower interest rates on net interest income. Actual results will differ from simulated results due to the timing, magnitude and frequency of interest rate changes, the difference between actual experience and the assumed volume and characteristics of new business and behavior of existing positions, and changes in market conditions and management strategies, among other factors. The Corporation's interest rate risk management policies provide that net interest income should not decrease by more than 3% if interest rates gradually increase or decrease from current rates by 100 basis points over a twelve-month period. At March 31, 2001, if interest rates were to gradually increase by 100 basis points over the next twelve months, the model indicated that net interest income would decrease by .7%. If interest rates were to gradually decrease by 100 basis points over the next twelve months, the model indicated that net interest income would increase by .1%. The Corporation models additional interest rate scenarios covering a wider range of rate movements to identify yield curve, term structure and basis risk exposures. These scenarios are developed based on historical rate relationships or management's expectations regarding the future direction and level of interest rates. Depending on market conditions and other factors, these scenarios may be modeled more or less frequently. Such analyses are used to identify inherent risk and develop strategies. An economic value of equity model is used by the Corporation to value all current on-balance-sheet and off-balance-sheet positions under a range of instantaneous interest rate changes. The resulting change in the value of equity is a measure of overall long-term interest rate risk inherent in the Corporation's existing on-balance-sheet and off-balance-sheet positions. The Corporation uses the economic value of equity model to complement the net interest income simulation modeling process. The Corporation's interest rate risk management policies provide that the change in economic value of equity should not decline by more than 1.5% of the book value of assets for a 200 basis point instantaneous increase or decrease in interest rates. Based on the results of the economic value of equity model at March 31, 2001, if interest rates were to instantaneously increase by 200 basis points, the model indicated that the economic value of existing on-balance-sheet and off-balance-sheet positions would decline by 1.1% of assets. If interest rates were to instantaneously decrease by 200 basis points, the model indicated that the economic value of existing on-balance-sheet and off-balance-sheet positions would increase by .1% of assets. 20 FINANCIAL REVIEW THE PNC FINANCIAL SERVICES GROUP, INC. LIQUIDITY RISK Liquidity represents the Corporation's ability to obtain cost-effective funding to meet the needs of customers as well as the Corporation's financial obligations. Liquidity is centrally managed by Asset and Liability Management, with oversight provided by the Corporate Asset and Liability Committee and the Finance Committee of the Board of Directors. Access to capital markets funding sources is a key factor affecting liquidity management. Access to such markets is in part based on the Corporation's credit ratings, which are influenced by a number of factors including capital ratios, credit quality and earnings. Additional factors that impact liquidity include the maturity structure of existing assets, liabilities, and off-balance-sheet positions, the level of liquid securities and loans available for sale, and the Corporation's ability to securitize and sell various types of loans. Liquidity can also be provided through the sale of liquid assets, which consist of short-term investments, loans held for sale and securities available for sale. At March 31, 2001, such assets totaled $14.6 billion, with $4.6 billion pledged as collateral for borrowings, trust and other commitments. Liquidity can also be obtained through secured advances from the Federal Home Loan Bank, of which PNC Bank, N.A., PNC's largest bank subsidiary, is a member. These borrowings are generally secured by residential mortgages and mortgage-backed securities. At March 31, 2001, approximately $7.7 billion of residential mortgages were available as collateral for borrowings from the Federal Home Loan Bank. Funding can also be obtained through alternative forms of borrowing, including federal funds purchased, repurchase agreements and short-term and long-term debt issuances. Liquidity for the parent company and subsidiaries is also generated through the issuance of securities in public or private markets and lines of credit. At March 31, 2001, the Corporation had unused capacity under effective shelf registration statements of approximately $1.4 billion of debt and equity securities and $400 million of trust preferred capital securities. In addition, the Corporation had an unused line of credit of $485 million. The principal source of parent company revenue and cash flow is dividends from subsidiary banks. PNC Bancorp, Inc. is a wholly-owned subsidiary of the parent company and is the holding company for all bank subsidiaries. There are legal limitations on the ability of bank subsidiaries to pay dividends and make other distributions to PNC Bancorp, Inc. and in turn to the parent company. Without regulatory approval, the amount available for dividend payments to PNC Bancorp, Inc. by all bank subsidiaries was $302 million at March 31, 2001. Dividends may also be impacted by capital needs, regulatory requirements, corporate policies, contractual restrictions and other factors. Management believes the Corporation has sufficient liquidity to meet current obligations to borrowers, depositors, debt holders and others. The impact of replacing maturing liabilities is reflected in the income simulation model in the overall asset and liability management process. TRADING ACTIVITIES Most of PNC's trading activities are designed to provide capital markets services to customers and not to position the Corporation's portfolio for gains from market movements. PNC participates in derivatives and foreign exchange trading as well as "market making" in equity securities as an accommodation to customers. PNC also engages in trading activities as part of risk management strategies. Risk associated with trading, capital markets and foreign exchange activities is managed using a value-at-risk approach that combines interest rate risk, foreign exchange rate risk, spread risk and volatility risk. Using this approach, exposure is measured as the potential loss due to a two standard deviation, one-day move in interest rates. The combined period-end value-at-risk of all trading operations using this measurement was estimated as less than $500 thousand at March 31, 2001. 21 FINANCIAL DERIVATIVES The Corporation uses a variety of financial derivatives as part of the overall asset and liability risk management process to manage interest rate, market and credit risk inherent in the Corporation's business activities. Substantially all such instruments are used to manage risk related to changes in interest rates. Interest rate and total rate of return swaps, purchased interest rate caps and floors and interest rate futures contracts are the primary instruments used by the Corporation for interest rate risk management. Interest rate swaps are agreements with a counterparty to exchange periodic fixed and floating interest rate payments calculated on a notional amount. The floating rate is based on a money market index, primarily short-term LIBOR. Total rate of return swaps are agreements with a counterparty to exchange an interest rate payment for the total rate of return on a specified reference index calculated on a notional amount. Purchased interest rate caps and floors are agreements where, for a fee, the counterparty agrees to pay the Corporation the amount, if any, by which a specified market interest rate exceeds or is less than a defined rate applied to a notional amount, respectively. Interest rate futures contracts are exchange-traded agreements to make or take delivery of a financial instrument at an agreed upon price and are settled in cash daily. Financial derivatives involve, to varying degrees, interest rate, market and credit risk. For interest rate and total rate of return swaps, caps and floors and futures contracts, only periodic cash payments and, with respect to caps and floors, premiums, are exchanged. Therefore, cash requirements and exposure to credit risk are significantly less than the notional value. Not all elements of interest rate, market and credit risk are addressed through the use of financial or other derivatives, and such instruments may be ineffective for their intended purposes due to unanticipated market characteristics among other reasons. The following table sets forth changes, during the first three months of 2001, in the notional value of financial derivatives used for risk management and designated as accounting hedges under SFAS No. 133.
FINANCIAL DERIVATIVES ACTIVITY Weighted- December 31 Adjust- January 1 Addi- Maturi- Termi- March 31 Average Dollars in millions 2000 ments(1) 2001 tions ties nations 2001 Maturity - ----------------------------------------------------------------------------------------------------------------------------------- Interest rate risk management Interest rate swaps Receive fixed $4,756 $180 $4,936 $2,700 $(500) $(68) $7,068 2 yrs. 9 mos. Pay fixed 1 248 249 20 (102) 167 4 yrs. 3 mos. Basis swaps 2,230 (1,773) 457 (250) 207 2 yrs.11 mos. Interest rate caps 308 (243) 65 11 (40) 36 2 yrs. 1 mo. Interest rate floors 3,238 (238) 3,000 22 (3,000) 22 2 yrs. 2 mos. Futures contracts 116 116 10 mos. - ------------------------------------------------------------------------------------------------------------------ Total interest rate risk management 10,533 (1,826) 8,707 2,869 (500) (3,460) 7,616 - ------------------------------------------------------------------------------------------------------------------ Commercial mortgage banking risk management Interest rate swaps 311 311 354 (461) 204 9 yrs. 4 mos. Total rate of return swaps 75 75 75 (75) 75 5 mos. - ------------------------------------------------------------------------------------------------------------------ Total commercial mortgage banking risk management 386 386 429 (75) (461) 279 Student lending activities - Forward contracts 347 (347) Credit-related activities - Credit default swaps 4,391 (4,391) - ------------------------------------------------------------------------------------------------------------------ Total $15,657 $(6,564) $9,093 $3,298 $(575) $(3,921) $7,895 ===================================================================================================================================
(1) Primarily consists of derivatives that are not designated as accounting hedges under SFAS No. 133 and instruments no longer considered financial derivatives under SFAS No. 133. 22 FINANCIAL REVIEW THE PNC FINANCIAL SERVICES GROUP, INC. The following table sets forth the notional value and the fair value of financial derivatives used for risk management and designated as accounting hedges under SFAS No. 133. Weighted-average interest rates presented are based on the implied forward yield curve at March 31, 2001. FINANCIAL DERIVATIVES
Weighted-Average Interest Rates Notional ------------------------------- March 31, 2001 - dollars in millions Value Fair Value Paid Received - ------------------------------------------------------------------------------------------------------------------------------- Interest rate risk management Asset rate conversion Interest rate swaps (1) Receive fixed designated to loans $5,687 $61 4.80% 5.41% Pay fixed designated to loans 167 (6) 6.14 5.21 Basis swaps designated to loans 207 5.00 5.05 Interest rate caps designated to loans (2) 36 NM NM Interest rate floors designated to loans (3) 22 NM NM Futures contracts designated to loans 116 NM NM - ----------------------------------------------------------------------------------------------- Total asset rate conversion 6,235 55 - ----------------------------------------------------------------------------------------------- Liability rate conversion Interest rate swaps (1) Receive fixed designated to borrowed funds 1,381 94 5.57 6.60 - ----------------------------------------------------------------------------------------------- Total liability rate conversion 1,381 94 - ----------------------------------------------------------------------------------------------- Total interest rate risk management 7,616 149 - ----------------------------------------------------------------------------------------------- Commercial mortgage banking risk management Pay fixed interest rate swaps designated to securities (1) 42 (4) 6.87 5.83 Pay fixed interest rate swaps designated to loans (1) 162 5.75 5.78 Pay total rate of return swaps designated to loans (1) 75 (1) 6.45 4.08 - ----------------------------------------------------------------------------------------------- Total commercial mortgage banking risk management 279 (5) - ----------------------------------------------------------------------------------------------- Total financial derivatives $7,895 $144 ===============================================================================================================================
(1) The floating rate portion of interest rate contracts is based on money-market indices. As a percent of notional value, 75% were based on 1-month LIBOR, 23% on 3-month LIBOR and the remainder on other short-term indices. (2) Interest rate caps with notional values of $26 million require the counterparty to pay the Corporation the excess, if any, of 3-month LIBOR over a weighted-average strike of 6.61%. At March 31, 2001, 3-month LIBOR was 4.88%. (3) Interest rate floors with notional values of $20 million require the counterparty to pay the excess, if any, weighted-average strike of 4.75% over 3-month LIBOR. At March 31, 2001, 3-month LIBOR was 4.88%. The following table sets forth the notional value and the estimated fair value of financial derivatives used for risk management. Weighted-average interest rates presented are based on the implied forward yield curve at December 31, 2000. FINANCIAL DERIVATIVES
Weighted-Average Interest Rates Notional ------------------------------- December 31, 2000 - dollars in millions Value Fair Value Paid Received - ------------------------------------------------------------------------------------------------------------------------------- Interest rate risk management Asset rate conversion Interest rate swaps (1) Receive fixed designated to loans $3,250 $27 5.96% 5.56% Basis swaps designated to other earning assets 226 3 5.63 5.85 Interest rate caps designated to loans (2) 308 4 NM NM Interest rate floors designated to loans (3) 3,238 (1) NM NM - ----------------------------------------------------------------------------------------------- Total asset rate conversion 7,022 33 - ----------------------------------------------------------------------------------------------- Liability rate conversion Interest rate swaps (1) Receive fixed designated to: Interest-bearing deposits 125 4 5.85 6.73 Borrowed funds 1,381 57 5.96 6.60 Pay fixed designated to borrowed funds 1 5.88 5.78 Basis swaps designated to borrowed funds 2,004 10 5.76 5.79 - ----------------------------------------------------------------------------------------------- Total liability rate conversion 3,511 71 - ----------------------------------------------------------------------------------------------- Total interest rate risk management 10,533 104 - ----------------------------------------------------------------------------------------------- Commercial mortgage banking risk management Pay fixed interest rate swaps designated to securities (1) 135 (8) 6.94 6.04 Pay fixed interest rate swaps designated to loans (1) 176 3 5.76 5.99 Pay total rate of return swaps designated to loans (1) 75 (5) 5.76 6.15 - ----------------------------------------------------------------------------------------------- Total commercial mortgage banking risk management 386 (10) - ----------------------------------------------------------------------------------------------- Student lending activities - Forward contracts (4) 347 NM NM Credit-related activities - Credit default swaps (4) 4,391 (2) NM NM - ----------------------------------------------------------------------------------------------- Total financial derivatives $15,657 $92 ===============================================================================================================================
(1) The floating rate portion of interest rate contracts is based on money-market indices. As a percent of notional value, 62% were based on 1-month LIBOR, 36% on 3-month LIBOR and the remainder on other short-term indices. (2) Interest rate caps with notional values of $61 million, $95 million and $150 million require the counterparty to pay the Corporation the excess, if any, of 3-month LIBOR over a weighted-average strike of 6.00%, 1-month LIBOR over a weighted-average strike of 5.68% and Prime over a weighted-average strike of 8.76%, respectively. At December 31, 2000, 3-month LIBOR was 6.40%, 1-month LIBOR was 6.56% and Prime was 9.50%. (3) Interest rate floors with notional values of $3.0 billion, require the counterparty to pay the excess, if any, of the weighted-average strike of 4.63% over 3-month LIBOR. At December 31, 2000, 3-month LIBOR was 6.40%. (4) Due to the structure of these contracts, they are no longer considered financial derivatives under SFAS No. 133. NM- Not meaningful 23 OTHER DERIVATIVES To accommodate customer needs, PNC enters into customer-related financial derivative transactions primarily consisting of interest rate swaps, caps, floors and foreign exchange contracts. Risk exposure from customer positions is managed through transactions with other dealers. Additionally, the Corporation enters into other derivative transactions for risk management purposes that are not designated as accounting hedges. OTHER DERIVATIVES
At March 31, 2001 -------------------------------------------------------------------- 2001 Positive Negative Average Notional Fair Fair Net Asset Fair In millions Value Value Value (Liability) Value (a) - --------------------------------------------------------------------------------------------------------------------------------- Customer-related Interest rate Swaps $14,118 $193 $(203) $(10) $(5) Caps/floors Sold 4,787 (19) (19) (19) Purchased 3,669 18 18 17 Foreign exchange 4,402 96 (74) 22 16 Other 2,794 35 (35) 3 - --------------------------------------------------------------------------------------------------------------------------------- Total customer-related 29,770 342 (331) 11 12 Other 4,171 28 (3) 25 20 - --------------------------------------------------------------------------------------------------------------------------------- Total other derivatives $33,941 $370 $(334) $36 $32 =================================================================================================================================
(a) Represents average for three months ended March 31, 2001. FORWARD-LOOKING STATEMENTS This report and other documents filed by the Corporation with the SEC include forward-looking statements within the meaning of the Private Securities Litigation Reform Act with respect to future financial or business performance, conditions, strategies, expectations and goals. In addition, the Corporation may also include forward-looking statements in other written or oral statements. Forward-looking statements are typically identified by words or phrases such as "believe," "expect," "anticipate," "intend," "estimate," "position," "target," "mission," "assume," "achievable," "potential," "strategy," "goal," "objective," "plan," "aspiration," "outlook," "outcome," "continue," "remain," "maintain," "strive," "trend" and variations of such words and similar expressions, or future or conditional verbs such as "will," "would," "should," "could," "may" or similar expressions. The Corporation cautions that forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time. Actual results could differ materially from those anticipated in forward-looking statements and future results could differ materially from historical performance. Forward-looking statements speak only as of the date they are made, and the Corporation assumes no duty to update forward-looking statements. In addition to the factors mentioned elsewhere in this report, the following factors, among others, could cause actual results to differ materially from forward-looking statements or historical performance: adjustments to recorded results of sale of residential mortgage banking business after final settlement is completed; decisions the Corporation makes with respect to the redeployment of available capital; changes in asset quality and credit risk; economic conditions; changes in financial and capital markets; the inability to sustain revenue and earnings growth; changes in interest rates; inflation; changes in values of assets under management and assets serviced; relative investment performance of assets under management; customer acceptance of PNC products and services; customer borrowing, repayment, investment, and deposit practices; customer disintermediation; valuation of debt and equity investments; the inability to successfully manage risks inherent in the Corporation's business; the introduction, withdrawal, success and timing of business initiatives and strategies; the extent and cost of any share repurchases; decisions the Corporation makes with respect to further reduction of balance sheet leverage and potential investments in PNC businesses; competitive conditions; the inability to realize cost savings or revenue enhancements, implement integration plans and other consequences associated with mergers, acquisitions, restructurings and divestitures; unfavorable resolution of legal proceedings; and the impact, extent and timing of technological changes, capital management activities, and actions of the Federal Reserve Board and legislative and regulatory actions and reforms. Further, an increase in the number of customer or counterparty delinquencies, bankruptcies, or defaults could result in, among other things, a higher loan loss provision and reduced profitability. Some of the above factors are described in more detail in the Risk Factors section of this Financial Review and factors relating to credit risk, interest rate risk, liquidity risk, trading activities, and financial and other derivatives are discussed in the Risk Management section of this Financial Review. Other factors are described elsewhere in this report. 24 CONSOLIDATED STATEMENT OF INCOME THE PNC FINANCIAL SERVICES GROUP, INC.
Three months ended March 31 - in millions, except per share data 2001 2000 - -------------------------------------------------------------------------------------------------------- INTEREST INCOME Loans and fees on loans $981 $984 Securities available for sale 122 94 Loans held for sale 37 64 Other 32 19 - -------------------------------------------------------------------------------------------------------- Total interest income 1,172 1,161 - -------------------------------------------------------------------------------------------------------- INTEREST EXPENSE Deposits 397 369 Borrowed funds 221 237 - -------------------------------------------------------------------------------------------------------- Total interest expense 618 606 - -------------------------------------------------------------------------------------------------------- Net interest income 554 555 Provision for credit losses 80 31 - -------------------------------------------------------------------------------------------------------- Net interest income less provision for credit losses 474 524 - -------------------------------------------------------------------------------------------------------- NONINTEREST INCOME Asset management 223 186 Fund servicing 181 155 Service charges on deposits 50 50 Brokerage 54 71 Consumer services 55 47 Corporate services 76 82 Equity management (39) 87 Net securities gains (losses) 29 (3) Other 72 53 - -------------------------------------------------------------------------------------------------------- Total noninterest income 701 728 - -------------------------------------------------------------------------------------------------------- NONINTEREST EXPENSE Staff expense 421 411 Net occupancy 53 53 Equipment 57 56 Amortization 26 28 Marketing 9 13 Distributions on capital securities 17 16 Other 192 215 - -------------------------------------------------------------------------------------------------------- Total noninterest expense 775 792 - -------------------------------------------------------------------------------------------------------- Income from continuing operations before income taxes 400 460 Income taxes 135 158 - -------------------------------------------------------------------------------------------------------- Income from continuing operations 265 302 - -------------------------------------------------------------------------------------------------------- Income from discontinued operations (less applicable income taxes of $0 and $5) 40 6 - -------------------------------------------------------------------------------------------------------- Net income before cumulative effect of accounting change 305 308 Cumulative effect of accounting change (less applicable income taxes of $2) (5) - -------------------------------------------------------------------------------------------------------- Net income $300 $308 - -------------------------------------------------------------------------------------------------------- EARNINGS PER COMMON SHARE Continuing operations Basic $.90 $1.02 Diluted .89 1.01 Net income Basic $1.02 $1.04 Diluted 1.01 1.03 CASH DIVIDENDS DECLARED PER COMMON SHARE $.48 $.45 AVERAGE COMMON SHARES OUTSTANDING Basic 289.2 291.9 Diluted 292.8 294.1 ========================================================================================================
See accompanying Notes to Consolidated Financial Statements. 25 CONSOLIDATED BALANCE SHEET THE PNC FINANCIAL SERVICES GROUP, INC.
March 31 December 31 In millions, except par value 2001 2000 - ----------------------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $2,998 $3,662 Short-term investments 853 1,151 Loans held for sale 1,765 1,655 Securities available for sale 11,976 5,902 Loans, net of unearned income of $1,062 and $999 45,626 50,601 Allowance for credit losses (675) (675) - ----------------------------------------------------------------------------------------------------------------------- Net loans 44,951 49,926 Goodwill and other amortizable assets 2,437 2,468 Investment in discontinued operations 356 Other 5,986 4,724 - ----------------------------------------------------------------------------------------------------------------------- Total assets $70,966 $69,844 ======================================================================================================================= LIABILITIES Deposits Noninterest-bearing $8,431 $8,490 Interest-bearing 38,758 39,174 - ----------------------------------------------------------------------------------------------------------------------- Total deposits 47,189 47,664 Borrowed funds Federal funds purchased 785 1,445 Repurchase agreements 830 607 Bank notes and senior debt 5,362 6,110 Federal Home Loan Bank borrowings 2,623 500 Subordinated debt 2,379 2,407 Other borrowed funds 300 649 - ----------------------------------------------------------------------------------------------------------------------- Total borrowed funds 12,279 11,718 Other 3,869 2,958 - ----------------------------------------------------------------------------------------------------------------------- Total liabilities 63,337 62,340 - ----------------------------------------------------------------------------------------------------------------------- Mandatorily redeemable capital securities of subsidiary trusts 848 848 SHAREHOLDERS' EQUITY Preferred stock 7 7 Common stock - $5 par value Authorized 450 shares Issued 353 shares 1,764 1,764 Capital surplus 1,323 1,303 Retained earnings 6,857 6,736 Deferred benefit expense (26) (25) Accumulated other comprehensive income (loss) from continuing operations 7 (43) Accumulated other comprehensive loss from discontinued operations (45) Common stock held in treasury at cost: 64 and 63 shares (3,151) (3,041) - ----------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 6,781 6,656 - ----------------------------------------------------------------------------------------------------------------------- Total liabilities, capital securities and shareholders' equity $70,966 $69,844 =======================================================================================================================
See accompanying Notes to Consolidated Financial Statements. 26 CONSOLIDATED STATEMENT OF CASH FLOWS THE PNC FINANCIAL SERVICES GROUP, INC.
Three months ended March 31 - in millions 2001 2000 - --------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $300 $308 Discontinued operations (40) (6) Cumulative effect of accounting change 5 - --------------------------------------------------------------------------------------------------------------- Income from continuing operations 265 302 Adjustments to reconcile income from continuing operations to net cash provided by operating activities Provision for credit losses 80 31 Depreciation, amortization and accretion 100 77 Deferred income taxes 114 117 Net securities (gains) losses (28) 3 Valuation adjustments 8 17 Change in Loans held for sale (124) 661 Other (266) (341) - --------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 149 867 - --------------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Net change in loans (64) (631) Repayment of securities available for sale 265 185 Sales Securities available for sale 4,958 1,427 Loans 1,161 Foreclosed assets 5 7 Purchases Securities available for sale (7,357) (1,594) Loans (110) Net cash received in sale of business 503 Other 71 (70) - ---------------------------------------------------------------------------------------------------------------- Net cash used by investing activities (568) (676) - --------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Net change in Noninterest-bearing deposits (59) (142) Interest-bearing deposits (416) 107 Federal funds purchased (660) (372) Sales/issuances Repurchase agreements 65,210 33,151 Bank notes and senior debt 1,050 Federal Home Loan Bank borrowings 2,623 1,500 Subordinated debt 1 99 Other borrowed funds 9,410 10,399 Common stock 80 31 Repayments/maturities Repurchase agreements (64,987) (33,417) Bank notes and senior debt (750) (1,025) Federal Home Loan Bank borrowings (500) (1,700) Subordinated debt (100) Other borrowed funds (9,762) (10,528) Acquisition of treasury stock (191) (116) Cash dividends paid (144) (136) - --------------------------------------------------------------------------------------------------------------- Net cash used by financing activities (245) (1,099) - --------------------------------------------------------------------------------------------------------------- DECREASE IN CASH AND DUE FROM BANKS (664) (908) Cash and due from banks at beginning of year 3,662 3,080 - --------------------------------------------------------------------------------------------------------------- Cash and due from banks at end of period $2,998 $2,172 =============================================================================================================== CASH PAID FOR Interest $577 $634 Income taxes 29 90 NON-CASH ITEMS Transfer of residential mortgage loans to securities available for sale 3,775 Transfer from loans held for sale to loans 6 Transfer from loans to other assets 3 9 ===============================================================================================================
See accompanying Notes to Consolidated Financial Statements. 27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THE PNC FINANCIAL SERVICES GROUP, INC. BUSINESS The PNC Financial Services Group, Inc. ("Corporation" or "PNC") is one of the largest diversified financial services companies in the United States, operating businesses engaged in community banking, corporate banking, real estate finance, asset-based lending, wealth management, asset management and global fund services. The Corporation provides certain products and services nationally and others in PNC's primary geographic markets in Pennsylvania, New Jersey, Delaware, Ohio and Kentucky. The Corporation also provides certain asset management and processing products and services internationally. PNC is subject to intense competition from other financial services companies and is subject to regulation by various domestic and international authorities. ACCOUNTING POLICIES BASIS OF FINANCIAL STATEMENT PRESENTATION The unaudited consolidated interim financial statements include the accounts of PNC and its subsidiaries, most of which are wholly owned. Such statements have been prepared in accordance with accounting principles generally accepted in the United States. All significant intercompany accounts and transactions have been eliminated. In the opinion of management, the financial statements reflect all adjustments of a normal recurring nature necessary for a fair statement of results for the interim periods presented. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the amounts reported. Actual results will differ from such estimates and the differences may be material to the consolidated financial statements. The consolidated financial statements and notes to consolidated financial statements reflect the residential mortgage banking business, which was sold on January 31, 2001, as discontinued operations, unless otherwise noted. The notes included herein should be read in conjunction with the audited consolidated financial statements included in The PNC Financial Services Group, Inc.'s 2000 Annual Report. FINANCIAL DERIVATIVES The Corporation uses a variety of financial derivatives as part of the overall asset and liability risk management process to manage interest rate, market and credit risk inherent in the Corporation's business activities. Substantially all such instruments are used to manage risk related to changes in interest rates. Interest rate and total rate of return swaps, purchased interest rate caps and floors and futures contracts are the primary instruments used by the Corporation for interest rate risk management. Interest rate swaps are agreements with a counterparty to exchange periodic fixed and floating interest payments calculated on a notional amount. The floating rate is based on a money market index, primarily short-term LIBOR. Total rate of return swaps are agreements with a counterparty to exchange an interest rate payment for the total rate of return on a specified reference index calculated on a notional amount. Purchased interest rate caps and floors are agreements where, for a fee, the counterparty agrees to pay the Corporation the amount, if any, by which a specified market interest rate exceeds or is less than a defined rate applied to a notional amount, respectively. Interest rate futures contracts are exchange-traded agreements to make or take delivery of a financial instrument at an agreed upon price and are settled in cash daily. Financial derivatives involve, to varying degrees, interest rate, market and credit risk. The Corporation manages these risks as part of its asset and liability management process and through credit policies and procedures. The Corporation seeks to minimize the credit risk by entering into transactions with only a select number of high-quality institutions, establishing credit limits, requiring bilateral-netting agreements, and, in certain instances, segregated collateral. FAIR VALUE HEDGING STRATEGIES The Corporation enters into interest rate and total rate of return swaps, caps, floors and interest rate futures derivative contracts to hedge designated commercial mortgage loans held for sale, securities available for sale, commercial loans, bank notes and subordinated debt for changes in fair value primarily due to changes in interest rates. CASH FLOW HEDGING STRATEGY The Corporation enters into interest rate swap contracts to modify the interest rate characteristics of designated commercial loans from variable to fixed in order to reduce the impact of interest rate changes on future interest income. The fair value of the derivative is reported in other assets or other liabilities and offset in accumulated other comprehensive income for the effective portion of the derivative. Ineffectiveness of the strategy, as defined under Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137 and No. 138, if any, is reported in net interest income. Amounts reclassed into earnings, when the hedged transaction affects earnings, are included in net interest income. 28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THE PNC FINANCIAL SERVICES GROUP, INC. CUSTOMER AND OTHER DERIVATIVES To accommodate customer needs, PNC also enters into financial derivative transactions primarily consisting of interest rate swaps, caps, floors and foreign exchange contracts. Interest rate and foreign exchange risk exposures from customer positions are managed through transactions with other dealers. These positions are recorded at estimated fair value and changes in value are included in noninterest income. Effective January 1, 2001, the Corporation implemented SFAS No. 133. The statement requires the Corporation to recognize all derivative instruments as either assets or liabilities on the balance sheet at fair value. Financial derivatives are reported at fair value in other assets or other liabilities. The accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, the Corporation must designate the hedging instrument, based on the exposure being hedged, as either a fair value hedge, a cash flow hedge or a hedge of a net investment in a foreign operation. For derivatives that are designated as fair value hedges (i.e., hedging the exposure to changes in the fair value of an asset or a liability attributable to a particular risk), the gain or loss on derivatives as well as the loss or gain on the hedged items are recognized in current earnings. For derivatives designated as cash flow hedges (i.e., hedging the exposure to variability in expected future cash flows), the effective portions of the gain or loss on derivatives are reported as a component of accumulated other comprehensive income in the same period or periods during which the hedged transaction affects earnings. The remaining gain or loss on the derivatives in excess of the hedged future cash flows, if any, is recognized in current earnings. For derivatives not designated as hedges, the gain or loss is recognized in current earnings. FINANCIAL DERIVATIVES - PRE-SFAS NO. 133 Prior to January 1, 2001, interest rate swaps, caps and floors that modified the interest rate characteristics (such as from fixed to variable, variable to fixed, or one variable index to another) of designated interest-bearing assets or liabilities were accounted for under the accrual method. The net amount payable or receivable from the derivative contract was accrued as an adjustment to interest income or interest expense of the designated instrument. Premiums on contracts were deferred and amortized over the life of the agreement as an adjustment to interest income or interest expense of the designated instruments. Unamortized premiums were included in other assets. Changes in the fair value of financial derivatives accounted for under the accrual method were not reflected in results of operations. Realized gains and losses, except losses on terminated interest rate caps and floors, were deferred as an adjustment to the carrying amount of the designated instruments and amortized over the shorter of the remaining original life of the agreements or the designated instruments. Losses on terminated interest rate caps and floors were recognized immediately in results of operations. If the designated instruments were disposed, the fair value of the associated derivative contracts and any unamortized deferred gains or losses were included in the determination of gain or loss on the disposition of such instruments. Contracts not qualifying for accrual accounting were marked to market with gains or losses included in noninterest income. Credit default swaps were entered into to mitigate credit risk and lower the required regulatory capital associated with commercial lending activities. If the credit default swaps qualified for hedge accounting treatment, the premium paid to enter into the credit default swaps were recorded in other assets and deferred and amortized to noninterest expense over the life of the agreement. Changes in the fair value of credit default swaps qualifying for hedge accounting treatment were not reflected in the Corporation's financial position and had no impact on results of operations. If the credit default swap did not qualify for hedge accounting treatment or if the Corporation was the seller of credit protection, the credit default swap was marked to market with gains or losses included in noninterest income. Due to the particular structure of the Corporation's credit default swaps discussed in the preceding paragraphs, these instruments are not considered financial derivatives under the provisions of SFAS No. 133. Commencing January 1, 2001, the premiums paid to enter credit default swaps not considered to be derivatives are recorded in other assets and amortized to noninterest expense over the life of the agreement. 29 RECENT ACCOUNTING PRONOUNCEMENTS SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" (a replacement of SFAS No. 125) was issued in September 2000 and replaces SFAS No. 125. Although SFAS No. 140 has changed many of the rules regarding securitizations, it continues to require an entity to recognize the financial and servicing assets it controls and the liabilities it has incurred and to derecognize financial assets when control has been surrendered in accordance with the criteria provided in the standard. As required, the Corporation will apply the new rules prospectively to transactions beginning in the second quarter of 2001. Based on current circumstances, management believes that the application of the new rules will not have a material impact on the Corporation's financial condition or results of operations. SFAS No. 140 requires certain disclosures pertaining to securitization transactions effective for fiscal years ending after December 15, 2000. DISCONTINUED OPERATIONS On January 31, 2001, PNC closed the sale of its residential mortgage banking business to Washington Mutual, F.A. The income and net assets of the residential mortgage banking business, which are presented on one line in the income statement and balance sheet, respectively, are as follows: INCOME FROM DISCONTINUED OPERATIONS Three months ended March 31 - in millions 2001 2000 - ----------------------------------------------------------------- Total income from operations after tax $15 $6 Total gain on disposal after tax 25 - ----------------------------------------------------------------- Total income from discontinued operations $40 $6 ================================================================= Certain closing date adjustments are currently in dispute between PNC and the buyer. The disputed matters will be resolved in accordance with procedures provided for in the purchase agreement. The ultimate financial impact of the sale will not be determined until final settlement is completed. INVESTMENT IN DISCONTINUED OPERATIONS December 31 - in millions 2000 - ------------------------------------------------------------------ Loans held for sale $3,003 Securities available for sale 3,016 Loans, net of unearned income 739 Goodwill and other amortizable assets 1,925 All other assets 1,168 - ------------------------------------------------------------------ Total assets 9,851 - ------------------------------------------------------------------ Deposits 1,150 Borrowed funds 7,601 Other liabilities 744 - ------------------------------------------------------------------ Total liabilities 9,495 - ------------------------------------------------------------------ Net assets $356 ================================================================== CASH FLOWS During the first three months of 2001, divestiture activity that affected cash flows consisted of $383 million of divested net assets and cash receipts of $503 million. The Corporation did not have any acquisition or divestiture activity that affected cash flows during the first three months of 2000. TRADING ACTIVITIES Most of PNC's trading activities are designed to provide capital markets services to customers and not to position the Corporation's portfolio for gains from market movements. PNC participates in derivatives and foreign exchange trading as well as "market making" in equity securities as an accommodation to customers. PNC also engages in trading activities as part of risk management strategies. Net trading income for the first three months of 2001 totaled $38 million compared with net trading income of $20 million for the prior-year period and was included in noninterest income as follows: Three months ended March 31 - in millions 2001 2000 - ---------------------------------------------------------------- Corporate services $1 Other income Securities trading 20 $12 Derivatives trading 12 3 Foreign exchange 5 5 - ---------------------------------------------------------------- Net trading income $38 $20 ================================================================ 30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THE PNC FINANCIAL SERVICES GROUP, INC. SECURITIES AVAILABLE FOR SALE
Unrealized Amortized ------------------------ Fair In millions Cost Gains Losses Value - ------------------------------------------------------------------------------------------------------------------------- MARCH 31, 2001 Debt securities U.S. Treasury and government agencies $1,519 $5 $(2) $1,522 Mortgage-backed 8,707 16 (18) 8,705 Asset-backed 1,358 7 (4) 1,361 State and municipal 80 3 83 Other debt 70 1 71 - ------------------------------------------------------------------------------------------------------------------------- Total debt securities 11,734 32 (24) 11,742 Corporate stocks and other 248 52 (66) 234 - ------------------------------------------------------------------------------------------------------------------------- Total securities available for sale $11,982 $84 $(90) $11,976 ========================================================================================================================= DECEMBER 31, 2000 Debt securities U.S. Treasury and government agencies $313 $1 $(1) $313 Mortgage-backed 4,037 13 (48) 4,002 Asset-backed 902 1 (10) 893 State and municipal 94 2 96 Other debt 73 1 (1) 73 - ------------------------------------------------------------------------------------------------------------------------- Total debt securities 5,419 18 (60) 5,377 Corporate stocks and other 537 2 (14) 525 - ------------------------------------------------------------------------------------------------------------------------- Total securities available for sale $5,956 $20 $(74) $5,902 =========================================================================================================================
The fair value of securities available for sale at March 31, 2001 was $12.0 billion compared with $5.9 billion at December 31, 2000. Securities represented 17% of total assets at March 31, 2001 compared with 8% at December 31, 2000. The increase was primarily due to $3.8 billion of residential mortgage loan securitizations and purchases of securities during the first three months of 2001. The expected weighted-average life of securities available for sale was 3 years and 11 months at March 31, 2001 compared with 4 years and 5 months at December 31, 2000. At March 31, 2001, the securities available for sale balance included a net unrealized loss of $6 million, which represented the difference between fair value and amortized cost. The comparable amount at December 31, 2000 was a net unrealized loss of $54 million. Net unrealized gains and losses in the securities available for sale portfolio are included in accumulated other comprehensive income or loss, net of tax or, for the portion attributable to changes in a hedged risk as part of a fair value hedge strategy, in net income. Net securities gains associated with the disposition of securities available for sale were $29 million for the first three months of 2001 and net losses of $3 million for the first three months of 2000. Net securities losses of $1 million for the first three months of 2001, related to commercial mortgage banking activities, were included in corporate services revenue. 31 NONPERFORMING ASSETS Nonperforming assets were as follows: March 31 December 31 In millions 2001 2000 - -------------------------------------------------------------------- Nonaccrual loans $330 $323 Troubled debt restructured loan 6 Foreclosed and other assets 50 49 - -------------------------------------------------------------------- Total nonperforming assets $386 $372 ==================================================================== The above table excludes $24 million and $18 million of equity management assets carried at estimated fair value at March 31, 2001 and December 31, 2000, respectively. ALLOWANCE FOR CREDIT LOSSES Changes in the allowance for credit losses were as follows: In millions 2001 2000 - -------------------------------------------------------------------- Allowance at January 1 $675 $674 Charge-offs Consumer (10) (12) Residential mortgage (2) Commercial (78) (29) Lease financing (3) (2) - -------------------------------------------------------------------- Total charge-offs (91) (45) Recoveries Consumer 5 6 Commercial 6 7 Lease financing 1 - -------------------------------------------------------------------- Total recoveries 11 14 - -------------------------------------------------------------------- Net charge-offs Consumer (5) (6) Residential mortgage (2) Commercial (72) (22) Lease financing (3) (1) - -------------------------------------------------------------------- Total net charge-offs (80) (31) Provision for credit losses 80 31 - -------------------------------------------------------------------- Allowance at March 31 $675 $674 ==================================================================== FINANCIAL DERIVATIVES Effective January 1, 2001, the Corporation implemented SFAS No. 133. As a result of the adoption of this statement, the Corporation recognized, in the first quarter of 2001, an after-tax loss from the cumulative effect of a change in accounting principle of $5 million reported in the consolidated income statement and an after-tax accumulated other comprehensive loss of $4 million. The impact of the adoption of this standard related to the residential mortgage banking business that was sold was reflected in the results of discontinued operations. During the first quarter of 2001, the Corporation recognized a net loss of $1 million related to the ineffective portion of its fair value hedging instruments. This net loss was reported as an adjustment to net interest income. Cash flow hedge ineffectiveness was not significant to the results of operations of the Corporation during the first three months of 2001. At March 31, 2001, the Corporation expects to reclassify $28 million of net gains on derivative instruments from accumulated other comprehensive income to earnings during the next twelve months due to the receipts of variable interest associated with floating rate commercial loans. At March 31, 2001 and December 31, 2000, the Corporation's exposure to credit losses with respect to financial derivatives was not material. LEGAL PROCEEDINGS The Corporation and persons to whom the Corporation may have indemnification obligations, in the normal course of business, are subject to various pending and threatened legal proceedings in which claims for monetary damages and other relief are asserted. Management, after consultation with legal counsel, does not at the present time anticipate the ultimate aggregate liability, if any, arising out of such legal proceedings will have a material adverse effect on the Corporation's financial condition. At the present time, management is not in a position to determine whether any such pending or threatened legal proceedings will have a material adverse effect on the Corporation's results of operations in any future reporting period. 32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THE PNC FINANCIAL SERVICES GROUP, INC. COMPREHENSIVE INCOME Comprehensive income from continuing operations was $315 million for the first quarter of 2001, compared with $294 million for the first quarter of 2000. The Corporation's other comprehensive income consists of unrealized gains or losses on securities available for sale and cash flow hedge, foreign currency translation and minimum pension liability adjustments. The income effects allocated to each component of other comprehensive income are as follows: Three months ended March 31, 2001 Pretax Tax Benefit After-tax In millions Amount (Expense) Amount - ------------------------------------------------------------------------------- Unrealized securities gains $53 $(19) $34 Less: Reclassification adjustment for gains realized in net income 6 (2) 4 - ------------------------------------------------------------------------------- Net unrealized securities gains 47 (17) 30 - ------------------------------------------------------------------------------- SFAS No. 133 transition adjustment (6) 2 (4) Unrealized gains on cash flow hedge derivatives 31 (11) 20 Less: Reclassification adjustment for losses realized in net income (7) 2 (5) - ------------------------------------------------------------------------------- Net unrealized gains on cash flow hedge derivatives 32 (11) 21 Foreign currency translation adjustment (2) 1 (1) - ------------------------------------------------------------------------------- Other comprehensive income from continuing operations $77 $(27) $50 =============================================================================== Year ended December 31, 2000 Pretax Tax Benefit After-tax In millions Amount (Expense) Amount - ------------------------------------------------------------------------------- Unrealized securities gains $127 $(41) $86 Less: Reclassification adjustment for losses realized in net income (3) 1 (2) - ------------------------------------------------------------------------------- Net unrealized securities gains 130 (42) 88 Minimum pension liability adjustment 2 (1) 1 - ------------------------------------------------------------------------------- Other comprehensive income from continuing operations $132 $(43) $89 =============================================================================== The accumulated balances related to each component of other comprehensive income (loss) are as follows: March 31 December 31 In millions 2001 2000 - ---------------------------------------------------------------------- Net unrealized securities losses $(2) $(32) Net unrealized gains on cash flow hedge derivatives 21 Minimum pension liability adjustment (11) (11) Foreign currency translation adjustment (1) - ---------------------------------------------------------------------- Accumulated other comprehensive income (loss) from continuing operations $7 $(43) ====================================================================== SHAREHOLDERS' EQUITY On March 6, 2001, the Corporation commenced a cash tender offer for its nonconvertible Series F preferred stock at a price of $50.35 per share plus accrued and unpaid dividends. Approximately 1.9 million shares of the 6 million shares outstanding were tendered through this offer and were purchased by the Corporation on April 5, 2001. 33 EARNINGS PER SHARE The following table sets forth basic and diluted earnings per share calculations.
Three months ended March 31 - in millions, except share and per share data 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------ CALCULATION OF BASIC EARNINGS PER COMMON SHARE Income from continuing operations $265 $302 Less: Preferred dividends declared 5 5 - ------------------------------------------------------------------------------------------------------------------------------ Income from continuing operations applicable to basic earnings per common share 260 297 Income from discontinued operations applicable to basic earnings per common share 40 6 Cumulative effect of accounting change applicable to basic earnings per common share (5) - ------------------------------------------------------------------------------------------------------------------------------ Net income applicable to basic earnings per common share $295 $303 Basic weighted-average common shares outstanding (in thousands) 289,205 291,891 Basic earnings per common share from continuing operations $.90 $1.02 Basic earnings per common share from discontinued operations .14 .02 Basic earnings per common share from cumulative effect of accounting change (.02) - ------------------------------------------------------------------------------------------------------------------------------ Basic earnings per common share $1.02 $1.04 ============================================================================================================================== CALCULATION OF DILUTED EARNINGS PER COMMON SHARE Income from continuing operations $265 $302 Less: Dividends declared on nonconvertible preferred stock Series F 4 5 - ------------------------------------------------------------------------------------------------------------------------------ Income from continuing operations applicable to diluted earnings per common share 261 297 Income from discontinued operations applicable to diluted earnings per common share 40 6 Cumulative effect of accounting change applicable to diluted earnings per common share (5) - ------------------------------------------------------------------------------------------------------------------------------ Net income applicable to diluted earnings per common share $296 $303 Basic weighted-average common shares outstanding (in thousands) 289,205 291,891 Weighted-average common shares to be issued using average market price and assuming: Conversion of preferred stock Series A and B 111 122 Conversion of preferred stock Series C and D 902 1,028 Conversion of debentures 17 22 Exercise of stock options 2,266 699 Incentive share awards 304 368 - ------------------------------------------------------------------------------------------------------------------------------ Diluted weighted-average common shares outstanding (in thousands) 292,805 294,130 Diluted earnings per common share from continuing operations $.89 $1.01 Diluted earnings per common share from discontinued operations .14 .02 Diluted earnings per common share from cumulative effect of accounting change (.02) - ------------------------------------------------------------------------------------------------------------------------------ Diluted earnings per common share $1.01 $1.03 ==============================================================================================================================
34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THE PNC FINANCIAL SERVICES GROUP, INC. SEGMENT REPORTING PNC operates seven major businesses engaged in community banking, corporate banking, real estate finance, asset-based lending, wealth management, asset management and global fund services. Business results are presented based on PNC's management accounting practices and the Corporation's management structure. There is no comprehensive, authoritative body of guidance for management accounting equivalent to generally accepted accounting principles; therefore, PNC's business results are not necessarily comparable with similar information for any other financial services institution. Financial results are presented, to the extent practicable, as if each business operated on a stand-alone basis. The management accounting process uses various balance sheet and income statement assignments and transfers to measure performance of the businesses. Methodologies change from time to time as management accounting practices are enhanced and businesses change. Securities available for sale or borrowings and related net interest income are assigned based on the net asset or liability position of each business. Capital is assigned based on management's assessment of inherent risks and equity levels at independent companies providing similar products and services. The allowance for credit losses is allocated based on management's assessment of risk inherent in the loan portfolios. Support areas not directly aligned with the businesses are allocated primarily based on the utilization of services. Total business financial results differ from consolidated results from continuing operations primarily due to differences between management accounting practices and generally accepted accounting principles, businesses and loan portfolios that have been divested or designated for exit during 2000 or earlier, equity management activities, minority interests, residual asset and liability management activities, eliminations and unassigned items, the impact of which is reflected in the "Other" category. BUSINESS SEGMENT PRODUCTS AND SERVICES Community Banking provides deposit, branch-based brokerage, electronic banking and credit products and services to retail customers as well as deposit, credit, treasury management and capital markets products and services to small businesses primarily within PNC's geographic region. Corporate Banking provides credit, equipment leasing, treasury management and capital markets products and services to large and mid-sized corporations, institutions and government entities primarily within PNC's geographic region. PNC Real Estate Finance provides credit, capital markets, treasury management, commercial mortgage loan servicing and other products and services to developers, owners and investors in commercial real estate. PNC Business Credit provides asset-based lending, capital markets and treasury management products and services to middle market customers nationally. PNC Business Credit's lending services include loans secured by accounts receivable, inventory, machinery and equipment, and other collateral, and its customers include manufacturing, wholesale, distribution, retailing and service industry companies. PNC Advisors provides a full range of tailored investment products and services to affluent individuals and families including full-service brokerage through J.J.B. Hilliard, W.L. Lyons, Inc. and investment advisory services to the ultra-affluent through Hawthorn. PNC Advisors also serves as investment manager and trustee for employee benefit plans and charitable and endowment assets. BlackRock is one of the largest publicly traded investment management firms in the United States with $202 billion of assets under management at March 31, 2001. BlackRock manages assets on behalf of institutions and individuals through a variety of fixed income, liquidity, equity and alternative investment separate accounts and mutual funds, including its flagship fund families, BlackRock Funds and BlackRock Provident Institutional Funds. In addition, BlackRock provides risk management and technology services to a growing number of institutional investors under the BlackRock Solutions name. PFPC is the largest full-service mutual fund transfer agent and second largest provider of mutual fund accounting and administration services in the United States, providing a wide range of global fund services to the investment management industry. As an extension of its domestic services, PFPC also provides customized processing services to the international marketplace through its Dublin, Ireland and Luxembourg operations. 35 RESULTS OF BUSINESSES
PNC Real PNC Three months ended March 31 Community Corporate Estate Business PNC In millions Banking Banking Finance Credit Advisors BlackRock PFPC Other Total - ----------------------------------------------------------------------------------------------------------------------------------- 2001 INCOME STATEMENT Net interest income (a) $354 $140 $29 $24 $32 $2 $(15) $(7) $559 Noninterest income 188 52 24 14 167 134 180 (58) 701 - ----------------------------------------------------------------------------------------------------------------------------------- Total revenue 542 192 53 38 199 136 165 (65) 1,260 Provision for credit losses 10 57 5 8 80 Depreciation and amortization 21 3 5 1 4 6 10 14 64 Other noninterest expense 258 98 31 7 124 86 127 (20) 711 - ----------------------------------------------------------------------------------------------------------------------------------- Pretax earnings 253 34 17 25 71 44 28 (67) 405 Income taxes 91 10 (3) 9 27 19 11 (24) 140 - --------------------------------------------------------------------------------------------------------------------------------- Earnings $162 $24 $20 $16 $44 $25 $17 $(43) $265 =================================================================================================================================== Inter-segment revenue $1 $1 $19 $3 $(24) =================================================================================================================================== AVERAGE ASSETS $40,617 $16,939 $5,378 $2,377 $3,505 $500 $1,735 $734 $71,785 =================================================================================================================================== 2000 INCOME STATEMENT Net interest income (a) $344 $134 $27 $24 $35 $1 $(10) $5 $560 Noninterest income 133 80 19 4 169 108 155 60 728 - ----------------------------------------------------------------------------------------------------------------------------------- Total revenue 477 214 46 28 204 109 145 65 1,288 Provision for credit losses 12 15 3 1 31 Depreciation and amortization 21 3 5 1 4 5 13 14 66 Other noninterest expense 243 98 30 6 131 71 122 25 726 - ----------------------------------------------------------------------------------------------------------------------------------- Pretax earnings 201 98 11 21 66 33 10 25 465 Income taxes 72 34 (2) 8 25 14 4 8 163 - ----------------------------------------------------------------------------------------------------------------------------------- Earnings $129 $64 $13 $13 $41 $19 $6 $17 $302 =================================================================================================================================== Inter-segment revenue $1 $1 $22 $3 $(27) =================================================================================================================================== AVERAGE ASSETS $37,866 $15,950 $5,382 $2,084 $3,598 $388 $1,603 $1,473 $68,344 ===================================================================================================================================
(a) Taxable-equivalent basis 36 STATISTICAL INFORMATION THE PNC FINANCIAL SERVICES GROUP, INC. CONSOLIDATED AVERAGE BALANCE SHEET AND NET INTEREST ANALYSIS
---------------------------------------------------------------------- First Quarter 2001 Fourth Quarter 2000 ---------------------------------------------------------------------- Average Average Dollars in millions Average Yields/ Average Yields/ Taxable-equivalent basis Balances Interest Rates Balances Interest Rates - --------------------------------------------------------------------------------------------------------------------------------- ASSETS Interest-earning assets Loans held for sale $2,005 $37 7.31% $1,991 $41 8.32% Securities available for sale U.S. Treasury and government agencies and corporations 3,933 57 5.84 1,795 27 6.12 Other debt 4,001 63 6.32 3,635 60 6.59 Other 127 2 5.63 498 10 7.55 - ------------------------------------------------------------------------------------ ---------------------- Total securities available for sale 8,061 122 6.08 5,928 97 6.53 Loans, net of unearned income Consumer 9,085 194 8.70 9,081 202 8.84 Residential mortgage 12,673 232 7.32 12,838 232 7.23 Commercial 20,882 422 8.09 21,109 455 8.44 Commercial real estate 2,580 55 8.44 2,670 61 8.97 Lease financing 3,897 71 7.32 3,639 68 7.42 Other 520 11 7.98 591 13 8.73 - ------------------------------------------------------------------------------------ ---------------------- Total loans, net of unearned income 49,637 985 7.96 49,928 1,031 8.16 Other 1,831 33 7.20 1,322 26 7.80 - ------------------------------------------------------------------------------------ ---------------------- Total interest-earning assets/interest income 61,534 1,177 7.67 59,169 1,195 7.99 Noninterest-earning assets Investment in discontinued operations 207 570 Allowance for credit losses (683) (678) Cash and due from banks 2,977 2,877 Other assets 7,957 7,015 - ------------------------------------------------------------------------ --------- Total assets $71,992 $68,953 - ------------------------------------------------------------------------ --------- LIABILITIES, CAPITAL SECURITIES AND SHAREHOLDERS' EQUITY Interest-bearing liabilities Interest-bearing deposits Demand and money market $20,468 162 3.20 $19,762 186 3.74 Savings 1,919 6 1.31 1,937 8 1.72 Retail certificates of deposit 13,724 199 5.90 14,795 223 6.00 Other time 565 10 6.67 587 10 6.61 Deposits in foreign offices 1,402 20 5.75 1,579 26 6.48 - ------------------------------------------------------------------------------------ ---------------------- Total interest-bearing deposits 38,078 397 4.22 38,660 453 4.66 Borrowed funds Federal funds purchased 2,948 44 5.89 1,236 18 5.80 Repurchase agreements 1,145 14 4.83 804 12 5.93 Bank notes and senior debt 5,896 91 6.19 6,109 106 6.76 Federal Home Loan Bank borrowings 1,576 21 5.46 500 9 6.66 Subordinated debt 2,408 44 7.09 2,407 45 7.44 Other borrowed funds 402 7 7.30 682 14 8.26 - ------------------------------------------------------------------------------------ ---------------------- Total borrowed funds 14,375 221 6.15 11,738 204 6.83 - ------------------------------------------------------------------------------------ ---------------------- Total interest-bearing liabilities/interest expense 52,453 618 4.75 50,398 657 5.16 Noninterest-bearing liabilities and shareholders' equity Demand and other noninterest-bearing deposits 8,190 8,304 Accrued expenses and other liabilities 3,830 2,978 Mandatorily redeemable capital securities of subsidiary trusts 848 848 Shareholders' equity 6,671 6,425 - ------------------------------------------------------------------------ --------- Total liabilities, capital securities and shareholders' equity $71,992 $68,953 - --------------------------------------------------------------------------------------------------------------------------------- Interest rate spread 2.92 2.83 Impact of noninterest-bearing sources .70 .77 - --------------------------------------------------------------------------------------------------------------------------------- Net interest income/margin $559 3.62% $538 3.60% - ---------------------------------------------------------------------------------------------------------------------------------
Nonaccrual loans are included in loans, net of unearned income. The impact of financial derivatives used in interest rate risk management is included in the interest income/expense and average yields/rates of the related assets and liabilities. Average balances of securities available for sale are based on amortized historical cost (excluding SFAS No. 115 adjustments to fair value). Loan fees for the three months ended March 31, 2001, December 31, 2000, September 30, 2000, June 30, 2000 and March 31, 2000 were $29 million, $26 million, $29 million, $31 million and $29 million, respectively. 37
- ----------------------------------------------------------------------------------------------------------------------------------- Third Quarter 2000 Second Quarter 2000 First Quarter 2000 - ----------------------------------------------------------------------------------------------------------------------------------- Average Average Average Average Yields/ Average Yields/ Average Yields/ Balances Interest Rates Balances Interest Rates Balances Interest Rates - ----------------------------------------------------------------------------------------------------------------------------------- $2,151 $47 8.77% $2,577 $52 8.11% $3,319 $64 7.64% 1,662 25 5.97 1,648 25 6.11 1,936 28 5.57 3,934 65 6.65 3,742 62 6.58 3,578 57 6.45 583 9 6.08 619 11 7.02 614 10 6.92 - ------------------------------ -------------------------- ------------------------- 6,179 99 6.41 6,009 98 6.50 6,128 95 6.22 9,174 201 8.72 9,209 198 8.63 9,247 192 8.35 12,405 222 7.16 12,571 223 7.09 12,584 222 7.08 21,800 472 8.47 22,042 464 8.33 21,791 447 8.12 2,688 61 8.85 2,682 59 8.74 2,698 59 8.60 3,238 58 7.24 3,049 55 7.19 2,958 54 7.33 646 14 8.64 676 14 8.50 688 14 8.09 - ------------------------------ -------------------------- ------------------------- 49,951 1,028 8.13 50,229 1,013 8.03 49,966 988 7.88 1,445 30 8.05 1,276 22 7.01 1,113 19 6.92 - ------------------------------ -------------------------- ------------------------- 59,726 1,204 7.98 60,091 1,185 7.86 60,526 1,166 7.68 515 448 412 (680) (689) (683) 2,848 2,837 2,306 6,689 6,418 6,195 - ------------- ----------- ------------ $69,098 $69,105 $68,756 - ------------- ----------- ------------ $18,914 175 3.68 $18,549 159 3.46 $17,700 138 3.14 2,020 9 1.81 2,107 9 1.75 2,138 9 1.64 14,776 217 5.85 14,403 195 5.45 14,591 191 5.25 619 10 6.55 641 10 6.44 637 10 6.36 1,342 23 6.50 1,483 24 6.25 1,489 21 5.63 - ------------------------------ -------------------------- ----------------------- 37,671 434 4.58 37,183 397 4.30 36,555 369 4.05 1,904 32 6.51 2,162 34 6.28 2,279 33 5.67 846 14 5.84 769 11 5.56 595 8 5.46 6,290 108 6.75 6,762 110 6.40 6,976 108 6.10 1,105 20 7.16 1,514 24 6.35 2,331 33 5.69 2,419 45 7.44 2,420 45 7.45 2,377 44 7.43 954 17 7.18 795 14 6.89 775 11 5.80 - ------------------------------ -------------------------- ----------------------- 13,518 236 6.85 14,422 238 6.54 15,333 237 6.14 - ------------------------------ -------------------------- ----------------------- 51,189 670 5.18 51,605 635 4.92 51,888 606 4.67 8,239 8,357 7,700 2,637 2,290 2,393 848 848 848 6,185 6,005 5,927 - ---------------- ------------- -------------- $69,098 $69,105 $68,756 - ----------------------------------------------------------------------------------------------------------------------------------- 2.80 2.94 3.01 .74 .69 .67 - ----------------------------------------------------------------------------------------------------------------------------------- $534 3.54% $550 3.63% $560 3.68% - -----------------------------------------------------------------------------------------------------------------------------------
38 QUARTERLY REPORT ON FORM 10-Q THE PNC FINANCIAL SERVICES GROUP, INC. Securities and Exchange Commission Washington, D.C. 20549 Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended March 31, 2001. Commission File Number 1-9718 THE PNC FINANCIAL SERVICES GROUP, INC. Incorporated in the Commonwealth of Pennsylvania IRS Employer Identification No. 25-1435979 Address: One PNC Plaza 249 Fifth Avenue Pittsburgh, Pennsylvania 15222-2707 Telephone: (412) 762-2000 As of April 27, 2001 The PNC Financial Services Group, Inc. had 288,884,641 shares of common stock ($5 par value) outstanding. The PNC Financial Services Group, Inc. (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. The following sections of the Financial Review set forth in the cross-reference index are incorporated in the Quarterly Report on Form 10-Q. Cross-reference Page(s) - ---------------------------------------------------------------- PART I FINANCIAL INFORMATION Item 1 Financial Statements Consolidated Statement of Income for the three months ended March 31, 2001 and 2000 25 Consolidated Balance Sheet as of March 31, 2001 and December 31, 2000 26 Consolidated Statement of Cash Flows for the three months ended March 31, 2001 and 2000 27 Notes to Consolidated Financial Statements 28 - 36 Consolidated Average Balance Sheet and Net Interest Analysis 37 - 38 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 3 - 24 Item 3 Quantitative and Qualitative Disclosures About Market Risk 17 - 24 - ---------------------------------------------------------------- PART II OTHER FINANCIAL INFORMATION ITEM 4. SUBMISSION OF MATTERS FOR A VOTE OF SECURITY HOLDERS An annual meeting of shareholders of The PNC Financial Services Group, Inc. was held on April 24, 2001 for the purpose of considering and acting upon the following: Fifteen directors were elected and the votes cast for or against/withheld were as follows: Aggregate Votes ------------------------------- Nominee For Against/Withheld - ---------------------------------------------------------------- Paul W. Chellgren 253,982,913 1,972,035 Robert N. Clay 253,990,205 1,964,743 George A. Davidson, Jr. 254,021,522 1,933,426 David F. Girard-diCarlo 250,855,373 5,099,575 Walter E. Gregg, Jr. 254,005,421 1,949,527 William R. Johnson 242,111,951 13,842,997 Bruce C. Lindsay 253,990,964 1,963,984 W. Craig McClelland 253,887,437 2,067,511 Thomas H. O'Brien 253,731,377 2,223,571 Jane G. Pepper 253,701,679 2,253,269 James E. Rohr 253,973,181 1,981,767 Lorene K. Steffes 253,694,535 2,260,413 Thomas J. Usher 253,941,317 2,013,631 Milton A. Washington 253,906,913 2,048,035 Helge H. Wehmeier 254,022,187 1,932,761 ================================================================ Three matters were approved and the votes cast for or against and the abstentions were as follows: Aggregate Votes --------------------------------------- Matter For Against Abstain - -------------------------------------------------------------------------------- An amendment of the Corporation's Articles of Incorporation to increase the number of authorized shares of $5.00 par value common stock from 450,000,000 shares to 800,000,000 229,323,991 24,469,392 2,160,500 Reapproval of certain elements of and approval of amendments to the Corporation's 1997 Long-Term Incentive Award Plan 204,683,322 48,076,241 3,194,320 Reapproval of certain elements of and approval of amendments to the Corporation's 1996 Executive Incentive Award Plan 230,135,398 22,483,580 3,334,905 ================================================================================ There were no broker non-votes. 39 With respect to the preceding matters, holders of the Corporation's common and voting preferred stock voted together as a single class. The following table sets forth, as of the February 28, 2001 record date, the number of shares of each class or series of stock that were issued and outstanding and entitled to vote, the voting power per share and the aggregate voting power of each class or series: Number of Voting Shares Rights Entitled Aggregate Title of Class or Series Per Share to Vote Voting Power - -------------------------------------------------------------------------------- Common Stock 1 289,606,244 289,606,244 $1.80 Cumulative Convertible Preferred Stock - Series A 8 10,814 86,512 $1.80 Cumulative Convertible Preferred Stock - Series B 8 3,024 24,192 $1.60 Cumulative Convertible Preferred Stock - Series C 4/2.4 222,748 371,247* $1.80 Cumulative Convertible Preferred Stock - Series D 4/2.4 314,477 524,128* ------------ Total possible votes 290,612,323* ================================================================================ * Represents greatest number of votes possible. Actual aggregate voting power was less since each holder of such preferred stock was entitled to a number of votes equal to the number of full shares of common stock into which such holder's preferred stock was convertible. Holders of the Corporation's issued and outstanding shares of Fixed/Adjustable Rate Noncumulative Preferred Stock-Series F were not entitled to vote with respect to the matters presented at the meeting. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K The following exhibit index lists Exhibits filed with this Quarterly Report on Form 10-Q: 3.1 Articles of Incorporation of the Corporation, as amended and restated as of April 24, 2001 12.1 Computation of Ratio of Earnings to Fixed Charges 12.2 Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends ================================================================================ 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@pnc.com. The Corporation did not file any Reports on Form 8-K during the quarter ended March 31, 2001. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on May 10, 2001, on its behalf by the undersigned thereunto duly authorized. THE PNC FINANCIAL SERVICES GROUP, INC. By: /s/ Robert L. Haunschild - ----------------------------- Robert L. Haunschild Senior Vice President and Chief Financial Officer 40 CORPORATE INFORMATION THE PNC FINANCIAL SERVICES GROUP, INC. CORPORATE HEADQUARTERS The PNC Financial Services Group, Inc. One PNC Plaza 249 Fifth Avenue Pittsburgh, Pennsylvania 15222-2707 (412) 762-2000 STOCK LISTING The PNC Financial Services Group, Inc. common stock is listed on the New York Stock Exchange under the symbol PNC. INTERNET INFORMATION The PNC Financial Services Group, Inc.'s financial reports and information about its products and services are available on the Internet at www.pnc.com. FINANCIAL INFORMATION The Annual Report on Form 10-K is filed with the Securities and Exchange Commission ("SEC"). Copies of this document and other filings, including Exhibits thereto, may be obtained electronically at the SEC's home page at www.sec.gov. Copies may also be obtained without charge by writing to Lynn Fox Evans, Director of Financial Reporting, at corporate headquarters, by calling (412) 762-1553 or via e-mail at financial.reporting@pnc.com. INQUIRIES For financial services call 1-888-PNC-2265. Individual shareholders should contact Shareholder Relations at (800) 982-7652. Analysts and institutional investors should contact William H. Callihan, Vice President, Investor Relations, at (412) 762-8257 or via e-mail at investor.relations@pnc.com. News media representatives and others seeking general information should contact R. Jeep Bryant, Director of Corporate Communications, at (412) 762-8221 or via e-mail at corporate.communications@pnc.com. COMMON STOCK PRICES/DIVIDENDS DECLARED The table below sets forth by quarter the range of high and low sale and quarter-end closing prices for The PNC Financial Services Group, Inc. common stock and the cash dividends declared per common share. Cash Dividends High Low Close Declared - ----------------------------------------------------------------------- 2001 QUARTER - ----------------------------------------------------------------------- First $75.813 $56.000 $67.750 $.48 ======================================================================= 2000 QUARTER - ----------------------------------------------------------------------- First $48.500 $36.000 $45.063 $.45 Second 57.500 41.000 46.875 .45 Third 66.375 47.625 65.000 .45 Fourth 75.000 56.375 73.063 .48 - ----------------------------------------------------------------------- Total $1.83 ======================================================================= DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN The PNC Financial Services Group, Inc. Dividend Reinvestment and Stock Purchase Plan enables holders of common and preferred stock to purchase additional shares of common stock conveniently and without paying brokerage commissions or service charges. A prospectus and enrollment card may be obtained by writing to Shareholder Relations at corporate headquarters. REGISTRAR AND TRANSFER AGENT The Chase Manhattan Bank 85 Challenger Road Ridgefield Park, New Jersey 07660 (800) 982-7652 41