[PNC LOGO] NEWS RELEASE
CONTACTS:
MEDIA:
- ------
Brian Goerke
(412) 762-4550
corporate.communications@pnc.com
INVESTORS:
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William H. Callihan
(412) 762-8257
investor.relations@pnc.com
THE PNC FINANCIAL SERVICES GROUP REPORTS
SECOND QUARTER 2003 RESULTS
PITTSBURGH, July 21, 2003 - The PNC Financial Services Group, Inc.
(NYSE: PNC) today reported second quarter 2003 net income of $184 million, or
$.65 per diluted share. This compares with net income of $262 million, or $.92
per diluted share, for the first quarter of 2003 and $320 million, or $1.12 per
diluted share, for the second quarter of 2002. Results for the second quarter of
2003 included expenses totaling $87 million after taxes, or $.31 per diluted
share, in connection with the Corporation's previously announced agreement with
the United States Department of Justice ("DOJ") and related legal and consulting
costs. Excluding these expenses, second quarter 2003 results would have been
$271 million, or $.96 per diluted share.
"Our company performed well this quarter. Revenues were stronger than
first quarter in several areas, our net interest margin improved, we made
progress on our efficiency initiatives, and asset quality remained stable," said
James E. Rohr, chairman and chief executive officer of The PNC Financial
Services Group. "The strength of our asset management and processing businesses
and Regional Community Banking, along with improved performance from our
brokerage business, drove our earnings, excluding the impact of the DOJ-related
expenses. This quarter's results reflect our team's ability to execute on
strategies designed to meet customer needs, control expenses, manage capital and
maintain a strong balance sheet. Although we expect the historically low
interest rate environment will continue to pressure net interest revenue at PNC
and across our industry, I believe our mix of diverse businesses is well
positioned to deliver solid results in the second half of the year."
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Return on average common shareholders' equity was 10.91 percent for the
second quarter of 2003 compared with 15.76 percent for the first quarter of 2003
and 21.00 percent for the second quarter of 2002. Return on average assets was
1.13 percent for the second quarter of 2003 compared with 1.61 percent for the
first quarter of 2003 and 1.93 percent for the second quarter of 2002. Excluding
the impact of the DOJ-related expenses, second quarter 2003 ratios would have
been 16.06 percent and 1.66 percent, respectively. See the Consolidated
Financial Highlights for a reconciliation of these ratios as adjusted to those
as reported under generally accepted accounting principles ("GAAP").
HIGHLIGHTS OF THE QUARTER
- - Regional Community Banking grew average home equity loans at an annualized
rate of 19 percent and grew average demand deposits at an annualized rate
of 8 percent compared with the first quarter of 2003 and 14 percent and 6
percent, respectively, compared with the second quarter of 2002.
- - BlackRock's earnings improved 9 percent compared with the first quarter of
2003 and 11 percent compared with the second quarter of last year.
- - PNC Advisors and PFPC each grew earnings by 25 percent for the second
quarter of 2003 compared with the first quarter of 2003 as a result of more
favorable market conditions and improved efficiency.
- - Consolidated assets under management grew to $328 billion at June 30, 2003
compared with $313 billion at March 31, 2003 and $294 billion at June 30,
2002.
- - Asset quality remained stable and nonperforming assets fell to $404 million
at June 30, 2003, the lowest quarter-end level since December 31, 2001.
- - The $100 million efficiency initiative is on track and has resulted in
expense savings of approximately $21 million in the second quarter of 2003
and approximately $37 million through the first six months of 2003.
- - PFPC completed the sale of its retirement services business which is
expected to improve its operating margins.
BUSINESS RESULTS
Total business earnings were $296 million for the second quarter of 2003
compared with $287 million for the first quarter of 2003 and $345 million for
the second quarter of 2002. Total business earnings for the second quarter of
2003 increased from the first quarter of 2003 driven by higher earnings from
Regional Community Banking and the asset management and processing businesses.
Second quarter 2003 total business earnings declined compared with the second
quarter of 2002 primarily due to the impact of a lower interest rate environment
and the effects of comparatively weaker equity markets on several of the
Corporation's banking and processing businesses. See the Consolidated Financial
Highlights for a
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reconciliation of total business earnings to total consolidated results and for
a reconciliation of taxable-equivalent net interest income to net interest
income as reported under GAAP. The "Other" category in the Consolidated
Financial Highlights reflects differences between total business earnings and
consolidated results as reported in the first paragraph of this news release,
including the impact of the DOJ-related expenses recognized in the second
quarter of 2003.
BANKING BUSINESSES
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Earnings for Regional Community Banking totaled $159 million for the second
quarter of 2003 compared with $152 million for the first quarter of 2003 and
$176 million for the second quarter of 2002. Higher earnings in the second
quarter of 2003 compared with the first quarter of 2003 reflected increases in
taxable-equivalent net interest income and various components of noninterest
income which more than offset lower net securities gains and an increase in the
provision for credit losses. The increase in taxable-equivalent net interest
income compared with the first quarter of 2003 reflected a change in asset mix
and a decline in average balances and average rates paid on retail certificates
of deposit. Growth in revenue resulting from higher gains on sales of education
loans, higher consumer service fees, increased brokerage revenue that reflected
an upward trend in market conditions and additional revenue from service charges
on deposits contributed to higher noninterest income for the second quarter of
2003 compared with the first quarter of 2003. The decline in earnings compared
with the second quarter of 2002 reflected a $23 million decline in
taxable-equivalent net interest income primarily due to the lower interest rate
environment and a 33 percent decline in the average residential mortgage loan
portfolio, partially offset by higher net securities gains and higher fees from
transaction deposits.
Wholesale Banking includes the results of Corporate Banking, PNC Real
Estate Finance and PNC Business Credit. Wholesale Banking earnings totaled $63
million for the second quarter of 2003 compared with $72 million for the first
quarter of 2003 and $82 million for the second quarter of 2002. The goal for
this business is to grow client relationships that meet the desired risk/return
profile for the capital invested. While Wholesale Banking experienced growth in
client relationships during the second quarter of 2003, loan demand has remained
weak given the current economic environment.
Corporate Banking earnings were $33 million for the second quarter of
2003 compared with $42 million for the first quarter of 2003 and $54 million for
the second quarter of 2002. The decrease in earnings in the second quarter of
2003 compared with the first quarter of 2003 resulted from a decline in both
taxable-equivalent net interest income and noninterest income and a higher
provision for credit losses that together more than offset a reduction in
noninterest expense. The decline in taxable-equivalent net interest income was
consistent with a decline in earning assets that resulted from a decrease in
average loans outstanding that reflected weak loan demand and a strategy to exit
client relationships that did not meet the desired risk/return profile for the
capital invested. Noninterest income declined compared with
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the first quarter of 2003 primarily due to $23 million of net securities gains
(related to the liquidation of the PAGIC entities) recognized in the first
quarter, compared with $2 million of net securities gains recognized in the
second quarter. Noninterest expense declined compared with the first quarter of
2003 as the first quarter included $22 million of PAGIC-related liquidation
costs. Earnings declined compared with the second quarter of 2002 as the current
quarter included $13 million of net gains in excess of valuation adjustments
related to the liquidation of the institutional loans held for sale compared
with $50 million of net gains in the same quarter of 2002. In addition,
taxable-equivalent net interest income decreased compared with the prior year
quarter primarily due to a smaller loan portfolio and lower interest rates.
These items more than offset the impact of a lower provision for credit losses
in the 2003 quarter.
Earnings from PNC Real Estate Finance totaled $24 million for the
second quarter of 2003. Earnings for the first quarter of 2003 and the second
quarter of 2002 were $16 million and $26 million, respectively. An increase in
noninterest income due to commercial mortgage loan sales and a decline in the
provision for credit losses that reflected continued stable asset quality
contributed to improved results for the second quarter of 2003 compared with the
first quarter of 2003. Earnings declined compared with the second quarter of
2002 as noninterest expense increased and total revenues declined.
PNC Business Credit earnings totaled $6 million for the second quarter
of 2003 compared with $14 million for the first quarter of 2003 and $2 million
for the second quarter of 2002. The decrease in earnings compared with the first
quarter of 2003 was primarily due to an increase in the provision for credit
losses in excess of net charge-offs that more than offset higher
taxable-equivalent net interest income resulting from loan growth. Earnings
improved compared with the second quarter of 2002 as the provision for credit
losses declined.
Earnings from PNC Advisors totaled $20 million for the second quarter
of 2003 compared with $16 million for the first quarter of 2003 and $31 million
for the second quarter of 2002. Improved results in the second quarter of 2003
compared with the first quarter of 2003 primarily reflected an upward trend in
the equity markets during the second quarter that drove increases in brokerage
and asset management revenues. However, results declined compared with the
second quarter of 2002 primarily due to the impact of comparatively weaker
equity market conditions on asset management and brokerage revenues and the
negative effect on taxable-equivalent net interest income of lower average loan
levels and the lower interest rate environment. Assets under management at PNC
Advisors totaled $51.1 billion at June 30, 2003, $48.7 billion at March 31, 2003
and $55.8 billion at June 30, 2002.
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ASSET MANAGEMENT AND PROCESSING BUSINESSES
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BlackRock's earnings totaled $39 million for the second quarter of 2003 compared
with $35 million for both the first quarter of 2003 and the second quarter of
2002. Earnings improved in the second quarter of 2003 compared with the first
quarter of 2003 primarily due to higher investment income and a lower effective
tax rate. A positive impact on operating income of strong growth in assets under
management, which rose $12.7 billion since March 31, 2003 and $36.5 billion from
June 30, 2002, and reduced operating expenses offset the negative effect of an
anticipated decline in performance fees and mutual fund revenue compared with
the second quarter of 2002. BlackRock's assets under management were $286.3
billion at June 30, 2003, compared with $273.6 billion at March 31, 2003 and
$249.8 billion at June 30, 2002. Growth in assets under management since March
31, 2003 reflected net market appreciation of $7.6 billion and net subscriptions
of $5.1 billion, while growth compared with the second quarter of 2002 was
comprised of net market appreciation of $14.7 billion and net subscriptions of
$21.8 billion. BlackRock is approximately 69 percent owned by PNC and is
consolidated into PNC's financial statements. Accordingly, approximately 31
percent of BlackRock's earnings are recognized as a minority interest expense in
the Corporation's consolidated income statement and are included in the "Other"
category in the Business Earnings (Loss) table in the Consolidated Financial
Highlights.
Earnings from PFPC totaled $15 million for the second quarter of 2003
compared with $12 million for the first quarter of 2003 and $21 million for the
second quarter of 2002. Improved results for the second quarter of 2003 compared
with the first quarter of 2003 reflected the impact of a seven percent reduction
in operating expenses driven by efficiency initiatives that more than offset a
decline in fund servicing revenue. The decline in fund servicing revenue
reflected the loss of one large transfer agency client that occurred in the
first quarter of 2003. PFPC's results for the second quarter of 2002 included a
one-time benefit of approximately $13 million of fees related to the
renegotiation of a customer contract.
"OTHER"
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The "Other" category includes differences between business performance reporting
and financial statement reporting, equity management activities, minority
interest in income of consolidated entities, residual asset and liability
management activities, eliminations and corporate overhead. A net loss of $112
million was reported in "Other" for the second quarter of 2003 compared with a
net loss of $25 million for both the first quarter of 2003 and the second
quarter of 2002. Expenses totaling $120 million, or $87 million after taxes,
recognized in connection with the DOJ agreement are included in "Other" for the
second quarter of 2003.
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CONSOLIDATED REVENUE
Consolidated revenue represents the sum of taxable-equivalent net interest
income and noninterest income. Total revenue of $1.3 billion for the second
quarter of 2003 was flat compared with the first quarter of 2003 as a $17
million, or three percent, increase in taxable-equivalent net interest income
was offset by a decline in noninterest income resulting from lower net
securities gains and higher losses from equity management activities. Total
revenue declined $129 million, or nine percent, compared with the second quarter
of 2002 primarily due to lower net gains related to the institutional lending
held for sale portfolio, the impact of comparatively weaker equity markets on
fee income and a decrease in taxable-equivalent net interest income primarily
due to a lower interest rate environment.
Taxable-equivalent net interest income totaled $523 million and the net
interest margin was 3.91 percent for the second quarter of 2003 compared with
$506 million and 3.76 percent, respectively, for the first quarter of 2003.
Taxable-equivalent net interest income was $558 million and the net interest
margin was 3.99 percent for the second quarter of 2002. The increases in
taxable-equivalent net interest income and margin for the second quarter of 2003
compared with the first quarter of 2003 were due in part to a reduction of $1.7
billion in average federal funds sold in the second quarter of 2003 that were
replaced by securities with comparatively higher average yields. A decline in
average balances of retail certificates of deposit and related average rates
paid during the second quarter of 2003 also contributed to the increase.
Declines in taxable-equivalent net interest income and margin compared with the
second quarter of 2002 resulted primarily from the lower interest rate
environment in 2003 and a decline in average interest-earning assets due to
prepayments on the residential mortgage loan portfolio and the continued
downsizing of the institutional lending portfolio. A benefit from growth in
average transaction deposits for the second quarter of 2003 compared with the
prior year second quarter partially offset the impact of these declines on
average earning assets.
Noninterest income totaled $776 million and represented 60 percent of
total revenue for the second quarter of 2003 compared with $795 million and 61
percent, respectively, for the first quarter of 2003. Noninterest income was
$870 million and represented 61 percent of total revenue for the second quarter
of 2002. The following table highlights changes in specific items contained
within noninterest income:
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Second Quarter First Quarter Second Quarter
In millions 2003 2003 2002
- ----------------------------------------------------------------------------------------------------------------------
Net securities gains $ 26 $ 56 $ 16
Held for sale gains, net of valuation adjustments (a) 15 15 55
Net gains on sales of commercial mortgages (a) 13 10 5
Gains on sales of education loans (b) 7 1 9
NBOC put option valuation income (b) 1 6 10
Gain on sale of real estate investment (b) 14
PFPC customer contract renegotiation (c) 13
Equity management losses (17) (4) (13)
All other 731 711 761
----- ----- -----
Noninterest income $ 776 $ 795 $ 870
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(a) Included in "Corporate services" in the Consolidated Statement of
Income.
(b) Included in "Other" noninterest income in the Consolidated Statement of
Income.
(c) Included in "Fund servicing" in the Consolidated Statement of Income.
All other noninterest income increased $20 million, or three percent, compared
with the first quarter of 2003 primarily due to higher brokerage, consumer
services, and trading income. All other noninterest income decreased $30
million, or four percent, compared with the second quarter of 2002 as asset
management, fund servicing and brokerage revenue declined primarily due to the
impact of comparatively weaker equity market conditions.
CONSOLIDATED EXPENSES
Noninterest expense totaled $935 million and the efficiency ratio was 72 percent
for the second quarter of 2003 compared with $856 million and 66 percent,
respectively, for the first quarter of 2003. Noninterest expense was $839
million and the efficiency ratio was 59 percent for the second quarter of 2002.
The following table highlights changes in specific items contained within
noninterest expense:
Second Quarter First Quarter Second Quarter
In millions 2003 2003 2002
- ----------------------------------------------------------------------------------------------------------------------
Costs incurred under DOJ agreement (a) $115
PAGIC liquidation costs (a) $29
Facilities charge related to leased properties (b) 23
Charge associated with co-investment partnerships (a) $16
Legal and consulting fees related to regulatory compliance and
certain legal proceedings (a) 5 2 2
All other 815 802 821
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Noninterest expense $ 935 $ 856 $ 839
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(a) Included in "Other" noninterest expense in the Consolidated Statement of
Income.
(b) Included in "Net occupancy" in the Consolidated Statement of Income.
All other noninterest expense increased $13 million, or two percent, compared
with the first quarter of 2003 primarily due to higher marketing, compensation
and staff reduction expenses that more than offset a $5 million higher benefit
from the efficiency initiative in the second quarter of 2003. All other
noninterest expense in the second quarter of 2003 declined slightly compared
with the second quarter of 2002 as a $21 million benefit from the efficiency
initiative offset higher pension, stock option and marketing expenses.
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AGREEMENT WITH DEPARTMENT OF JUSTICE
As reported on June 2, 2003, one of PNC's non-bank subsidiaries, PNC ICLC Corp.
("PNCICLC"), has entered into a deferred prosecution agreement with the DOJ
relating to PNCICLC's actions in connection with the PAGIC transactions that
were entered into in 2001. Under the terms of the agreement, PNCICLC established
a $90 million restitution fund to satisfy shareholder claims stemming from the
PAGIC transactions and paid a $25 million monetary penalty to the Federal
government. PNC recognized a pretax charge of $120 million in the second quarter
of 2003 in connection with the DOJ agreement, including $5 million of related
legal and consulting costs.
ASSET QUALITY REVIEW
At June 30, 2003, nonperforming assets totaled $404 million compared with $408
million at March 31, 2003 and $500 million at June 30, 2002. Nonperforming
assets at June 30, 2002 reflected the funding during the second quarter of 2002
of approximately $63 million resulting from a draw on a liquidity facility by
Market Street Funding Corporation ("Market Street"). The ratio of nonperforming
assets to total loans, loans held for sale and foreclosed assets was 1.12
percent at June 30, 2003 compared with 1.10 percent at March 31, 2003 and 1.25
percent at June 30, 2002.
Nonperforming loans were $327 million at June 30, 2003 compared with
$335 million at March 31, 2003 and $325 million at June 30, 2002. The decline in
nonperforming loans at June 30, 2003 compared with March 31, 2003 resulted from
charge-offs and the transfer of a single airline industry credit to foreclosed
and other assets that more than offset the addition of credits related to the
manufacturing sector. The ratio of nonperforming loans to total loans was .95
percent at both June 30, 2003 and March 31, 2003, and .86 percent at June 30,
2002. The increase in this ratio from a year ago was primarily due to a $3.2
billion decline in loans.
At June 30, 2003, nonperforming loans held for sale totaled $45
million, a decline of $16 million from March 31, 2003 and a decline of $117
million from June 30, 2002 due to net sales and valuation adjustments.
Nonperforming loans held for sale are carried at lower of cost or market value
and represented 11 percent, 15 percent and 32 percent of total nonperforming
assets at June 30, 2003, March 31, 2003 and June 30, 2002, respectively.
Foreclosed and other assets totaled $32 million at June 30, 2003
compared with $12 million at March 31, 2003 and $13 million at June 30, 2002.
The increase represented the Corporation's repossession of collateral related to
a single airline industry credit during the second quarter of 2003.
The provision for credit losses was $57 million for the second quarter
of 2003 compared with $36 million for the first quarter of 2003 and $89 million
for the second quarter of 2002. The increase compared with the first quarter of
2003 reflected an addition to reserves primarily for PNC Business Credit,
Corporate
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Banking and Regional Community Banking that was partially offset by a lower
provision for PNC Real Estate Finance. The decline in the provision for credit
losses compared with the second quarter of 2002 reflected a higher provision for
Corporate Banking in the prior year quarter primarily due to a Market Street
exposure.
The allowance for credit losses was $673 million at June 30, 2003, and
represented 1.95 percent of total loans and 206 percent of nonperforming loans.
The comparable amounts and ratios were $680 million, 1.93 percent and 203
percent, respectively, at March 31, 2003 and $654 million, 1.74 percent and 201
percent, respectively, at June 30, 2002. The allowance for unfunded loan
commitments and letters of credit was $78 million at June 30, 2003 compared with
$77 million at March 31, 2003 and $73 million at June 30, 2002.
Net charge-offs were $63 million, or .73 percent, of average loans for
the second quarter of 2003 compared with $36 million, or .42 percent,
respectively, for the first quarter of 2003. Net charge-offs were $74 million or
..78 percent of average loans for the second quarter of 2002. Net charge-offs for
the second quarter of 2003 included $24 million related to a single airline
industry credit for which a reserve had been provided at December 31, 2002.
Excluding this item, net charge-offs for the second quarter of 2003 would have
been .45 percent of average loans. Net charge-offs for the second quarter of
2002 included $45 million related to a customer of Market Street for which a
reserve had been provided at March 31, 2002. Excluding this item, net
charge-offs for the second quarter of 2002 would have been .31 percent of
average loans.
National Bank of Canada ("NBOC") exercised its put option effective
July 15, 2003 related to the portfolio it had retained in connection with the
Corporation's NBOC acquisition in 2002. PNC had serviced this portfolio for the
past 18 months and had established a liability to reflect its obligation to
purchase the loans under the terms of the option. The loans were purchased by
PNC on the put option exercise date of July 15, 2003 for $121 million. The loans
were recorded at the purchase price net of the remaining put option liability of
$43 million as determined by an independent third party. The net recorded amount
of $78 million equaled the fair value of the loans on July 15, 2003. This amount
was comparable to the fair value at June 30, 2003, and represented approximately
65 percent of the purchase price of the loans.
BALANCE SHEET REVIEW
Total assets were $67.3 billion at June 30, 2003 compared with $68.6 billion at
March 31, 2003 and $66.9 billion at June 30, 2002. Average interest-earning
assets of $53.3 billion for the second quarter of 2003 were down slightly
compared with the first quarter of 2003 and decreased $2.4 billion compared with
the second quarter of 2002. The decline compared with the prior year quarter
reflected a change in the mix of
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interest-earning assets and a decline in residential mortgages. Average total
loans for the second quarter of 2003 were $34.9 billion, a decline of
approximately $300 million, or three percent on an annualized basis, compared
with the first quarter of 2003, and a decline of $3.1 billion, or eight percent,
compared with the second quarter of 2002. The decline in each comparison was
primarily due to prepayments of residential mortgages and the run-off of vehicle
leases, partially offset by an increase in home equity loans.
Average total deposits were $43.9 billion for the second quarter of
2003 compared with $44.4 billion for the first quarter of 2003 and $44.3 billion
for the second quarter of 2002. Average total deposits represented 67 percent of
total sources of funds for the second quarter of 2003, the first quarter of 2003
and the second quarter of 2002. Average transaction deposits (consisting of
interest-bearing demand and money market deposits and demand and other
non-interest bearing deposits) were $32.4 billion for the second quarter of
2003, an increase of approximately $200 million, or two percent on an annualized
basis, compared with the first quarter of 2003 and up $1.8 billion compared with
the second quarter of 2002. Both increases reflected ongoing client acquisition
and retention efforts.
Average borrowed funds were $8.7 billion for the second quarter of
2003, essentially unchanged compared with the first quarter of 2003 but down
$2.2 billion compared with the second quarter of 2002. The decline compared with
the second quarter of 2002 reflected a decrease in the Corporation's balance
sheet and the retention of capital.
Shareholders' equity totaled $6.8 billion at June 30, 2003 and March
31, 2003. The regulatory capital ratios at June 30, 2003 are estimated to be 8.1
percent for Leverage, 8.9 percent for Tier 1 and 12.3 percent for Total
Risk-based Capital.
Common shares outstanding at June 30, 2003 were 280.1 million. PNC has
a stock repurchase program adopted in January 2002 that permits the purchase of
up to 35 million shares of common stock through February 29, 2004. Under this
program, PNC purchased 2.2 million common shares during the second quarter of
2003 at a total cost of $107 million. For the first half of 2003, 6.6 million
shares have been purchased at a total cost of $300 million. Management continues
to be authorized to purchase up to a total of $1.0 billion of its common stock
during 2003. The extent and timing of share repurchases during the remainder of
the year will depend on a number of factors including, among others, market and
general economic conditions, regulatory capital considerations, alternative uses
of capital and the potential impact on PNC's credit rating. Under applicable
regulations, as long as PNC remains subject to its written agreement with the
Federal Reserve Bank of Cleveland, it must obtain prior regulatory approval to
repurchase its common stock in amounts that exceed 10 percent of consolidated
net worth in any 12-month period. A total of 6.9 million common shares have been
repurchased under this program from inception through June 30, 2003.
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ASSETS UNDER MANAGEMENT AND FUND ASSETS SERVICED
Assets under management were $328 billion at June 30, 2003 compared with $313
billion at March 31, 2003 and $294 billion at June 30, 2002. Growth in fixed
income assets managed by BlackRock was the primary factor in the increases from
each prior quarter.
At June 30, 2003, PFPC provided accounting/administration services for
$618 billion of pooled investment assets and provided custody services for $371
billion of pooled investment assets. The comparable amounts were $573 billion
and $347 billion, respectively, at March 31, 2003 and $513 billion and $323
billion, respectively, at June 30, 2002. Increases in both
accounting/administration and custody pooled investment assets at June 30, 2003
compared with the prior periods resulted from new client asset inflows and the
upward trend in the equity markets during the second quarter of 2003. PFPC
serviced approximately 48 million shareholder accounts at both June 30, 2003 and
March 31, 2003, and 51 million at June 30, 2002. The decline in shareholder
accounts in 2003 was primarily due to a loss of one large transfer agency client
in the first quarter. Total assets serviced by PFPC amounted to $1.5 trillion at
June 30, 2003 and $1.4 trillion at both March 31, 2003 and June 30, 2002.
CONFERENCE CALL AND SUPPLEMENTARY FINANCIAL INFORMATION
PNC Chairman and Chief Executive Officer, James E. Rohr, and PNC Vice Chairman
and Chief Financial Officer, William S. Demchak, will hold a conference call for
investors at 10:00 a.m. (eastern time) today regarding the topics addressed in
this release and the related financial supplement. Investors should call 5-10
minutes before the start of the conference at 800-990-2718 (domestic) and
706-643-0187 (international). A taped replay of the call will be available for
one week at 800-642-1687 (domestic) and 706-645-9291 (international); enter
conference ID: 1446541.
In addition, internet access to the call (listen-only), PNC's second
quarter earnings release and supplementary financial information regarding PNC's
second quarter results will be available on PNC's website at www.pnc.com under
"For Investors." PNC's second quarter earnings release and the related financial
supplement, which includes significant financial information that will be
discussed on the conference call, will be available on PNC's website prior to
the beginning of the conference call. A replay of the webcast will be available
on PNC's website for thirty days.
The conference call may include a discussion of non-GAAP financial
measures, which is qualified by GAAP reconciliation information included in this
news release or otherwise available on PNC's website under "For Investors." The
conference call may include forward-looking information which, along with the
supplementary financial information and this news release, is subject to the
cautionary statements that follow.
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FORWARD-LOOKING STATEMENTS
This news release contains, and other statements that the Corporation may make
may contain, forward-looking statements with respect to the Corporation's
outlook or expectations for earnings, revenues, expenses, capital levels, asset
quality or other future financial or business performance, strategies or
expectations, or the impact of legal, regulatory or supervisory matters on the
Corporation's business operations or performance. Forward-looking statements are
typically identified by words or phrases such as "believe," "feel," "expect,"
"anticipate," "intend," "outlook," "estimate," "forecast," "project,"
"position," "target," "assume," "achievable," "potential," "strategy," "goal,"
"objective," "plan," "aspiration," "outcome," "continue," "remain," "maintain,"
"seek," "strive," "trend," and variations of such words and similar expressions,
or future or conditional verbs such as "will," "would," "should," "could,"
"might," "can," "may," or similar expressions. The Corporation cautions that
forward-looking statements are subject to numerous assumptions, risks and
uncertainties, which change over time. Forward-looking statements speak only as
of the date they are made, and the Corporation assumes no duty and does not
undertake to update forward-looking statements. Actual results could differ
materially from those anticipated in forward-looking statements and future
results could differ materially from historical performance.
The factors discussed elsewhere in this news release and the following
factors, among others, could cause actual results to differ materially from
those anticipated in forward-looking statements or from historical performance:
(1) changes in political, economic or industry conditions, the interest rate
environment or financial and capital markets, which if adverse could result in:
a deterioration in credit quality, increased credit losses, and increased
funding of unfunded loan commitments and letters of credit; an adverse effect on
the allowances for credit losses and unfunded loan commitments and letters of
credit; a reduction in demand for credit or fee-based products and services; a
reduction in net interest income, value of assets under management and assets
serviced, value of private equity investments and of other debt and equity
investments, value of loans held for sale or value of other on-balance sheet and
off-balance sheet assets; or changes in the availability and terms of funding
necessary to meet PNC's liquidity needs; (2) relative and absolute investment
performance of assets under management; (3) the introduction, withdrawal,
success and timing of business initiatives and strategies, decisions regarding
further reductions in balance sheet leverage, the timing and pricing of any
sales of loans held for sale, and PNC's inability to realize cost savings or
revenue enhancements, or to implement integration plans relating to or resulting
from mergers, acquisitions, restructurings and divestitures; (4) customer
borrowing, repayment, investment and deposit practices and their acceptance of
PNC's products and services; (5) the impact of increased competition; (6) how
PNC chooses to redeploy available capital, including the extent and timing of
any share repurchases and investments in PNC businesses; (7) the inability to
manage risks inherent in PNC's business; (8) the unfavorable resolution of legal
proceedings or government inquiries; the impact of increased litigation risk
from recent regulatory and other governmental developments; and the impact of
reputational risk created by recent regulatory and other governmental
developments on such matters as business generation and retention, the ability
to attract and retain management, liquidity and funding; (9) the denial of
insurance coverage for claims made by PNC; (10) an increase in the number of
customer or counterparty delinquencies, bankruptcies or defaults that could
result in, among other things, increased credit and asset quality risk, a higher
provision for credit losses and reduced profitability; (11) the impact, extent
and timing of technological changes, the adequacy of intellectual property
protection and costs associated with obtaining rights in intellectual property
claimed by others; (12) actions of the Federal Reserve Board; (13) the impact of
legislative and regulatory reforms and changes in accounting policies and
principles; (14) the impact of the regulatory examination process, the
Corporation's failure to satisfy the requirements of written agreements with
regulatory and other governmental agencies, and regulators' future use of
supervisory and enforcement tools; and (15) terrorist activities and
international hostilities which may adversely affect the general economy,
financial and capital markets, specific industries, and the Corporation.
The Corporation's SEC reports, accessible on the SEC's website at
www.sec.gov and on PNC's website at www.pnc.com, contain additional information
about the foregoing factors and identify additional factors that can affect the
results anticipated in forward-looking statements.
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The PNC Financial Services Group, Inc. Reports Second Quarter 2003 Earnings -
Page 13
The PNC Financial Services Group, Inc., headquartered in Pittsburgh, is
one of the nation's largest diversified financial services organizations,
providing regional community banking; wholesale banking, including corporate
banking, real estate finance and asset-based lending; wealth management; asset
management and global fund services.
[TABULAR MATERIAL FOLLOWS]
CONSOLIDATED FINANCIAL HIGHLIGHTS
The PNC Financial Services Group, Inc. Page 14
For the three months ended For the six months ended
------------------------------- ------------------------
Dollars in millions, except per share data June 30 March 31 June 30 June 30 June 30
Unaudited 2003 2003 2002 2003 2002
- -----------------------------------------------------------------------------------------------------------------
FINANCIAL PERFORMANCE
Revenue
Net interest income (taxable-equivalent basis) (a) $ 523 $ 506 $ 558 $1,029 $1,151
Noninterest income 776 795 870 1,571 1,660
------ ------ ------ ------ ------
Total revenue $1,299 $1,301 $1,428 $2,600 $2,811
====== ====== ====== ====== ======
Net income $ 184 $ 262 $ 320 $ 446 $ 637
====== ====== ====== ====== ======
Per common share
Diluted earnings $ .65 $ .92 $ 1.12 $ 1.57 $ 2.23
====== ====== ====== ====== ======
Cash dividends declared $ .48 $ .48 $ .48 $ .96 $ .96
- -----------------------------------------------------------------------------------------------------------------
SELECTED RATIOS
Return on
Average common shareholders' equity (b) 10.91% 15.76% 21.00% 13.32% 21.41%
Average assets (b) 1.13 1.61 1.93 1.37 1.91
Net interest margin 3.91 3.76 3.99 3.83 4.06
Noninterest income to total revenue (c) 60 61 61 60 59
Efficiency (b)(d) 72 66 59 69 59
- -----------------------------------------------------------------------------------------------------------------
Certain prior period amounts included in these Consolidated Financial Highlights
have been reclassified to conform to the current period presentation.
(a) The interest income earned on certain assets is completely or partially
exempt from federal income tax. As such, these tax-exempt instruments
typically yield lower returns than a taxable investment. In order to
provide accurate comparisons of yields and margins for all earning
assets, the interest income earned on tax-exempt assets has been
increased to make them fully equivalent to other taxable interest income
investments. A reconciliation of net interest income as reported in the
Consolidated Statement of Income to net interest income on a
taxable-equivalent basis follows (in millions):
For the three months ended For the six months ended
----------------------------------- ------------------------
June 30 March 31 June 30 June 30 June 30
2003 2003 2002 2003 2002
------- -------- ------- ------- -------
Net interest income, GAAP basis $ 521 $ 503 $ 555 $1,024 $1,145
Taxable-equivalent adjustment 2 3 3 5 6
------ ------ ------ ------ ------
Net interest income, taxable-equivalent basis $ 523 $ 506 $ 558 $1,029 $1,151
====== ====== ====== ====== ======
(b) Ratios as adjusted for the second quarter 2003 DOJ-related expenses are
provided in the following table. See "Agreement with Department of
Justice."
These expenses represent matters which management believes are not
indicative of the Corporation's legal and regulatory affairs arising out of the
operation of its business in the ordinary course.
For the three For the six
months ended months ended
June 30, 2003 June 30, 2003
------------- -------------
Return on average common shareholders' equity, GAAP basis 10.91% 13.32%
Adjustment for DOJ-related expenses 5.15 2.59
----- -----
Return on average common shareholders' equity, as adjusted 16.06 15.91
===== =====
Return on average assets, GAAP basis 1.13% 1.37%
Adjustment for DOJ-related expenses .53 .26
----- -----
Return on average assets, as adjusted 1.66 1.63
===== =====
Efficiency ratio, GAAP basis 72% 69%
Adjustment for DOJ-related expenses (9) (5)
----- -----
Efficiency ratio, as adjusted 63 64
===== =====
(c) Computed as total noninterest income divided by the sum of net interest
income and noninterest income. For the six months ended June 30, 2002,
the ratio previously reported had been computed using taxable-equivalent
net interest income. The ratio for that period has been restated to
conform to the current period presentation.
(d) The efficiency ratio for all periods presented is computed as
noninterest expense divided by the sum of net interest income and
noninterest income. For the six months ended June 30, 2002, the
efficiency ratio previously reported had been computed by excluding
amortization expense and distributions on capital securities from the
calculation and had used taxable-equivalent net interest income. The
efficiency ratio for that period has been restated to conform to the
current period presentation.
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CONSOLIDATED FINANCIAL HIGHLIGHTS
The PNC Financial Services Group, Inc. Page 15
Second Quarter 2003 First Quarter 2003 Second Quarter 2002
------------------------- ---------------------------- -------------------------
Fully Fully Fully
diluted diluted diluted
Dollars in millions, except per share data Pretax Net earnings Pretax Net earnings Pretax Net earnings
Unaudited Impact Income per share Impact Income per share Impact Income per share
------ ------ --------- ------ ------ --------- ------ ------ ---------
RECONCILIATION OF QUARTERLY
GAAP EARNINGS TO NORMALIZED
EARNINGS (A)
Results as reported on a GAAP basis $184 $ .65 $262 $ .92 $320 $1.12
Normalization adjustments:
Costs incurred under Department of
Justice ("DOJ") agreement and legal
and consulting fees related to
regulatory compliance and certain
legal proceedings (b) $120 87 .31 $ 2 1 $ 2 1
---- ---- ----- ---- ---- ----- ---- ---- ----
Reported results excluding above item 271 .96 263 .92 321 1.12
Liquidation of PAGIC entities (c)
Net securities gains (d) $(25) (16)
Liquidation costs 29 19
---- ----
Liquidation of PAGIC entities, net 4 3
Facilities charge (c) 23 15
Held for sale gains, net of valuation
adjustments (e) (15) (10) (15) (10) (55) (36)
Equity management losses (f) 17 11 4 3 13 8
Net securities gains - other (d) (11) (7) (16) (11) (1) (1)
---- ---- ---- ---- ---- ----
Total other normalization adjustments (6) (.02) 0 .00 (29) (.10)
---- ----- ---- ----- ---- -----
Results as adjusted to reflect normalized
earnings $265 $ .94 $263 $ .92 $292 $1.02
- ------------------------------------------------------------------------------------------------------------------------------------
(a) This reconciliation is provided so that users of the Corporation's
financial information (shareholders, investor analysts, regulators and
others) have a basis for comparison of the Corporation's results for the
periods presented that supplements results as reported in accordance with
generally accepted accounting principles ("GAAP"). Management believes
that this additional information is useful and relevant as it identifies
and summarizes significant items included in reported GAAP earnings that
management believes are not a reflection of the Corporation's core
operating performance for the periods presented.
(b) See "Agreement with Department of Justice" regarding second quarter 2003
amounts. These expenses represent matters not arising out of the operation
of the Corporation's business in the ordinary course. Therefore,
management believes these expenses are not indicative of the Corporation's
legal and regulatory affairs related to its business operations and have
been removed for the computation of normalized earnings.
(c) The liquidation costs of the PAGIC entities and the facilities charge
related to leased properties were each recognized during the first quarter
of 2003. Management does not believe that either of these transactions is
representative of the ongoing operating activities of the Corporation and
each has been removed for the computation of normalized earnings.
(d) Certain net gains or losses from the disposition of securities designated
as available for sale are a recurring component of the Corporation's
balance sheet and interest rate risk management process. Based on the
current portfolio and interest rate environment, management believes that
net securities gains in excess of $15 million may not be sustainable,
indicative of future performance, or reflect the Corporation's business
strategy. Accordingly, this amount has been removed for the computation of
normalized earnings.
Total net securities gains were $26 million for the second quarter of 2003
(consisting of $22 million in Regional Community Banking; $2 million in
Corporate Banking; and $1 million each in BlackRock and "Other").
Total net securities gains were $56 million for the first quarter of 2003
(consisting of $38 million in Regional Community Banking; $23 million in
Corporate Banking and $2 million in "Other," both related to the
liquidation of the PAGIC entities; and $7 million of net securities losses
in "Other" primarily due to impairment of mutual fund equity investments).
Total net securities gains were $16 million for the second quarter of 2002
(consisting of $15 million in Regional Community Banking and $1 million in
BlackRock).
(e) The Corporation has realized gains, net of valuation adjustments, on
disposition of loans designated as held for sale as part of its
institutional lending repositioning initiative. These assets and
underlying customer relationships are not included in the Corporation's
ongoing business strategy for Wholesale Banking. Accordingly, these
amounts have been removed for the computation of normalized earnings.
(f) Private equity investment activities have been conducted at a more
moderate pace than in prior years and emphasis is being placed on the
management of capital for other investors, for which the Corporation
generates fee income. Fair value adjustments on the existing portfolio of
investments are not managed outcomes from these activities. Accordingly,
valuation losses have been removed for the computation of normalized
earnings.
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CONSOLIDATED FINANCIAL HIGHLIGHTS
The PNC Financial Services Group, Inc. Page 16
For the three months ended For the six months ended
----------------------------------- ------------------------
In millions June 30 March 31 June 30 June 30 June 30
Unaudited 2003 2003 2002 2003 2002
----- ----- ----- ----- -----
BUSINESS EARNINGS (LOSS)
Banking Businesses
Regional Community Banking $ 159 $ 152 $ 176 $ 311 $ 353
Wholesale Banking
Corporate Banking 33 42 54 75 87
PNC Real Estate Finance 24 16 26 40 48
PNC Business Credit 6 14 2 20 4
----- ----- ----- ----- -----
Total wholesale banking 63 72 82 135 139
PNC Advisors 20 16 31 36 64
----- ----- ----- ----- -----
Total banking businesses 242 240 289 482 556
----- ----- ----- ----- -----
BlackRock 39 35 35 74 66
PFPC 15 12 21 27 38
----- ----- ----- ----- -----
Total asset management and processing businesses 54 47 56 101 104
----- ----- ----- ----- -----
Total business earnings 296 287 345 583 660
Other (a) (112) (25) (25) (137) (23)
----- ----- ----- ----- -----
Total consolidated $ 184 $ 262 $ 320 $ 446 $ 637
===== ===== ===== ===== =====
Dollars in millions, except per share data June 30 March 31 June 30
Unaudited 2003 2003 2002
----- ----- -----
BALANCE SHEET DATA
Assets $67,262 $68,619 $66,913
Earning assets 54,748 56,205 55,778
Loans, net of unearned income 34,534 35,245 37,684
Allowance for credit losses 673 680 654
Securities 16,017 14,973 12,313
Loans held for sale 1,475 1,702 2,441
Total deposits 46,694 47,081 44,427
Transaction deposits 35,316 34,644 31,154
Borrowed funds 7,903 8,534 10,480
Allowance for unfunded loan commitments and
letters of credit 78 77 73
Shareholders' equity 6,774 6,792 6,390
Common shareholders' equity 6,765 6,783 6,380
Book value per common share 24.16 24.05 22.46
Loans to deposits 74% 75% 85%
ASSETS UNDER MANAGEMENT (billions) $ 328 $ 313 $ 294
CAPITAL RATIOS
Tier 1 Risk-based (b) 8.9% 8.7% 8.2%
Total Risk-based (b) 12.3 12.3 12.0
Leverage (b) 8.1 8.0 7.4
Shareholders' equity to total assets 10.07 9.90 9.55
Common shareholders' equity to total assets 10.06 9.89 9.53
ASSET QUALITY RATIOS
Nonperforming assets to total loans,
loans held for sale and foreclosed assets 1.12% 1.10% 1.25%
Nonperforming loans to total loans .95 .95 .86
Net charge-offs to average loans (for the three
months ended) .73 .42 .78
Allowance for credit losses to total loans 1.95 1.93 1.74
Allowance for credit losses to nonperforming loans 206 203 201
(a) "Other" for the three months and six months ended June 30, 2003, includes
pretax expenses of $120 million ($87 million after taxes) in connection
with the DOJ agreement.
In addition, "Other" for the three months ended March 31, 2003 and six
months ended June 30, 2003 includes a pretax charge of $23 million ($15
million after taxes) related to leased facilities.
(b) Estimated for June 30, 2003.