THE PNC FINANCIAL SERVICES GROUP, INC.
Quarterly Report on Form 10-Q/A, Amendment No. 1
For the quarterly period ended June 30, 2001
Page 1 represents a portion of the second quarter 2001 Financial Review which is
not required by Amendment No. 1 to the Form 10-Q report and is not "filed" as
part of the Form 10-Q.
The Amendment No. 1 to Quarterly Report on Form 10-Q and cross reference index
is on page 41.
CONSOLIDATED FINANCIAL HIGHLIGHTS
THE PNC FINANCIAL SERVICES GROUP, INC.
By filing this amendment ("Amendment No. 1"), the registrant, The PNC
Financial Services Group, Inc., hereby amends its Quarterly Report on Form 10-Q
for the quarter ended June 30, 2001 ("June 2001 Form 10-Q") primarily for the
items described in "Restatements" in the Overview section of the Financial
Review and in the "Notes to Consolidated Financial Statements" of this Amendment
No. 1.
By this Amendment No. 1, the registrant is amending and restating its entire
June 2001 Form 10-Q.
Three months ended June 30 Six months ended June 30
------------------------------ ----------------------------
Dollars in millions, except per share data 2001 2000 2001 2000
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FINANCIAL PERFORMANCE
Revenue
Net interest income (taxable-equivalent basis) $569 $550 $1,128 $1,110
Noninterest income 720 728 1,421 1,456
------------------------------ ----------------------------
Total revenue 1,289 1,278 2,549 2,566
Income from continuing operations 295 299 560 601
Discontinued operations 16 5 22
------------------------------ ----------------------------
Income before cumulative effect of accounting change 295 315 565 623
Cumulative effect of accounting change (5)
------------------------------ ----------------------------
Net income $295 $315 $560 $623
============================== ============================
Per common share
DILUTED EARNINGS
Continuing operations $1.00 $1.01 $1.89 $2.02
Discontinued operations .05 .02 .07
------------------------------ ----------------------------
Before cumulative effect of accounting change 1.00 1.06 1.91 2.09
Cumulative effect of accounting change (.02)
------------------------------ ----------------------------
Net income $1.00 $1.06 $1.89 $2.09
============================== ============================
Cash dividends declared $.48 $.45 $.96 $.90
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SELECTED RATIOS
FROM CONTINUING OPERATIONS
Return on
Average common shareholders' equity 18.13% 20.77% 17.36% 21.03%
Average assets 1.67 1.74 1.58 1.75
Net interest margin 3.77 3.63 3.70 3.65
Noninterest income to total revenue 55.86 56.96 55.75 56.74
Efficiency (b) 57.65 57.29 57.78 57.57
FROM NET INCOME
Return on
Average common shareholders' equity 18.13% 21.91% 17.36% 21.81%
Average assets 1.67 1.68 1.55 1.67
Net interest margin 3.77 3.41 3.65 3.43
Noninterest income to total revenue 55.86 58.92 55.89 58.60
Efficiency (c) 57.65 55.70 57.66 56.53
========================================================================================================================
(a) Excludes amortization and distributions on capital securities.
(b) Excludes amortization, distributions on capital securities and residential
mortgage banking risk management activities.
1
June 30 December 31 June 30
Dollars in millions, except per share data 2001 2000 2000
-------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
Assets $69,998 $69,844 $68,885
Earning assets 58,307 59,373 59,334
Loans, net of unearned income 44,167 50,601 50,281
Securities 10,982 5,902 5,315
Loans held for sale 1,870 1,655 2,305
Deposits 45,799 47,664 46,381
Borrowed funds 12,119 11,718 13,028
Shareholders' equity 6,748 6,656 6,157
Common shareholders' equity 6,532 6,344 5,844
Book value per common share 22.60 21.88 20.22
Loans to deposits 96% 106% 108%
CAPITAL RATIOS
Leverage 8.1% 8.0% 6.7%
Common shareholders' equity to total assets 9.33 9.08 8.48
ASSET QUALITY RATIOS
Nonperforming assets to total loans,
loans held for sale and foreclosed assets 1.03% .71% .67%
Allowance for credit losses to total loans 1.53 1.33 1.34
Allowance for credit losses to nonaccrual loans 180.48 208.98 217.04
Net charge-offs to average loans (For the three
months ended) .40 .32 .27
=======================================================================================================
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 certain 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 certain 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 regional 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 global fund services
internationally.
Financial services organizations today are challenged to demonstrate that they
can generate high-quality earnings growth in an increasingly competitive and
weakened economic environment, one with slower growth rates, asset quality
concerns and weaker equity markets. As a result, PNC has been aggressively
pursuing strategies to create a more diverse and valuable business mix by
increasing the contribution from more highly-valued businesses such as asset
management, processing and treasury management and decreasing the contribution
from lending-based traditional banking businesses. Earnings from asset
management and processing businesses represented 26% of total business earnings
for the first six months of 2001 and noninterest income was 56% 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 96% at June 30, 2001.
On January 31, 2001, PNC closed the sale of its residential mortgage banking
business. The net loss on sale and income from operations included in the first
six months of 2001 resulted in income from discontinued operations of $5
million or $.02 per diluted share. Certain closing date adjustments are
currently in dispute between PNC and the buyer, Washington Mutual Bank, FA. The
ultimate financial impact of the sale will not be determined until the disputed
matters are finally resolved.
RESTATEMENTS
Subsequent to December 31, 2001, PNC announced two changes that affected
results for the six months ended June 30, 2001.
During the second quarter of 2001, the Corporation entered into a transaction
with a subsidiary of a third party financial institution (American International
Group, Inc.) involving the sale of loan assets and the receipt of preferred
interests in the subsidiary. At the time of the transaction, the loans were
removed from PNC's balance sheet and the preferred interests in the entity were
recorded as securities available for sale in conformity with accounting guidance
received from PNC's independent auditors. In January 2002, the Federal Reserve
Board staff advised PNC that under generally accepted accounting principles the
subsidiary of the third party financial institution should be consolidated into
the financial statements of PNC in preparing bank holding company reports. After
considering all of the circumstances, PNC made the decision to restate its
consolidated financial statements for the second and third quarters of 2001 to
conform financial reporting with regulatory reporting requirements. Amounts
appearing in this Amendment No. 1 reflect the consolidation of the entity.
Loans in this entity are included in the consolidated balance sheet as loans
held for sale and are carried at the lower of cost or market value. Charges
recorded at the dates the assets were sold into the entity were reflected as
charge-offs on those loans in portfolio and as valuation adjustments in
noninterest income on loans previously classified as held for sale.
The amounts contained in this Amendment No. 1 also include the restatement of
the results for the first quarter of 2001 to reflect the correction of an error
related to the accounting for the sale of the residential mortgage banking
business. This restatement reduced income from discontinued operations and net
income for the six months ended June 30, 2001 by $35 million or $.12 per diluted
share.
See "Restatements" in the Notes to Consolidated Financial Statements for
additional information.
3
SUMMARY FINANCIAL RESULTS
Consolidated net income for the first six months of 2001 was $560 million or
$1.89 per diluted share. Excluding the effect of adopting the new accounting
standard for financial derivatives, net income was $565 million or $1.91 per
diluted share compared with $623 million or $2.09 per diluted share for the
first six months of 2000. These results include the negative impact of a $49
million or $.17 per diluted share net loss from venture capital activities.
Excluding this loss and the effect of the accounting change, results for the
first six months of 2001 were $614 million or $2.08 per diluted share.
Return on average common shareholders' equity was 17.36% and return on average
assets was 1.55% for the first six months of 2001 compared with 21.81% and
1.67%, respectively, for the first six months of 2000.
The residential mortgage banking business, which was sold in January 2001, is
reflected in discontinued operations throughout the Corporation's consolidated
financial statements. Accordingly, the income and net assets of the
residential mortgage banking business are shown separately on one line in the
income statement and balance sheet, respectively, for all periods presented.
The remainder of the discussion and information in this Financial Review
reflects continuing operations, unless otherwise noted.
Income from continuing operations for the first six months of 2001 was $560
million or $1.89 per diluted share, compared with $601 million or $2.02 per
diluted share for the first six months of 2000.
Taxable-equivalent net interest income of $1.128 billion for the first six
months of 2001 increased 2% compared with the first six months of 2000. The net
interest margin was 3.70% for the first six months of 2001 compared with 3.65%
for the first six months of 2000. The increases were primarily due to the
positive impact of transaction deposit growth and a lower rate environment that
was partially offset by the impact of continued downsizing of the loan
portfolio.
The provision for credit losses was $125 million for the first six months of
2001 compared with $66 million for the same period in 2000. The increase was
primarily related to loans in the communications and energy, metals and mining
portfolios that PNC is downsizing.
Noninterest income was $1.421 billion for the first six months of 2001 and
included $69 million of equity management losses from venture capital
activities. Excluding equity management gains and losses from both years,
noninterest income increased 13% compared with the first six months of 2000
primarily due to growth in asset management and processing revenue.
Noninterest expense was $1.564 billion for the first six months of 2001 compared
with $1.572 billion for the first six months of 2000 and the efficiency ratio
remained flat at 58% during both periods. The decrease in expense was primarily
due to aggressive expense management.
Total assets were $70.0 billion at June 30, 2001 compared with $69.8 billion at
December 31, 2000. Average interest-earning assets were $60.7 billion for the
first six months of 2001 compared with $60.3 billion for the first six months of
2000. A decline in loans and loans held for sale was offset by an increase in
securities that are used for balance sheet and interest rate risk management
activities.
Shareholders' equity totaled $6.7 billion at June 30, 2001 and the regulatory
capital ratios were 8.1% for leverage, 9.0% for tier I risk-based and 12.8% for
total risk-based capital. During the first six months of 2001, PNC repurchased
3.4 million shares of common stock.
Nonperforming assets were $474 million at June 30, 2001 compared with $372
million at December 31, 2000. The ratio of nonperforming assets to total loans,
loans held for sale and foreclosed assets increased to 1.03% at June 30, 2001
compared with .71% at December 31, 2000.
The allowance for credit losses was $675 million and represented 1.53% of total
loans and 180% of nonaccrual loans at June 30, 2001. The comparable amounts were
$675 million, 1.33% and 209%, respectively, at December 31, 2000. The increase
in the allowance as a percentage of total loans primarily resulted from the
downsizing of the loan portfolio. Net charge-offs were $125 million or .53% of
average loans for the first six months of 2001 compared with $65 million or .26%
for the same period in 2000. The increase was primarily related to loans in
institutional lending portfolios that PNC is downsizing.
4
FINANCIAL REVIEW
THE PNC FINANCIAL SERVICES GROUP, INC.
REVIEW OF BUSINESSES
PNC operates seven major businesses engaged in regional 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 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 designated for downsizing 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
---------------------------------------------------------------------------------------
Six months ended June 30 -
dollars in millions 2001 2000 2001 2000 2001 2000 2001 2000
----------------------------------------------------------------------------------------------------------------------------------
PNC Bank
Regional Community Banking $339 $281 $1,100 $991 25% 22% $40,321 $38,182
Corporate Banking 65 120 383 420 11 20 16,618 16,110
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Total PNC Bank 404 401 1,483 1,411 21 21 56,939 54,292
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Secured Finance
PNC Real Estate Finance 38 33 106 103 19 17 5,291 5,604
PNC Business Credit 30 26 71 57 38 36 2,430 2,173
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Total Secured Finance 68 59 177 160 25 23 7,721 7,777
--------------------------------------------------------------------------------- ----------------------
Total Banking 472 460 1,660 1,571 21 22 64,660 62,069
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Asset Management and Processing
PNC Advisors 83 86 389 398 30 31 3,420 3,577
BlackRock 52 40 269 221 26 27 571 434
PFPC 32 16 370 331 31 16 1,742 1,587
--------------------------------------------------------------------------------- ----------------------
Total Asset Management and
Processing 167 142 1,028 950 29 27 5,733 5,598
--------------------------------------------------------------------------------- ----------------------
Total business results 639 602 2,688 2,521 23 23 70,393 67,667
Other (79) (1) (139) 45 854 833
--------------------------------------------------------------------------------- ----------------------
Results from continuing operations 560 601 2,549 2,566 17 21 71,247 68,500
Discontinued operations 5 22 103 430
Cumulative effect of accounting change (5)
--------------------------------------------------------------------------------- ----------------------
Total Consolidated $560 $623 $2,549 $2,566 17 22 $71,350 $68,930
==================================================================================================================================
5
REGIONAL COMMUNITY BANKING
Six months ended June 30 -
dollars in millions 2001 2000
-----------------------------------------------------------------
INCOME STATEMENT
Net interest income $718 $703
Other noninterest income 339 292
Net securities gains (losses) 43 (4)
-----------------------------------------------------------------
Total revenue 1,100 991
Provision for credit losses 20 22
Noninterest expense 551 534
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Pretax earnings 529 435
Income taxes 190 154
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Earnings $339 $281
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AVERAGE BALANCE SHEET
Loans
Consumer
Home equity $6,121 $5,311
Indirect 895 1,352
Other consumer 924 871
-----------------------------------------------------------------
Total consumer 7,940 7,534
Commercial 3,624 3,711
Residential mortgage 9,603 11,599
Leasing 1,799 1,179
Other 136 172
-----------------------------------------------------------------
Total loans 23,102 24,195
Securities available for sale 9,346 5,470
Loans held for sale 1,288 1,358
Assigned assets and other assets 6,585 7,159
-----------------------------------------------------------------
Total assets $40,321 $38,182
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Deposits
Noninterest-bearing demand $4,488 $4,591
Interest-bearing demand 5,517 5,377
Money market 11,919 9,776
Savings 1,870 2,063
Certificates 12,741 13,524
-----------------------------------------------------------------
Total deposits 36,535 35,331
Other liabilities 1,066 274
Assigned capital 2,720 2,577
Total funds $40,321 $38,182
-----------------------------------------------------------------
PERFORMANCE RATIOS
Return on assigned capital 25% 22%
Noninterest income to total revenue 35 29
Efficiency 48 52
=================================================================
Regional 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.
Regional 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. Regional 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.
Regional 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.
Regional Community Banking contributed 53% of total business earnings for the
first six months of 2001 compared with 47% for the first six months of 2000.
Earnings increased $58 million or 21% to $339 million for the first six months
of 2001 primarily due to business growth and net securities gains. Excluding net
securities gains from the first six months of 2001 and net securities losses
from the first six months of 2000, earnings increased 10% primarily driven by
higher noninterest income, deposit growth and improved efficiency.
Total revenue increased 11% to $1.1 billion for the first six months of 2001.
Excluding net securities gains and losses from both periods, revenue increased
6% in the period-to-period comparison primarily due to higher consumer
transaction activity in 2001 and residential mortgage loan securitization gains.
The provision for credit losses for the first six months of 2001 decreased $2
million compared with the same period in 2000 primarily due to the impact of
downsizing indirect lending.
Total loans decreased in the comparison as the reduction of residential mortgage
loans due to securitizations and the continued downsizing of the indirect
automobile lending portfolio were partially offset by higher home equity loans
and leases that resulted from strategic acquisitions. The decrease in
residential mortgage loans was offset by an increase in securities.
Total deposits grew 3% in the comparison driven by a $2.2 billion increase in
transaction 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
Six months ended June 30 -
dollars in millions 2001 2000
------------------------------------------------------------------
INCOME STATEMENT
Credit-related revenue $204 $199
Noncredit revenue 179 221
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Total revenue 383 420
Provision for credit losses 88 38
Noninterest expense 196 196
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Pretax earnings 99 186
Income taxes 34 66
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Earnings $65 $120
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AVERAGE BALANCE SHEET
Loans
Middle market $5,943 $6,132
Large corporate 3,161 3,106
Energy, metals and mining 1,273 1,334
Communications 1,169 1,451
Leasing 2,216 1,734
Other 321 368
------------------------------------------------------------------
Total loans 14,083 14,125
Other assets 2,535 1,985
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Total assets $16,618 $16,110
------------------------------------------------------------------
Deposits $4,862 $4,539
Assigned funds and other liabilities 19,510 10,363
Assigned capital 1,246 1,208
------------------------------------------------------------------
Total funds $16,618 $16,110
------------------------------------------------------------------
PERFORMANCE RATIOS
Return on assigned capital 11% 20%
Noncredit revenue to total revenue 47 53
Efficiency 51 46
==================================================================
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 on the middle market with an
emphasis on higher-margin noncredit products and services, especially treasury
management and capital markets. Approximately 35% 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
downsize the communications portfolio and certain portions of the energy, metals
and mining and large corporate portfolios. The designated loans are included 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 10% of total business earnings for the first six
months of 2001 compared with 20% for the first six months of 2000. Earnings
declined to $65 million for the first six months of 2001 compared with $120
million for the first six months of 2000 primarily due to provision for credit
losses in 2001 related to portfolios that PNC is downsizing.
Total revenue of $383 million for the first six months of 2001 decreased $37
million compared with the same period in 2000. Credit-related revenue increased
3% compared with the first six months of 2000 as an increase in net interest
margin was partially offset by a decrease in average loans. The decrease in
average loans in the period-to-period comparison was primarily due to reductions
in the energy, metals and mining, communications and middle market portfolios,
partially offset by 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 $42 million compared with the first six months
of 2000 primarily due to the impact of weak equity market conditions that
resulted in lower capital markets fees and valuation losses associated with
equity investments.
The provision for credit losses was $88 million for the first six months of 2001
compared with $38 million for the first six months of 2000. The higher provision
was primarily related to portfolios that are being downsized. 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 was $170 million for the first six months of
2001 compared with $169 million for the first six months of 2000. Increases in
fee revenue were offset by lower income earned on customers' deposit balances
resulting from the lower interest rate environment in 2001 and the impact of
downsizing institutional lending. Consolidated revenue from capital markets was
$57 million for the first six months of 2001, an $11 million decrease compared
with the first six months of 2000. The decrease was primarily due to weak equity
market conditions as well as the impact of downsizing certain lending
portfolios.
7
PNC REAL ESTATE FINANCE
Six months ended June 30 -
dollars in millions 2001 2000
------------------------------------------------------------------
INCOME STATEMENT
Net interest income $57 $59
Noninterest income
Commercial mortgage banking 32 30
Other 17 14
------------------------------------------------------------------
Total noninterest income 49 44
------------------------------------------------------------------
Total revenue 106 103
Provision for credit losses (2)
Noninterest expense 76 67
------------------------------------------------------------------
Pretax earnings 32 36
Income tax (benefit) expense (6) 3
------------------------------------------------------------------
Earnings $38 $33
------------------------------------------------------------------
AVERAGE BALANCE SHEET
Loans
Commercial - real estate related $1,804 $2,041
Commercial real estate 2,326 2,428
------------------------------------------------------------------
Total loans 4,130 4,469
Commercial mortgages held for sale 188 151
Other assets 973 984
------------------------------------------------------------------
Total assets $5,291 $5,604
------------------------------------------------------------------
Deposits $362 $244
Assigned funds and other liabilities 4,533 4,977
Assigned capital 396 383
------------------------------------------------------------------
Total funds $5,291 $5,604
------------------------------------------------------------------
PERFORMANCE RATIOS
Return on assigned capital 19% 17%
Noninterest income to total revenue 46 43
Efficiency 58 51
==================================================================
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 lending as well as processing
businesses. The processing businesses include Midland Loan Services, Inc., a
leading third-party provider of loan servicing and technology to the commercial
real estate finance industry, and Columbia Housing Partners, LP, a national
syndicator of affordable housing equity.
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 and increasing the value of its lending business by
selling more fee-based products. During the first six months of 2001, 46% of
total revenue was generated by fee-based activities compared with 43% for the
first six months of 2000. Management also continues to evaluate opportunities to
reduce credit exposure and improve the risk/return characteristics of the
lending business.
PNC Real Estate Finance contributed 6% of total business earnings for the first
six months of 2001 compared with 5% for the first six months of 2000. Earnings
increased $5 million or 15% in the period-to-period comparison primarily due to
growth in processing businesses. Average loans decreased 8% in the
period-to-period comparison reflecting management's ongoing strategy to reduce
balance sheet leverage.
Total revenue was $106 million for the first six months of 2001 compared with
$103 million for the first six months of 2000. The increase of $3 million or 3%
was primarily due to growth in commercial mortgage loan servicing fees,
reflecting a larger servicing portfolio, partially offset by lower commercial
mortgage-backed securitization gains. The commercial mortgage servicing
portfolio grew 29% in the comparison to $62 billion at June 30, 2001.
COMMERCIAL MORTGAGE SERVICING PORTFOLIO
In billions 2001 2000
------------------------------------------------------------
January 1 $54 $45
Acquisitions/additions 12 6
Repayments/transfers (4) (3)
------------------------------------------------------------
June 30 $62 $48
============================================================
PNC Real Estate Finance had net recoveries of $2 million during the first six
months of 2001.
Noninterest expense was $76 million and the efficiency ratio was 58% for the
first six months of 2001 compared with $67 million and 51%, respectively, in the
same period last year. The increases were primarily due to non-cash (passive)
losses on affordable housing investments that were more than offset by related
income tax credits.
8
FINANCIAL REVIEW
THE PNC FINANCIAL SERVICES GROUP, INC.
PNC BUSINESS CREDIT
Six months ended June 30 -
dollars in millions 2001 2000
------------------------------------------------------------------
INCOME STATEMENT
Net interest income $51 $49
Noninterest income 20 8
------------------------------------------------------------------
Total revenue 71 57
Provision for credit losses 8 2
Noninterest expense 16 14
------------------------------------------------------------------
Pretax earnings 47 41
Income taxes 17 15
------------------------------------------------------------------
Earnings $30 $26
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AVERAGE BALANCE SHEET
Loans $2,305 $2,100
Other assets 125 73
------------------------------------------------------------------
Total assets $2,430 $2,173
------------------------------------------------------------------
Deposits $80 $56
Assigned funds and other liabilities 2,189 1,973
Assigned capital 161 144
------------------------------------------------------------------
Total funds $2,430 $2,173
------------------------------------------------------------------
PERFORMANCE RATIOS
Return on assigned capital 38% 36%
Noninterest income to total revenue 28 14
Efficiency 21 23
==================================================================
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 10% to $2.3 billion at June 30, 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 six
months of 2001 compared with 4% for the first six months of 2000. Earnings
increased $4 million or 15% in the period-to-period comparison to $30 million
for the first six months of 2001 as higher revenue was partially offset by an
increase in the provision for credit losses.
Revenue was $71 million for the first six months of 2001, a $14 million or 25%
increase compared with the first six 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.
The provision for credit losses increased $6 million to $8 million for the first
six months of 2001 as a result of declining credit conditions in a weaker
economy. PNC Business Credit loans are secured loans to borrowers with a weaker
financial condition. As a result, in a weaker economy, the provision for credit
losses may be adversely affected. See Credit Risk in the Risk Management section
of this Financial Review for additional information regarding credit risk.
Noninterest expense was $16 million and the efficiency ratio improved to 21% for
the first six months of 2001 compared with $14 million and 23%, respectively,
for the first six months of 2000. The efficiency ratio improved in the
comparison primarily due to higher noninterest income and economies of scale
resulting from a centralized back office.
9
PNC ADVISORS
Six months ended June 30 -
dollars in millions 2001 2000
------------------------------------------------------------------
INCOME STATEMENT
Net interest income $68 $68
Noninterest income
Investment management and trust 210 205
Brokerage 70 90
Other 41 35
------------------------------------------------------------------
Total noninterest income 321 330
------------------------------------------------------------------
Total revenue 389 398
Provision for credit losses 1 3
Noninterest expense 256 258
------------------------------------------------------------------
Pretax earnings 132 137
Income taxes 49 51
------------------------------------------------------------------
Earnings $83 $86
------------------------------------------------------------------
AVERAGE BALANCE SHEET
Loans
Commercial $521 $643
Consumer 1,098 957
Residential mortgage 911 978
Other 405 548
------------------------------------------------------------------
Total loans 2,935 3,126
Other assets 485 451
------------------------------------------------------------------
Total assets $3,420 $3,577
------------------------------------------------------------------
Deposits $2,045 $2,086
Assigned funds and other liabilities 823 941
Assigned capital 552 550
------------------------------------------------------------------
Total funds $3,420 $3,577
------------------------------------------------------------------
PERFORMANCE RATIOS
Return on assigned capital 30% 31%
Noninterest income to total revenue 83 83
Efficiency 65 64
==================================================================
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 primary geographic region and
leveraging its comprehensive distribution platform.
PNC Advisors contributed 13% of total business earnings for the first six months
of 2001 compared with 14% for the first six months of 2000. Earnings were $83
million and $86 million for the first six months of 2001 and 2000, respectively.
Revenue decreased $9 million in the period-to-period comparison due to lower
levels of retail investor trading activity and weak equity markets, the impact
of which was partially offset by investment management and trust revenue accrual
adjustments of $15 million. Management expects that revenues in this business
will continue to be challenged at least until equity market conditions improve.
Noninterest expense decreased $2 million in the period-to-period comparison
primarily due to lower production-based compensation and effective expense
management initiatives.
ASSETS UNDER MANAGEMENT (a)
June 30 - in billions 2001 2000(b)
-----------------------------------------------------------------
Personal investment management and trust $49 $49
Institutional trust 14 15
-----------------------------------------------------------------
Total $63 $64
=================================================================
(a) Assets under management do not include brokerage assets administered.
(b) Restated to reflect the transfer of assets under management between PNC
businesses.
Assets under management decreased $1 billion as approximately $4 billion of net
new asset inflows during the past twelve months were more than offset by a
decline in the value of the equity component of customers' portfolios. See Asset
Management Performance in the Risk Factors section of this Financial Review for
additional information regarding the potential impact of market conditions and
asset management performance on PNC's revenue.
Brokerage assets administered by PNC Advisors were $28 billion at June 30, 2001
and 2000 and were also impacted by weak market conditions.
PNC Advisors will continue to focus on acquiring new customers and growing and
expanding existing customer relationships while aggressively managing the
revenue/expense relationship.
10
FINANCIAL REVIEW
THE PNC FINANCIAL SERVICES GROUP, INC.
BLACKROCK
Six months ended June 30 -
dollars in millions 2001 2000
----------------------------------------------------------------
INCOME STATEMENT
Investment advisory and administrative fees $252 $209
Other income 17 12
----------------------------------------------------------------
Total revenue 269 221
Operating expense 147 111
Fund administration
and servicing costs - affiliates 32 38
Amortization 5 5
----------------------------------------------------------------
Total expense 184 154
----------------------------------------------------------------
Operating income 85 67
Nonoperating income 4 2
----------------------------------------------------------------
Pretax earnings 89 69
Income taxes 37 29
----------------------------------------------------------------
Earnings $52 $40
----------------------------------------------------------------
PERIOD-END BALANCE SHEET
Intangible assets $187 $197
Other assets 384 237
----------------------------------------------------------------
Total assets $571 $434
----------------------------------------------------------------
Other liabilities $142 $113
Stockholders' equity 429 321
----------------------------------------------------------------
Total liabilities and stockholders'
equity $571 $434
----------------------------------------------------------------
PERFORMANCE DATA
Return on equity 26% 27%
Operating margin (a) 36 36
Diluted earnings per share $.80 $.62
===============================================================
(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 $213 billion of assets under management at June 30, 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 brand name.
BlackRock continues to focus on delivering superior investment performance to
clients while pursuing strategies to build on core strengths and to selectively
expand the firm's expertise and breadth of distribution.
BlackRock contributed 8% of total business earnings for the first six months of
2001 compared with 7% for the first six months of 2000.
Earnings increased 29% in the period-to-period comparison primarily due to a 20%
increase in assets under management. New client mandates and additional funding
from existing clients was $31 billion or 86% of the increase in assets under
management.
Total revenue for the first six months of 2001 increased $48 million or 22%
compared with the first six months of 2000 primarily due to new institutional
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
June 30 - in billions 2001 2000
----------------------------------------------------------------
Separate accounts
Fixed income $111 $84
Liquidity 7 7
Liquidity - securities lending 10 11
Equity 8 7
Alternative investment products 4 2
----------------------------------------------------------------
Total separate accounts 140 111
----------------------------------------------------------------
Mutual funds (a)
Fixed income 12 14
Liquidity 49 36
Equity 12 16
----------------------------------------------------------------
Total mutual funds 73 66
----------------------------------------------------------------
Total assets under management $213 $177
================================================================
(a) Includes BlackRock Funds, BlackRock Provident Institutional Funds, BlackRock
Closed End Funds, Short Term Investment Funds and BlackRock Global Series
Funds.
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
Six months ended June 30 -
dollars in millions 2001 2000
------------------------------------------------------------------
INCOME STATEMENT
Fund servicing revenue $370 $331
Operating expense 264 256
Amortization 13 16
------------------------------------------------------------------
Operating income 93 59
Nonoperating income (a) 7 14
Debt financing 47 47
------------------------------------------------------------------
Pretax earnings 53 26
Income taxes 21 10
------------------------------------------------------------------
Earnings $32 $16
------------------------------------------------------------------
AVERAGE BALANCE SHEET
Intangible assets $1,079 $1,110
Other assets 663 477
------------------------------------------------------------------
Total assets $1,742 $1,587
------------------------------------------------------------------
Assigned funds and other liabilities $1,534 $1,380
Assigned capital 208 207
------------------------------------------------------------------
Total funds $1,742 $1,587
------------------------------------------------------------------
PERFORMANCE RATIOS
Operating margin 25% 18%
Return on assigned capital 31 16
==================================================================
(a) Net of nonoperating expense
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 fund services to the investment management
industry. PFPC also provides customized processing solutions 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 5% of total business earnings for the first six months of 2001
and 3% for the first six months of 2000. Earnings increased $16 million in the
period-to-period comparison and performance ratios improved significantly. The
increase in earnings was primarily due to strong growth in transfer agency and
sub accounting revenue that resulted from an increase in shareholder accounts
serviced. The first six months of 2001 also benefited from focused expense
control efforts and the comparative impact of Investor Services Group
integration costs incurred in the prior-year period.
Revenue of $370 million for the first six months of 2001 increased $39 million
or 12% compared with the first six months of 2000, primarily driven by existing
client growth and new business. See Fund Servicing in the Risk Factors section
of this Financial Review for additional information regarding matters that could
impact fund servicing revenue.
Operating expense increased 3% in the period-to-period comparison primarily due
to business expansion partially offset by the comparative impact of one-time
integration costs in the prior-year period.
SERVICING STATISTICS
June 30 2001 2000
----------------------------------------------------------------
Accounting/administration
Assets ($ in billions) (a) $502 $449
Custody assets ($ in billions) 442 416
Shareholder accounts (in millions) 45 41
================================================================
(a) Includes net assets serviced offshore of approximately $14 billion and $8
billion at June 30, 2001 and 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
Six months ended June 30 - ---------------------------- -------------------------- -----------------------------
dollars in millions 2001 2000 Change 2001 2000 Change 2001 2000 Change
-----------------------------------------------------------------------------------------------------------------------------------
Interest-earning assets
Loans held for sale $1,864 $2,948 $(1,084) $68 $116 $(48) 7.19% 7.76% (57)bp
Securities 9,893 6,068 3,825 300 193 107 6.07 6.35 (28)
Loans, net of unearned income
Commercial 20,575 21,917 (1,342) 797 911 (114) 7.70 8.23 (53)
Commercial real estate 2,576 2,690 (114) 103 118 (15) 7.92 8.67 (75)
Consumer 9,090 9,228 (138) 382 389 (7) 8.49 8.46 3
Residential mortgage 10,554 12,577 (2,023) 384 446 (62) 7.27 7.08 19
Lease financing 4,024 3,004 1,020 145 109 36 7.19 7.26 (7)
Other 490 682 (192) 18 28 (10) 7.36 8.28 (92)
---------------------------------------------------------------------- ----------------------------
Total loans, net of unearned
income 47,309 50,098 (2,789) 1,829 2,001 (172) 7.72 7.95 (23)
Other 1,592 1,194 398 63 41 22 8.03 6.99 104
---------------------------------------------------------------------- ----------------------------
Total interest-earning assets/
interest income 60,658 60,308 350 2,260 2,351 (91) 7.44 7.76 (32)
Noninterest-earning assets 10,692 8,622 2,070
----------------------------------------------------------------------
Total assets $71,350 $68,930 $2,420
======================================================================
Interest-bearing liabilities
Deposits
Demand and money market $20,707 $18,125 $2,582 296 297 (1) 2.88 3.30 (42)
Savings 1,928 2,123 (195) 11 18 (7) 1.12 1.69 (57)
Retail certificates of deposit 13,190 14,497 (1,307) 374 386 (12) 5.73 5.35 38
Other time 551 639 (88) 18 20 (2) 6.58 6.40 18
Deposits in foreign offices 1,248 1,486 (238) 32 45 (13) 5.05 5.94 (89)
---------------------------------------------------------------------- ----------------------------
Total interest-bearing deposits 37,624 36,870 754 731 766 (35) 3.92 4.17 (25)
Borrowed funds 14,201 14,877 (676) 401 475 (74) 5.63 6.33 (70)
---------------------------------------------------------------------- ----------------------------
Total interest-bearing liabilities/
interest expense 51,825 51,747 78 1,132 1,241 (109) 4.38 4.79 (41)
---------------------------- -----------------------------
Noninterest-bearing liabilities,
capital securities and shareholders'
equity 19,525 17,183 2,342
----------------------------------------------------------------------
Total liabilities, capital
securities and shareholders'
equity $71,350 $68,930 $2,420
======================================================================
Interest rate spread 3.06 2.97 9
Impact of noninterest-bearing sources .64 .68 (4)
-----------------------------
Net interest income/margin $1,128 $1,110 $18 3.70% 3.65% 5bp
===================================================================================================================================
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 $1.128 billion for the first six
months of 2001 increased 2% compared with the first six months of 2000. The net
interest margin widened 5 basis points to 3.70% for the first six months of 2001
compared with 3.65% for the first six months of 2000. The increases were
primarily due to the positive impact of transaction deposit growth and a lower
rate environment that was partially offset by the impact of continued downsizing
of the loan portfolio. PNC expects modest growth in net interest income during
the second half of 2001 compared with the first six months of 2001. See Interest
Rate Risk in the Risk Management section of this Financial Review for additional
information regarding interest rate risk.
Loans represented 78% of average earning assets for the first six months of 2001
compared with 83% for the first six months of 2000. The decrease was primarily
due to the continued downsizing of certain institutional lending portfolios and
the securitization of residential mortgage loans during the first six months of
2001. Average loans held for sale decreased $1.1 billion in the period-to-period
comparison due to a reduction in commercial loans held for sale.
Securities represented 16% of average earning assets for the first six months of
2001 compared with 10% for the first six months of 2000. The increase was
primarily due to the purchase of U.S. agencies, asset-backed and other debt
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% and 65% of
total sources of funds for the first six months of 2001 and 2000, respectively,
with the remainder primarily comprised of wholesale funding obtained at
prevailing market rates.
Average demand and money market deposits increased $2.6 billion or 14% compared
with the first six 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 six months of 2001 decreased
$676 million compared with the first six months of 2000 as lower bank notes and
senior debt 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 $125 million for the first six months of
2001 compared with $66 million for the first six months of 2000. The increase
was primarily related to institutional lending portfolios that PNC is
downsizing. See Credit Risk in the Risk Management section of this Financial
Review for additional information regarding credit risk.
NONINTEREST INCOME
Noninterest income was $1.421 billion for the first six months of 2001 and
included $69 million of equity management losses. Excluding equity management
income and losses in both years, noninterest income increased 13% compared with
the first six months of 2000 primarily due to growth in asset management and
processing revenue.
Asset management fees of $437 million for the first six months of 2001 increased
$55 million or 14% primarily driven by new institutional business and strong
fixed-income performance at BlackRock. Consolidated assets under management were
$260 billion at June 30, 2001, a 16% increase compared with June 30, 2000. Fund
servicing fees were $363 million for the first six months of 2001, a $44 million
or 14% increase compared with the first six months of 2000 primarily driven by
existing client growth and new business.
Service charges on deposits increased 4% to $104 million for the first six
months of 2001 primarily due to an increase in transaction deposit accounts.
Brokerage fees were $109 million for the first six months of 2001 compared with
$131 million for the first six months of 2000. The decrease was primarily due to
a decline in equity markets activity. Consumer services revenue of $113 million
for the first six months of 2001 increased $15 million or 15% compared with the
first six months of 2000 primarily due to the expansion of PNC's ATM network and
the increase in transaction deposit accounts.
Corporate services revenue was $152 million for the first six months of 2001
compared with $162 million for the first six months of 2000. Higher commercial
mortgage servicing revenue was more than offset by valuation adjustments of
other assets, lower commercial mortgage-backed securitization gains and lower
capital markets revenue.
Equity management, which is comprised of venture capital activities, reflected a
net loss of $69 million for the first six months of 2001 compared with $135
million of income for the first six months of 2000. The decrease primarily
resulted from a decline in the estimated fair value of partnership and direct
investments. Equity management investments totaling approximately $700 million
were evenly split between direct and partnership investments. Net unrealized
appreciation on equity management investments was $38 million at June 30, 2001.
These valuations are subject to market conditions and may be volatile. PNC is
currently evaluating strategies to mitigate the impact of the inherent
volatility of this business.
Net securities gains were $46 million for the first six months of 2001 and were
mostly offset by valuation adjustments and write-downs of other assets and
e-commerce investments totaling $32 million that are reflected in corporate
services and other noninterest income.
Other noninterest income was $166 million for the first six months of 2001
compared with $132 million for the first six months of 2000. The increase was
primarily due to higher revenue from trading activities and residential mortgage
loan securitizations.
NONINTEREST EXPENSE
Noninterest expense was $1.564 billion for the first six months of 2001 compared
with $1.572 billion for the first six months of 2000 and the efficiency ratio
remained flat at 58% during both periods. The decrease in expense was primarily
due to aggressive expense management. Average full-time equivalent employees
totaled approximately 24,700 and 23,900 for the first six 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 $44.2 billion at June 30, 2001, a $6.4 billion decrease from year-end
2000 primarily due to residential mortgage loan securitizations and reductions
in most commercial loan categories as a result of continuing efforts to reduce
balance sheet leverage.
DETAILS OF LOANS
June 30 December 31
In millions 2001 2000 (a)
-----------------------------------------------------------------------
Commercial
Manufacturing $5,054 $5,581
Retail/wholesale 4,485 4,413
Service providers 2,584 2,944
Real estate related 1,831 1,783
Financial services 1,592 1,726
Communications 948 1,296
Health care 593 722
Other 2,465 2,742
-----------------------------------------------------------------------
Total commercial 19,552 21,207
-----------------------------------------------------------------------
Commercial real estate
Mortgage 635 673
Real estate project 1,922 1,910
-----------------------------------------------------------------------
Total commercial real estate 2,557 2,583
-----------------------------------------------------------------------
Consumer
Home equity 6,751 6,228
Automobile 953 1,166
Other 1,410 1,739
-----------------------------------------------------------------------
Total consumer 9,114 9,133
-----------------------------------------------------------------------
Residential mortgage 8,219 13,264
Lease financing 5,354 4,845
Other 444 568
Unearned income (1,073) (999)
-----------------------------------------------------------------------
Total, net of unearned income $44,167 $50,601
=======================================================================
(a) Certain amounts have been reclassified to conform to the current year
presentation.
Loan portfolio composition continued to be geographically diversified among
numerous industries and types of businesses.
During 1999, total outstandings and exposure designated for downsizing totaled
$3.7 billion and $10.5 billion, respectively. At June 30, 2001, remaining
outstandings associated with this initiative were $572 million, of which $472
million were classified as loans with the remainder included in loans held for
sale. Total remaining exposure related to this initiative was $1.6 billion at
June 30, 2001.
In addition, outstandings and exposure totaling approximately $2.5 billion and
$7.0 billion, respectively, were designated for 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. At June 30, 2001, remaining outstandings and exposure
associated with this initiative were $1.9 billion and $5.4 billion,
respectively.
At June 30, 2001, approximately $257 million of loans held by a subsidiary of a
third party financial institution were classified in the consolidated financial
statements as loans held for sale. Unfunded commitments and letters of credit
related to the loans totaled approximately $27 million at June 30, 2001.
NET UNFUNDED COMMITMENTS (a)
June 30 December 31
In millions 2001 2000
--------------------------------------------------------------------
Commercial $19,859 $24,253
Commercial real estate 1,233 1,039
Consumer 4,693 4,414
Lease financing 112 123
Other 130 173
--------------------------------------------------------------------
Total $26,027 $30,002
====================================================================
(a) Excludes unfunded commitments related to loans designated for downsizing in
1999 and 2001 and unfunded commitments related to loans held by a
subsidiary of a third party financial institution.
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 June 30, 2001 and December 31, 2000.
Net outstanding letters of credit totaled $4.1 billion and $4.0 billion at June
30, 2001 and December 31, 2000, respectively, and consisted primarily of standby
letters of credit that commit the Corporation to make payments on behalf of
customers if specified future events occur. Unfunded commitments and letters of
credit related to loans designated for downsizing in 2001 and 1999 totaled $4.5
billion at June 30, 2001 and $1.7 billion at December 31, 2000.
SECURITIES
Total securities at June 30, 2001 were $11.0 billion compared with $5.9
billion at December 31, 2000. Total securities represented 16% of total assets
at June 30, 2001 compared with 8% at December 31, 2000. The increase was
primarily due to residential mortgage loan securitizations and purchases of
U.S. agencies, asset-backed and other debt securities during the first six
months of 2001. The expected weighted-average life of securities available for
sale was 4 years and 8 months at June 30, 2001 compared with 4 years and
5 months at December 31, 2000.
At June 30, 2001, the securities available for sale balance of $10.9 billion
included a net unrealized loss of $92 million, which represented the difference
between fair value and amortized cost. Securities available for sale at December
31, 2000 totaled $5.9 billion and included 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
Securities designated as held to maturity are carried at amortized cost and are
assets of a subsidiary of a third party financial institution, which is
consolidated in PNC's financial statements. The expected weighted-average life
of securities held to maturity was 23 years and 5 months at June 30, 2001. PNC
had no securities held to maturity at December 31, 2000.
DETAILS OF SECURITIES
Amortized Fair
In millions Cost Value
------------------------------------------------------------------
JUNE 30, 2001
Securities Available For Sale
Debt securities
U.S. Treasury and government agencies $ 1,467 $ 1,439
Mortgage-backed 7,643 7,601
Asset-backed 1,333 1,317
State and municipal 67 69
Other debt 73 73
Corporate stocks and other 401 393
------------------------------------------------------------------
Total securities available for sale $10,984 $10,892
==================================================================
Securities Held To Maturity
Debt securities
U.S. Treasury and government agencies $ 78 $ 76
Other debt 12 12
------------------------------------------------------------------
Total securities held to maturity $ 90 $ 88
==================================================================
DECEMBER 31, 2000
Securities Available For Sale
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 $57.9 billion at June 30, 2001 and decreased $1.4
billion compared with December 31, 2000. Demand, savings and money market
deposits increased due to ongoing strategic marketing efforts to retain
customers and increase money market balances as funds shifted from certificates
of deposit. 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
June 30 December 31
In millions 2001 2000
-------------------------------------------------------------------
Deposits
Demand, savings and money market $31,834 $30,686
Retail certificates of deposit 12,057 14,175
Other time 516 567
Deposits in foreign offices 1,392 2,236
-------------------------------------------------------------------
Total deposits 45,799 47,664
-------------------------------------------------------------------
Borrowed funds
Federal funds purchased 1,444 1,445
Repurchase agreements 569 607
Bank notes and senior debt 4,496 6,110
Federal Home Loan Bank borrowings 2,464 500
Subordinated debt 2,349 2,407
Other borrowed funds 797 649
-------------------------------------------------------------------
Total borrowed funds 12,119 11,718
-------------------------------------------------------------------
Total $57,918 $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 June 30, 2001, the Corporation and each bank subsidiary were
considered well capitalized based on regulatory capital ratio requirements.
RISK-BASED CAPITAL
June 30 December 31
Dollars in millions 2001 2000
------------------------------------------------------------------
Capital components
Shareholders' equity
Common $6,532 $6,344
Preferred 216 312
Trust preferred capital securities 848 848
Goodwill and other (2,140) (2,214)
Net unrealized securities losses 58 77
------------------------------------------------------------------
Tier I risk-based capital 5,514 5,367
Minority Interest 11
Subordinated debt 1,665 1,811
Eligible allowance for credit losses 675 667
------------------------------------------------------------------
Total risk-based capital $7,865 $7,845
==================================================================
Assets
Risk-weighted assets and
off-balance-sheet instruments $61,489 $62,430
Average tangible assets 68,500 66,809
==================================================================
Capital ratios
Tier I risk-based 9.0% 8.6%
Total risk-based 12.8 12.6
Leverage 8.1 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.
16
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. During the first
six months of 2001, PNC repurchased 3.4 million shares of its common stock.
Management currently expects that share repurchases will increase in the second
half of 2001 compared with the first half of 2001.
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.
FINANCIAL REVIEW
THE PNC FINANCIAL SERVICES GROUP, INC.
RISK FACTORS
The Corporation is subject to a number of risks 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. Changes in interest rates could also affect
the value of assets under management. In a period of rapidly rising interest
rates, certain assets under management would likely be negatively impacted by
reduced asset values and increased redemptions. 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
PNC 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 expanded competition and 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 other things, the loss of customer
deposits and decreases in transactions that generate fee income.
17
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 value 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.
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 key employee, customer 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 other things, 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
June 30 December 31
Dollars in millions 2001 2000
-----------------------------------------------------------------------
Nonaccrual loans
Commercial $334 $312
Commercial real estate 20 3
Consumer 4 2
Residential mortgage 4 4
Lease financing 12 2
-----------------------------------------------------------------------
Total nonaccrual loans 374 323
Nonperforming loans held for sale (a) 85 33
Foreclosed and other assets
Commercial real estate 2 3
Residential mortgage 3 8
Other 10 5
-----------------------------------------------------------------------
Total foreclosed and other assets 15 16
-----------------------------------------------------------------------
Total nonperforming assets $474 $372
=======================================================================
Nonaccrual loans to total loans .85% .64%
Nonperforming assets to total loans,
loans held for sale and foreclosed assets 1.03 .71
Nonperforming assets to total assets .68 .53
=======================================================================
(a) Includes $7 million of a troubled debt restructured loan held for
sale at June 30, 2001.
The above table excludes $24 million and $18 million of equity management assets
carried at estimated fair value at June 30, 2001 and December 31, 2000,
respectively. The amount of nonperforming loans that were current as to
principal and interest was $108 million at June 30, 2001 and $67 million at
December 31, 2000. Approximately 40% of nonperforming assets were from
portfolios that were designated for downsizing at June 30, 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 368 190
Returned to performing (13) (3)
Principal reductions (97) (73)
Sales (23) (11)
Charge-offs and other (133) (75)
-----------------------------------------------------------------
June 30 $474 $353
=================================================================
ACCRUING LOANS PAST DUE 90 DAYS OR MORE
Amount Percent of Loans
--------------------------------------------------
June 30 December 31 June 30 December 31
Dollars in millions 2001 2000 2001 2000
-------------------------------------------------------------------------
Commercial $11 $46 .06% .22%
Commercial real estate 1 6 .04 .23
Consumer 21 24 .23 .26
Residential mortgage 37 36 .45 .27
Lease financing 2 1 .05 .03
-----------------------------------------------
Total $72 $113 .16 .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 $130 million at June 30, 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 six months of 2001 and the
evaluation of the allowance for credit losses as of June 30, 2001 reflected
changes in loan portfolio composition, the net impact of downsizing credit
exposure and changes in asset quality. The unallocated portion of the allowance
for credit losses represented 17% of the total allowance and .26% of total loans
at June 30, 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 (148) (88)
Recoveries 23 23
-----------------------------------------------------------------
Net charge-offs (125) (65)
Provision for credit losses 125 66
-----------------------------------------------------------------
June 30 $675 $675
=================================================================
The allowance as a percent of nonaccrual loans and total loans was 180% and
1.53%, respectively, at June 30, 2001. The comparable year-end 2000 percentages
were 209% and 1.33%, respectively.
CHARGE-OFFS AND RECOVERIES
Percent of
Six months ended June 30 Net Average
Dollars in millions Charge-offs Recoveries Charge-offs Loans
-------------------------------------------------------------------------------
2001
Commercial $119 $12 $107 1.05%
Consumer 20 9 11 .24
Residential mortgage 1 1 .02
Lease financing 8 2 6 .30
----------------------------------------------------------------
Total $148 $23 $125 .53
===============================================================================
2000
Commercial $59 $10 $49 .45%
Consumer 23 11 12 .26
Residential mortgage 3 1 2 .03
Lease financing 3 1 2 .13
----------------------------------------------------------------
Total $88 $23 $65 .26
===============================================================================
Net charge-offs were $125 million or .53% of average loans for the first six
months of 2001 compared with $65 million or .26% for the same period in 2000.
The increase was primarily related to loans in institutional lending portfolios
that PNC is downsizing.
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
June 30, 2001, credit default swaps of $4.4 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 June 30, 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 .5%. If interest rates were to gradually decrease by
100 basis points over the next twelve months, the model indicated that net
interest income would decrease by .3%.
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 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
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 June 30,
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 1.3% 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 .4% 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,
asset 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. At June 30, 2001,
such assets totaled $13.6 billion, with $5.9 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, other real-estate related loans and mortgage-backed
securities. At June 30, 2001, approximately $12.0 billion of residential
mortgages and other real-estate related loans 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 June
30, 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 at June 30, 2001.
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 $313 million at June 30, 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 $600
thousand at June 30, 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 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. 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 six months of 2001, in
the notional value of financial derivatives used for risk management and
designated as accounting hedges under Statement of Financial Accounting
Standards ("SFAS") No. 133.
FINANCIAL DERIVATIVES ACTIVITY
Weighted-
December 31 January 1 June 30 Average
Dollars in millions 2000 Adjustments (a) 2001 Additions Maturities Terminations 2001 Maturity
------------------------------------------------------------------------------------------------------------------------------------
Interest rate risk management
Interest rate swaps
Receive fixed $4,756 $180 $4,936 $4,700 $(1,368) $(120) $8,148 2 yrs. 10 mos.
Pay fixed 1 248 249 243 (284) 208 3 yrs.
Basis swaps 2,230 (1,773) 457 190 (360) 287 3 yrs. 2 mos.
Interest rate caps 308 (243) 65 44 (74) 35 3 yrs. 10 mos.
Interest rate floors 3,238 (238) 3,000 55 (3,020) 35 10 mos.
Futures contracts 116 (116)
---------------------------------------------------------------------------------------------------------------------
Total interest rate risk
management 10,533 (1,826) 8,707 5,348 (1,368) (3,974) 8,713
---------------------------------------------------------------------------------------------------------------------
Commercial mortgage banking
risk management
Interest rate swaps 311 311 588 (556) 343 9 yrs. 5 mos.
Total rate of return swaps 75 75 75 (75) 75 2 mos.
---------------------------------------------------------------------------------------------------------------------
Total commercial mortgage
banking risk management 386 386 663 (75) (556) 418
Student lending activities -
Forward contracts 347 (347)
Credit-related activities -
Credit default swaps 4,391 (4,391)
---------------------------------------------------------------------------------------------------------------------
Total $15,657 $(6,564) $9,093 $6,011 $(1,443) $(4,530) $9,131
===================================================================================================================================
(a) 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 June 30, 2001.
FINANCIAL DERIVATIVES
Weighted-Average Interest Rates
Notional -----------------------------------
June 30, 2001 - dollars in millions Value Fair Value Paid Received
--------------------------------------------------------------------------------------------------------------------------------
Interest rate risk management
Asset rate conversion
Interest rate swaps (a)
Receive fixed designated to loans $6,835 $ 48 4.77% 5.34%
Pay fixed designated to loans 208 (3) 5.59 5.15
Basis swaps designated to loans 287 5.23 5.43
Interest rate caps designated to loans (b) 35 NM NM
Interest rate floors designated to loans (c) 35 NM NM
-----------------------------------------------------------------------------------------------
Total asset rate conversion 7,400 45
-----------------------------------------------------------------------------------------------
Liability rate conversion
Interest rate swaps (a)
Receive fixed designated to borrowed funds 1,313 60 5.99 6.61
-----------------------------------------------------------------------------------------------
Total liability rate conversion 1,313 60
-----------------------------------------------------------------------------------------------
Total interest rate risk management 8,713 105
-----------------------------------------------------------------------------------------------
Commercial mortgage banking risk management
Pay fixed interest rate swaps designated to
securities (a) 154 6.02 6.16
Pay fixed interest rate swaps designated to loans (a) 189 4 5.99 6.29
Pay total rate of return swaps designated to loans (a) 75 (1) 6.45 3.31
-----------------------------------------------------------------------------------------------
Total commercial mortgage banking risk management 418 3
-----------------------------------------------------------------------------------------------
Total financial derivatives $9,131 $108
===========================================================================================================================
(a) The floating rate portion of interest rate contracts is based on
money-market indices. As a percent of notional value, 78% were based on
1-month LIBOR, 20% on 3-month LIBOR and the remainder on other short-term
indices.
(b) Interest rate caps with notional values of $25 million require the
counterparty to pay the Corporation the excess, if any, of 3-month LIBOR
over a weighted-average strike of 6.34%. At June 30, 2001, 3-month LIBOR
was 3.84%.
(c) Interest rate floors with notional values of $28 million require the
counterparty to pay the excess, if any, weighted-average strike of 4.30%
over 3-month LIBOR. At June 30, 2001, 3-month LIBOR was 3.84%.
NM- Not meaningful
23
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 Estimated -------------------------------
December 31, 2000 - dollars in millions Value Fair Value Paid Received
------------------------------------------------------------------------------------------------------------------------------
Interest rate risk management
Asset rate conversion
Interest rate swaps (a)
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 (b) 308 4 NM NM
Interest rate floors designated to loans (c) 3,238 (1) NM NM
---------------------------------------------------------------------------------------------
Total asset rate conversion 7,022 33
---------------------------------------------------------------------------------------------
Liability rate conversion
Interest rate swaps (a)
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 (a) 135 (8) 6.94 6.04
Pay fixed interest rate swaps designated to loans (a) 176 3 5.76 5.99
Pay total rate of return swaps designated to loans (a) 75 (5) 5.76 6.15
---------------------------------------------------------------------------------------------
Total commercial mortgage banking risk management 386 (10)
---------------------------------------------------------------------------------------------
Student lending activities - Forward contracts (d) 347 NM NM
Credit-related activities - Credit default swaps (d) 4,391 (2) NM NM
---------------------------------------------------------------------------------------------
Total financial derivatives $15,657 $92
==============================================================================================================================
(a) 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.
(b) 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%.
(c) 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%.
(d) Due to the structure of these contracts, they are no longer considered
financial derivatives under SFAS No. 133.
NM- Not meaningful
OTHER DERIVATIVES
To accommodate customer needs, PNC enters into customer-related financial
derivative transactions primarily consisting of interest rate swaps, caps,
floors and foreign exchange contracts. Risk exposure from customer positions is
managed through transactions with other dealers.
Additionally, the Corporation enters into other derivative transactions for risk
management purposes that are not designated as accounting hedges.
OTHER DERIVATIVES
At June 30, 2001
---------------------------------------------------------------------- 2001
Positive Negative Average
Notional Fair Fair Net Asset Fair
In millions Value Value Value (Liability) Value (a)
-----------------------------------------------------------------------------------------------------------------------
Customer-related
Interest rate
Swaps $15,551 $182 $(196) $(14) $(8)
Caps/floors
Sold 4,361 (20) (20) (20)
Purchased 3,349 18 18 18
Foreign exchange 4,306 62 (53) 9 12
Other 3,659 51 (48) 3 2
-----------------------------------------------------------------------------------------------------------------------
Total customer-related 31,226 313 (317) (4) 4
Other 4,615 23 (5) 18 19
-----------------------------------------------------------------------------------------------------------------------
Total other derivatives $35,841 $336 $(322) $14 $23
=======================================================================================================================
(a) Represents average for six months ended June 30, 2001.
24
FINANCIAL REVIEW
THE PNC FINANCIAL SERVICES GROUP, INC.
SECOND QUARTER 2001 VS.
SECOND QUARTER 2000
Earnings for the second quarter of 2001 were $295 million or $1.00 per diluted
share compared with earnings of $299 million or $1.01 per diluted share for the
second quarter of 2000. Excluding a $22 million or $0.08 per diluted share net
loss from venture capital activities, second quarter 2001 earnings per diluted
share increased 7% to $1.08 per diluted share. Return on average common
shareholders' equity was 18.13% and return on average assets was 1.67% for the
second quarter of 2001 compared with 20.77% and 1.74%, respectively, for the
second quarter of 2000.
Taxable-equivalent net interest income of $569 million for the second quarter of
2001 increased $19 million or 3% compared with the second quarter of 2000 and
the net interest margin widened 13 basis points to 3.76% for the second quarter
of 2001. The increases were primarily due to the positive impact of transaction
deposit growth and a lower rate environment that was partially offset by the
impact of continued downsizing of the loan portfolio.
The provision for credit losses was $45 million for the second quarter of 2001
compared with $35 million for the second quarter of 2000. The increase was
primarily related to institutional lending portfolios that PNC is downsizing.
Noninterest income was $720 million for the second quarter of 2001 and included
$30 million of venture capital losses. Excluding venture capital gains and
losses in both years, noninterest income increased 10% compared with the second
quarter of 2000 primarily due to growth in asset management and processing
revenue.
Asset management fees of $214 million for the second quarter of 2001 increased
$18 million or 9% compared with the second quarter of 2000. The increase was
primarily driven by new institutional business and strong fixed-income
performance at BlackRock, partially offset by the impact of weak equity markets
on investment management and trust revenue in PNC Advisors. Fund servicing fees
of $182 million for the second quarter of 2001 increased $18 million or 11%
compared with the second quarter of 2000 primarily due to existing and new
client growth.
Service charges on deposits were $54 million for the second quarter of 2001, up
8% compared with the same period last year primarily due to an increase in
transaction deposit accounts. Brokerage fees were $55 million for the second
quarter of 2001 compared with $60 million for the second quarter of 2000. The
decrease was primarily due to a decline in equity markets activity. Consumer
services revenue of $58 million for the second quarter of 2001 increased $7
million or 14% compared with the prior-year quarter primarily due to the
expansion of PNC's ATM network and the increase in transaction deposit accounts.
Corporate services revenue was $76 million for the second quarter of 2001
compared with $80 million for the second quarter of 2000. Higher commercial
mortgage servicing and treasury management revenue was more than offset by
valuation adjustments of other assets and lower commercial mortgage-backed
securitization gains.
Equity management reflected net losses of $30 million for the second quarter of
2001 compared with $48 million of net gains for the second quarter of 2000. The
decrease primarily resulted from a decline in the estimated fair value of
partnership and direct investments.
Net securities gains were $17 million for the second quarter of 2001. The gains
were mostly offset by $10 million of valuation adjustments that are reflected in
corporate services revenue. Other noninterest income was $94 million for the
second quarter of 2001 compared with $79 million for the second quarter of 2000.
The increase was primarily due to higher revenue from trading activities and
residential mortgage loan securitization gains.
Noninterest expense was $789 million and the efficiency ratio was 58% in the
second quarter of 2001 compared with $780 million and 57%, respectively, during
the second quarter of 2000. The increases were primarily related to the
expansion of asset management and processing businesses.
Total assets were $70.0 billion at June 30, 2001 compared with $75.7 billion at
June 30, 2000 prior to the sale of PNC's residential mortgage banking business.
On the same basis, average interest-earning assets were $60.0 billion for the
second quarter of 2001 compared with $64.8 billion for the second quarter of
2000. The decrease was primarily due to an $8.7 billion reduction in loans and
loans held for sale that resulted from the sale of the residential mortgage
banking business and other balance sheet downsizing initiatives, partially
offset by a $3.7 billion increase in securities that primarily resulted from the
securitization of certain residential mortgage loans.
Average deposits from continuing operations were $45.4 billion and represented
64% of total sources of funds for the second quarter of 2001 compared with $45.5
billion and 66%, respectively, in the second quarter of 2000. While total
deposits remained essentially unchanged, an increase in transaction deposits of
$2.3 billion or 8% was mostly offset by a $2.2 billion decrease in higher-cost
retail certificates and wholesale deposits.
Average borrowed funds declined to $14.0 billion for the second quarter of 2001
compared with $19.4 billion for the second quarter of 2000 prior to the sale of
PNC's residential mortgage banking business.
25
Nonperforming assets were $474 million at June 30, 2001 compared with $353
million at June 30, 2000. The ratio of nonperforming assets to total loans,
loans held for sale and foreclosed assets was 1.03% at June 30, 2001 compared
with .67% at June 30, 2000.
The allowance for credit losses was $675 million and represented 1.53% of
period-end loans and 180% of nonaccrual loans at June 30, 2001. The
comparable ratios were 1.34% and 217%, respectively, at June 30, 2000. Net
charge-offs were $45 million or .40% of average loans in the second quarter of
2001. The comparable amounts were $34 million or .27%, respectively, in the
second quarter of 2000.
FORWARD-LOOKING STATEMENTS
This report and other statements made by the Corporation may contain
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act with respect to the outlook or expectations for earnings,
revenues, asset quality, share repurchases, and other future financial or
business performance, strategies and expectations. Forward-looking statements
are typically identified by words or phrases such as "believe," "expect,"
"anticipate," "intend," "outlook," "forecast," "estimate," "position," "target,"
"mission," "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. 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 factors mentioned elsewhere in this report or previously
disclosed in the Corporation's SEC reports (accessible on the SEC's website at
www.sec.gov), the following factors, among others, could cause actual results to
differ materially from forward-looking statements or historical performance:
(1) adjustments to recorded results of the sale of the residential mortgage
banking business after disputes over certain closing date adjustments have
been resolved;
(2) changes in economic or industry conditions, the interest rate environment
or financial and capital markets, which could result in: a deterioration in
credit quality and increased credit losses; an adverse effect on the
allowance for loan losses; a reduction in demand for credit or fee-based
products and services, net interest income, value of assets under
management and assets serviced, value of debt and equity investments, or
value of on-balance sheet and off-balance-sheet assets; or changes in the
availability and terms of funding necessary to meet PNC's liquidity needs;
(3) relative investment performance of assets under management;
(4) the introduction, withdrawal, success and timing of business initiatives
and strategies, decisions regarding further reductions in balance sheet
leverage, and PNC's inability to realize cost savings or revenue
enhancements, implement integration plans and other consequences of
mergers, acquisitions, restructurings and divestitures;
(5) customer borrowing, repayment, investment and deposit practices and their
acceptance of PNC's products and services;
(6) the impact of increased competition;
(7) the means PNC chooses to redeploy available capital, including the extent
and timing of any share repurchases and investments in PNC businesses;
(8) the inability to manage risks inherent in PNC's business;
(9) the unfavorable resolution of legal proceedings;
(10) the denial of insurance coverage for claims made by PNC;
(11) 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 loan loss provision and
reduced profitability;
(12) the impact, extent and timing of technological changes; and
(13) actions of the Federal Reserve Board and legislative and regulatory actions
and reforms.
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.
26
CONSOLIDATED STATEMENT OF INCOME
THE PNC FINANCIAL SERVICES GROUP, INC.
Three months ended June 30 Six months ended June 30
------------------------------- -----------------------------
In millions, except per share data 2001 2000 2001 2000
----------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Loans and fees on loans $839 $1,009 $1,820 $1,993
Securities 177 97 299 191
Loans held for sale 31 52 68 116
Other 32 22 64 41
----------------------------------------------------------------------------------------------------------------------------------
Total interest income 1,079 1,180 2,251 2,341
----------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Deposits 334 397 731 766
Borrowed funds 180 238 401 475
----------------------------------------------------------------------------------------------------------------------------------
Total interest expense 514 635 1,132 1,241
----------------------------------------------------------------------------------------------------------------------------------
Net interest income 565 545 1,119 1,100
Provision for credit losses 45 35 125 66
----------------------------------------------------------------------------------------------------------------------------------
Net interest income less provision for credit losses 520 510 994 1,034
----------------------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Asset management 214 196 437 382
Fund servicing 182 164 363 319
Service charges on deposits 54 50 104 100
Brokerage 55 60 109 131
Consumer services 58 51 113 98
Corporate services 76 80 152 162
Equity management (30) 48 (69) 135
Net securities gains (losses) 17 46 (3)
Other 94 79 166 132
----------------------------------------------------------------------------------------------------------------------------------
Total noninterest income 720 728 1,421 1,456
----------------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Staff expense 418 396 839 807
Net occupancy 54 48 107 101
Equipment 60 55 117 111
Amortization 27 28 53 56
Marketing 16 19 25 32
Distributions on capital securities 16 17 33 33
Other 198 217 390 432
----------------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 789 780 1,564 1,572
----------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes 451 458 851 918
Income taxes 156 159 291 317
----------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations 295 299 560 601
----------------------------------------------------------------------------------------------------------------------------------
Income from discontinued operations (less applicable income
taxes of $10, $0 and $15) 16 5 22
----------------------------------------------------------------------------------------------------------------------------------
Net income before cumulative effect of accounting change 295 315 565 623
Cumulative effect of accounting change (less applicable
income taxes of $2) (5)
----------------------------------------------------------------------------------------------------------------------------------
Net income $295 $315 $560 $623
----------------------------------------------------------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE
Continuing operations
Basic $1.01 $1.01 $1.91 $2.03
Diluted 1.00 1.01 1.89 2.02
Net income
Basic $1.01 $1.07 $1.91 $2.11
Diluted 1.00 1.06 1.89 2.09
CASH DIVIDENDS DECLARED PER COMMON SHARE $.48 $.45 $.96 $.90
AVERAGE COMMON SHARES OUTSTANDING
Basic 288 290 289 291
Diluted 291 292 292 293
==================================================================================================================================
See accompanying Notes to Consolidated Financial Statements.
27
CONSOLIDATED BALANCE SHEET
THE PNC FINANCIAL SERVICES GROUP, INC.
June 30 December 31
In millions, except par value 2001 2000
------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $3,659 $3,662
Short-term investments 793 1,151
Loans held for sale 1,870 1,655
Securities 10,982 5,902
Loans, net of unearned income of $1,073 and $999 44,167 50,601
Allowance for credit losses (675) (675)
------------------------------------------------------------------------------------------------------------------
Net loans 43,492 49,926
Goodwill and other amortizable assets 2,405 2,468
Investment in discontinued operations 356
Other 6,797 4,724
------------------------------------------------------------------------------------------------------------------
Total assets $69,998 $69,844
==================================================================================================================
LIABILITIES
Deposits
Noninterest-bearing $8,982 $8,490
Interest-bearing 36,817 39,174
------------------------------------------------------------------------------------------------------------------
Total deposits 45,799 47,664
Borrowed funds
Federal funds purchased 1,444 1,445
Repurchase agreements 569 607
Bank notes and senior debt 4,496 6,110
Federal Home Loan Bank borrowings 2,464 500
Subordinated debt 2,349 2,407
Other borrowed funds 797 649
------------------------------------------------------------------------------------------------------------------
Total borrowed funds 12,119 11,718
Other 4,484 2,958
------------------------------------------------------------------------------------------------------------------
Total liabilities 62,402 62,340
------------------------------------------------------------------------------------------------------------------
Mandatorily redeemable capital securities of subsidiary trusts 848 848
SHAREHOLDERS' EQUITY
Preferred stock 5 7
Common stock - $5 par value
Authorized 800 and 450 shares
Issued 353 shares 1,764 1,764
Capital surplus 1,257 1,303
Retained earnings 7,010 6,736
Deferred benefit expense (25) (25)
Accumulated other comprehensive loss from continuing operations (60) (43)
Accumulated other comprehensive loss from discontinued operations (45)
Common stock held in treasury at cost: 64 and 63 shares (3,203) (3,041)
------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 6,748 6,656
------------------------------------------------------------------------------------------------------------------
Total liabilities, capital securities and shareholders' equity $69,998 $69,844
==================================================================================================================
See accompanying Notes to Consolidated Financial Statements.
28
CONSOLIDATED STATEMENT OF CASH FLOWS
THE PNC FINANCIAL SERVICES GROUP, INC.
Six months ended June 30 - in millions 2001 2000
---------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $560 $623
Discontinued operations (5) (22)
Cumulative effect of accounting change 5
---------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations 560 601
Adjustments to reconcile income from continuing operations
to net cash provided by operating activities
Provision for credit losses 125 66
Depreciation, amortization and accretion 167 173
Deferred income taxes 171 191
Net securities (gains) losses (45) 1
Valuation adjustments 9 23
Change in
Loans held for sale 26 1,149
Other (276) (936)
---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 737 1,268
---------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Net change in loans (167) 717
Repayment of securities 1,153 442
Sales
Securities 10,301 3,455
Loans 2,557 16
Foreclosed assets 11 20
Purchases
Securities (12,837) (3,293)
Loans (234)
Net cash received (paid) for acquisitions/divestitures 503 (4)
Other 11 (117)
---------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities 1,298 (198)
---------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net change in
Noninterest-bearing deposits 492 705
Interest-bearing deposits (2,357) (126)
Federal funds purchased (1) (399)
Sales/issuances
Repurchase agreements 115,246 76,929
Bank notes and senior debt 2,847
Federal Home Loan Bank borrowings 3,123 2,081
Subordinated debt 1 593
Other borrowed funds 18,960 20,335
Common stock 128 71
Repayments/maturities
Repurchase agreements (115,284) (76,827)
Bank notes and senior debt (1,615) (2,945)
Federal Home Loan Bank borrowings (1,155) (3,000)
Subordinated debt (100) (494)
Other borrowed funds (18,813) (20,292)
Acquisition of treasury stock (279) (238)
Series F preferred stock tender offer (96)
Cash dividends paid (288) (271)
---------------------------------------------------------------------------------------------------------------------------------
Net cash used by financing activities (2,038) (1,031)
---------------------------------------------------------------------------------------------------------------------------------
(DECREASE) INCREASE IN CASH AND DUE FROM BANKS (3) 39
Cash and due from banks at beginning of year 3,662 3,080
---------------------------------------------------------------------------------------------------------------------------------
Cash and due from banks at end of period $3,659 $3,119
=================================================================================================================================
CASH PAID FOR
Interest $1,105 $1,262
Income taxes 100 185
NON-CASH ITEMS
Transfer of residential mortgage loans to securities 3,775
Transfer from loans to loans held for sale (251)
Transfer from loans to other assets 5 22
=================================================================================================================================
See accompanying Notes to Consolidated Financial Statements.
29
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 regional 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 global fund 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, in 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.
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.
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, commercial loans, bank
notes and subordinated debt for changes in fair value primarily due to changes
in interest rates. Adjustments related to the ineffective portion of fair value
hedging instruments are recorded in either net interest income or noninterest
income depending on the hedged item.
30
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.
31
RESTATEMENTS
In connection with the repositioning of its institutional lending businesses,
PNC completed a transaction in June 2001 in which loans were sold to a
subsidiary of a third party financial institution with PNC receiving preferred
interests in the subsidiary. The transaction involved the sale of loan assets of
$257 million of which $84 million were classified as nonperforming assets at
the date of sale. Loan assets sold included loans previously held for sale and
other loans that were reclassified from loans to loans held for sale and marked
to the lower of cost or market prior to the sale. This resulted in charge-offs
at the date transferred of $15 million on loans and valuation adjustments of $1
million for those loans that previously had been classified as held for sale.
Including previous charge-offs and valuation adjustments, loans transferred had
been charged down by approximately $72 million prior to sale. In addition to
the loan assets, PNC also transferred cash amounting to $108 million. In
return, PNC received one hundred percent of the Class A convertible preferred
shares in the subsidiary. The Class A convertible preferred shares owned by PNC
have no voting rights. PNC, as holder of the Class A convertible preferred
shares, may convert such preferred shares to Class A common shares and cause
the liquidation of the subsidiary. A noncumulative annual dividend may be paid
on the preferred stock.
The third party financial institution formed the entity, contributed three
percent equity in the form of cash and received one hundred percent of the
Class B preferred shares and one hundred percent of the Class B common shares
of the entity. The proceeds received by the entity from the issuance of the
Class A preferred and all of the Class B shares were used to fund certain
operating expenses, future commitments under the loan agreements, investment in
a managed asset account and to purchase U.S. Treasury zero coupon securities.
The third party financial institution is the managing member of the entity and
holds one hundred percent of the voting power. All management and operating
decisions regarding the assets are at the discretion of the managing member.
The managing member is paid an annual fee for its services. PNC is the servicer
of the loans and is paid a servicing fee.
At the time of the transaction, the loans were removed from PNC's balance
sheet and the preferred interests in the entity were recorded as securities
available for sale in conformity with accounting guidance received from PNC's
independent auditors. In January 2002, the Federal Reserve Board staff advised
PNC that under generally accepted accounting principles the subsidiary of the
third party financial institution should be consolidated into the financial
statements of PNC in preparing bank holding company reports. After considering
all the circumstances, PNC made the decision to restate its consolidated
financial statements for the second and third quarters of 2001 to conform
financial reporting with regulatory reporting requirements. The effects of this
restatement on the consolidated financial statements for the second quarter of
2001 are included in this Amendment No. 1.
The amounts contained in this Amendment No. 1 also include the restatement of
the results for the first quarter of 2001 to reflect the correction of an error
related to the accounting for the sale of the residential mortgage banking
business. This restatement reduced income from discontinued operations and net
income for the six months ended June 30, 2001 by $35 million or $.12 per diluted
share. The consolidated balance sheet was not affected by this restatement as
the impact of the error had been reflected in retained earnings at June 30,
2001.
DISCONTINUED OPERATIONS
On January 31, 2001, PNC closed the sale of its residential mortgage banking
business. Certain closing date adjustments are currently in dispute between PNC
and the buyer, Washington Mutual Bank, FA. The ultimate financial impact of the
sale will not be determined until the disputed matters are finally resolved.
The income and net assets of the residential mortgage banking business, which
are presented on one line in the income statement and balance sheet,
respectively, are as follows:
INCOME FROM DISCONTINUED OPERATIONS
Six months ended June 30 - in millions 2001 2000
-----------------------------------------------------------------
Total income from operations after tax $15 $22
Net loss on disposal, after tax (a) (10)
-----------------------------------------------------------------
Total income from discontinued
operations $ 5 $22
=================================================================
(a) Includes recognition of $35 million of previously unrealized
securities losses in accumulated other comprehensive income.
INVESTMENT IN DISCONTINUED OPERATIONS
December 31 - in millions 2000
-----------------------------------------------------------------
Loans held for sale $3,003
Securities available for sale 3,016
Loans, net of unearned income 739
Goodwill and other amortizable assets 1,925
All other assets 1,168
-----------------------------------------------------------------
Total assets 9,851
-----------------------------------------------------------------
Deposits 1,150
Borrowed funds 7,601
Other liabilities 744
-----------------------------------------------------------------
Total liabilities 9,495
-----------------------------------------------------------------
Net assets $356
=================================================================
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE PNC FINANCIAL SERVICES GROUP, INC.
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" (a replacement of Financial Accounting Standards
Board ("FASB") Statement No. 125) was issued in September 2000. 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 began application of the new rules
prospectively to transactions beginning in the second quarter of 2001. SFAS No.
140 also requires certain disclosures pertaining to securitization transactions
effective for fiscal years ended after December 15, 2000. PNC included these
required disclosures in its December 31, 2000 consolidated financial statements.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations." SFAS No.
141 requires the purchase method of accounting be used for all business
combinations initiated or completed after June 30, 2001 and eliminates the
pooling-of-interests method of accounting. The statement also addresses
disclosure requirements for business combinations and initial recognition and
measurement criteria for goodwill and other intangible assets as a result of
purchase business combinations.
Also in July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets," which changes the accounting from amortizing goodwill to an
impairment-only approach. The amortization of goodwill, including goodwill
recognized relating to past business combinations, will cease upon adoption of
the new standard. Impairment testing for goodwill at a reporting unit level will
be required on at least an annual basis. The new standard also addresses other
accounting matters, disclosure requirements and financial statement presentation
issues relating to goodwill and other intangible assets. The Corporation will
adopt SFAS No. 142 effective January 1, 2002. Assuming no impairment adjustments
are necessary, no future business combinations and no other changes to goodwill,
the Corporation expects net income to increase by approximately $94 million in
2002 resulting from the cessation of goodwill amortization.
CASH FLOWS
During the first six months of 2001, divestiture activity that affected cash
flows consisted of $383 million of divested net assets and cash receipts of $503
million. During the first six months of 2000, acquisition activity that affected
cash flows consisted of $22 million of acquired assets, $2 million of acquired
liabilities and cash payments of $3 million.
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 six months of 2001 totaled $78 million compared
with $37 million for the prior-year period and was included in noninterest
income as follows:
Six months ended June 30 - in millions 2001 2000
----------------------------------------------------------------
Corporate services $1
Equity management $(4)
Other noninterest income
Market making 25 21
Derivatives trading 39 7
Foreign exchange 12 11
Other 1 2
----------------------------------------------------------------
Net trading income $78 $37
================================================================
33
SECURITIES
Unrealized
Amortized ------------------------------------- Fair
In millions Cost Gains Losses Value
-----------------------------------------------------------------------------------------------------------------------
JUNE 30, 2001
SECURITIES AVAILABLE FOR SALE
Debt securities
U.S. Treasury and government agencies $1,467 $1 $(29) $1,439
Mortgage-backed 7,643 12 (54) 7,601
Asset-backed 1,333 (16) 1,317
State and municipal 67 2 69
Other debt 73 73
-----------------------------------------------------------------------------------------------------------------------
Total debt securities 10,583 15 (99) 10,499
Corporate stocks and other 401 53 (61) 393
-----------------------------------------------------------------------------------------------------------------------
Total securities available for sale $10,984 $68 $(160) $10,892
=======================================================================================================================
SECURITIES HELD TO MATURITY
Debt securities
U.S. Treasury and government agencies $78 $(2) $76
Other debt 12 12
-----------------------------------------------------------------------------------------------------------------------
Total debt securities 90 (2) 88
-----------------------------------------------------------------------------------------------------------------------
Total securities held to maturity $90 $(2) $88
=======================================================================================================================
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
=======================================================================================================================
Total securities at June 30, 2001 was $11.0 billion compared with $5.9 billion
at December 31, 2000. Total securities represented 16% of total assets at June
30, 2001 compared with 8% at December 31, 2000. The increase was primarily due
to residential mortgage loan securitizations and purchases of U.S. agencies,
asset-backed and other debt securities during the first six months of 2001. The
expected weighted-average life of securities available for sale was 4 years and
8 months at June 30, 2001 compared with 4 years and 5 months at December 31,
2000.
At June 30, 2001, the securities available for sale balance of $10.9 billion
included a net unrealized loss of $92 million, which represented the difference
between fair value and amortized cost. Securities available for sale at December
31, 2000 totaled $5.9 billion and included 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 $46 million for the first six months of 2001 compared with net losses
of $3 million for the first six months of 2000. Net securities losses of $1
million for the first six months of 2001, and net securities gains of $2 million
for the first six months of 2000, related to commercial mortgage banking
activities, were included in corporate services revenue.
Securities designated as held to maturity are carried at amortized cost and are
assets of a subsidiary of a third party financial institution, which is
consolidated in PNC's financial statements. The expected weighted-average life
of securities held to maturity was 23 years and 5 months at June 30, 2001. PNC
had no securities held to maturity at December 31, 2000.
34
NONPERFORMING ASSETS
Nonperforming assets were as follows:
June 30 December 31
In millions 2001 2000
-------------------------------------------------------------------
Nonaccrual loans $374 $323
Nonperforming loans held for sale (a) 85 33
Foreclosed and other assets 15 16
-------------------------------------------------------------------
Total nonperforming assets $474 $372
===================================================================
(a) Includes $7 million of a troubled debt restructured loan held
for sale at June 30, 2001.
The above table excludes $24 million and $18 million of equity management assets
carried at estimated fair value at June 30, 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
Commercial (119) (59)
Consumer (20) (23)
Residential mortgage (1) (3)
Lease financing (8) (3)
-------------------------------------------------------------------
Total charge-offs (148) (88)
Recoveries
Commercial 12 10
Consumer 9 11
Residential mortgage 1
Lease financing 2 1
-------------------------------------------------------------------
Total recoveries 23 23
-------------------------------------------------------------------
Net charge-offs
Commercial (107) (49)
Consumer (11) (12)
Residential mortgage (1) (2)
Lease financing (6) (2)
-------------------------------------------------------------------
Total net charge-offs (125) (65)
Provision for credit losses 125 66
-------------------------------------------------------------------
Allowance at June 30 $675 $675
===================================================================
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 is reflected in the results of discontinued operations.
Earnings adjustments resulting from cash flow and fair value hedge
ineffectiveness were not significant to the results of operations of the
Corporation during the first six months of 2001.
During the next twelve months, the Corporation expects to reclassify to earnings
$50 million of pretax net gains on cash flow hedge derivatives currently
reported in accumulated other comprehensive income. These net gains may result
from anticipated net cash flows on receive fixed interest rate swaps and would
offset reductions in net interest income recognized on the related floating rate
commercial loans.
At June 30, 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.
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE PNC FINANCIAL SERVICES GROUP, INC.
COMPREHENSIVE INCOME
Comprehensive income from continuing operations was $228 million for the second
quarter of 2001 and $543 million for the first six months of 2001, compared with
$301 million and $595 million, respectively, in 2000.
The Corporation's other comprehensive income consists of unrealized gains or
losses on securities available for sale and cash flow hedge derivatives, foreign
currency translation and minimum pension liability adjustments. The income
effects allocated to each component of other comprehensive income are as
follows:
Six months ended June 30, 2001 Pretax Tax Benefit After-tax
In millions Amount (Expense) Amount
-----------------------------------------------------------------------------
Unrealized securities losses $(43) $15 $(28)
Less: Reclassification
adjustment for losses
realized in net income (5) 2 (3)
-----------------------------------------------------------------------------
Net unrealized securities
losses (38) 13 (25)
-----------------------------------------------------------------------------
SFAS No. 133 transition
adjustment (6) 2 (4)
Unrealized gains on cash flow
hedge derivatives 9 (3) 6
Less: Reclassification
adjustment for losses
realized in net income (11) 4 (7)
-----------------------------------------------------------------------------
Net unrealized gains on
cash flow hedge
derivatives 14 (5) 9
Foreign currency translation
adjustment (2) 1 (1)
-----------------------------------------------------------------------------
Other comprehensive loss
from continuing operations $(26) $9 $(17)
=============================================================================
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 loss
are as follows:
June 30 December 31
In millions 2001 2000
---------------------------------------------------------------------
Net unrealized securities losses $(57) $(32)
Net unrealized gains on cash flow hedge
derivatives 9
Minimum pension liability adjustment (11) (11)
Foreign currency translation adjustment (1)
---------------------------------------------------------------------
Accumulated other comprehensive loss
from continuing operations $(60) $(43)
=====================================================================
36
EARNINGS PER SHARE
The following table sets forth basic and diluted earnings per share
calculations.
Three months ended Six months ended
June 30 June 30
-------------------- -------------------
In millions, except share and per share data 2001 2000 2001 2000
-----------------------------------------------------------------------------------------------------------------------------------
CALCULATION OF BASIC EARNINGS PER COMMON SHARE
Income from continuing operations $295 $299 $560 $601
Less: Preferred dividends declared 5 5 10 10
-----------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations applicable to basic earnings per common share 290 294 550 591
Income from discontinued operations applicable to basic earnings per common share 16 5 22
Cumulative effect of accounting change applicable to basic earnings per common share (5)
-----------------------------------------------------------------------------------------------------------------------------------
Net income applicable to basic earnings per common share $290 $310 $550 $613
Basic weighted-average common shares outstanding (in thousands) 288,269 289,804 288,734 290,847
Basic earnings per common share from continuing operations $1.01 $1.01 $1.91 $2.03
Basic earnings per common share from discontinued operations .06 .02 .08
Basic earnings per common share from cumulative effect of accounting change (.02)
-----------------------------------------------------------------------------------------------------------------------------------
Basic earnings per common share $1.01 $1.07 $1.91 $2.11
===================================================================================================================================
CALCULATION OF DILUTED EARNINGS PER COMMON SHARE
Income from continuing operations $295 $299 $560 $601
Less: Dividends declared on nonconvertible preferred stock Series F 5 4 9 9
-----------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations applicable to diluted earnings per common share 290 295 551 592
Income from discontinued operations applicable to diluted earnings per common share 16 5 22
Cumulative effect of accounting change applicable to diluted earnings per common share (5)
-----------------------------------------------------------------------------------------------------------------------------------
Net income applicable to diluted earnings per common share $290 $311 $551 $614
Basic weighted-average common shares outstanding (in thousands) 288,269 289,804 288,734 290,847
Weighted-average common shares to be issued using average market price and assuming:
Conversion of preferred stock Series A and B 107 121 109 121
Conversion of preferred stock Series C and D 884 1,012 892 1,020
Conversion of debentures 17 20 17 21
Exercise of stock options 1,830 1,163 2,044 924
Incentive share awards 309 69 305 216
-----------------------------------------------------------------------------------------------------------------------------------
Diluted weighted-average common shares outstanding (in thousands) 291,416 292,189 292,101 293,149
Diluted earnings per common share from continuing operations $1.00 $1.01 $1.89 $2.02
Diluted earnings per common share from discontinued operations .05 .02 .07
Diluted earnings per common share from cumulative effect of accounting change (.02)
-----------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per common share $1.00 $1.06 $1.89 $2.09
===================================================================================================================================
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE PNC FINANCIAL SERVICES GROUP, INC.
SEGMENT REPORTING
PNC operates seven major businesses engaged in regional 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 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 designated for downsizing 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
Regional 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's commercial
real estate financial services platform includes lending as well as processing
businesses. The processing businesses include Midland Loan Services, Inc., a
leading third-party provider of loan servicing and technology to the commercial
real estate finance industry, and Columbia Housing Partners, LP, a national
syndicator of affordable housing equity.
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 $213 billion of assets under management at June 30, 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 brand 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 fund services to the investment management
industry. PFPC also provides customized processing solutions to the
international marketplace through its Dublin, Ireland and Luxembourg operations.
38
RESULTS OF BUSINESSES
PNC
Regional Real PNC
Three months ended June 30 Community Corporate Estate Business PNC
In millions Banking Banking Finance Credit Advisors BlackRock PFPC Other Total
-----------------------------------------------------------------------------------------------------------------------------------
2001
INCOME STATEMENT
Net interest income (a) $364 $128 $28 $27 $36 $2 $(16) $569
Noninterest income 194 63 25 6 154 135 183 $(40) 720
-----------------------------------------------------------------------------------------------------------------------------------
Total revenue 558 191 53 33 190 137 167 (40) 1,289
Provision for credit losses 10 31 (2) 3 1 2 45
Depreciation and amortization 21 4 6 4 6 11 15 67
Other noninterest expense 251 91 34 8 124 86 131 (3) 722
-----------------------------------------------------------------------------------------------------------------------------------
Pretax earnings 276 65 15 22 61 45 25 (54) 455
Income taxes 99 24 (3) 8 22 19 10 (19) 160
-----------------------------------------------------------------------------------------------------------------------------------
Earnings $177 $41 $18 $14 $39 $26 $15 $(35) $295
===================================================================================================================================
Inter-segment revenue $1 $1 $16 $5 $3 $(26)
===================================================================================================================================
AVERAGE ASSETS $40,028 $16,301 $5,205 $2,482 $3,336 $571 $1,749 $1,044 $70,716
===================================================================================================================================
2000
INCOME STATEMENT
Net interest income (a) $359 $138 $32 $25 $33 $1 $(12) $(26) $550
Noninterest income 155 68 25 4 161 113 165 37 728
-----------------------------------------------------------------------------------------------------------------------------------
Total revenue 514 206 57 29 194 114 153 11 1,278
Provision for credit losses 10 23 2 35
Depreciation and amortization 21 4 5 3 5 13 12 63
Other noninterest expense 249 91 27 7 120 73 124 26 717
-----------------------------------------------------------------------------------------------------------------------------------
Pretax earnings 234 88 25 20 71 36 16 (27) 463
Income taxes 82 32 5 7 26 15 6 (9) 164
-----------------------------------------------------------------------------------------------------------------------------------
Earnings $152 $56 $20 $13 $45 $21 $10 $(18) $299
===================================================================================================================================
Inter-segment revenue $1 $1 $21 $3 $(26)
===================================================================================================================================
AVERAGE ASSETS $38,498 $16,270 $5,826 $2,262 $3,556 $434 $1,571 $240 $68,657
===================================================================================================================================
Six months ended June 30
In millions
-----------------------------------------------------------------------------------------------------------------------------------
2001
INCOME STATEMENT
Net interest income (a) $718 $268 $57 $51 $68 $4 $(31) $(7) $1,128
Noninterest income 382 115 49 20 321 269 363 (98) 1,421
-----------------------------------------------------------------------------------------------------------------------------------
Total revenue 1,100 383 106 71 389 273 332 (105) 2,549
Provision for credit losses 20 88 (2) 8 1 10 125
Depreciation and amortization 42 7 11 1 8 12 21 29 131
Other noninterest expense 509 189 65 15 248 172 258 (23) 1,433
-----------------------------------------------------------------------------------------------------------------------------------
Pretax earnings 529 99 32 47 132 89 53 (121) 860
Income taxes 190 34 (6) 17 49 37 21 (42) 300
-----------------------------------------------------------------------------------------------------------------------------------
Earnings $339 $65 $38 $30 $83 $52 $32 $(79) $560
===================================================================================================================================
Inter-segment revenue $2 $2 $35 48 $3 $(50)
===================================================================================================================================
AVERAGE ASSETS $40,321 $16,618 $5,291 $2,430 $3,420 $571 $1,742 $854 $71,247
===================================================================================================================================
2000
INCOME STATEMENT
Net interest income (a) $703 $272 $59 $49 $68 $2 $(22) $(21) $1,110
Noninterest income 288 148 44 8 330 221 320 97 1,456
-----------------------------------------------------------------------------------------------------------------------------------
Total revenue 991 420 103 57 398 223 298 76 2,566
Provision for credit losses 22 38 2 3 1 66
Depreciation and amortization 42 7 10 1 7 10 26 26 129
Other noninterest expense 492 189 57 13 251 144 246 51 1,443
-----------------------------------------------------------------------------------------------------------------------------------
Pretax earnings 435 186 36 41 137 69 26 (2) 928
Income taxes 154 66 3 15 51 29 10 (1) 327
-----------------------------------------------------------------------------------------------------------------------------------
Earnings $281 $120 $33 $26 $86 $40 $16 $(1) $601
===================================================================================================================================
Inter-segment revenue $2 $2 $43 $6 $(53)
===================================================================================================================================
AVERAGE ASSETS $38,182 $16,110 $5,604 $2,173 $3,577 $434 $1,587 $833 $68,500
===================================================================================================================================
(a) Taxable-equivalent basis
39
Statistical Information
THE PNC FINANCIAL SERVICES GROUP, INC.
CONSOLIDATED AVERAGE BALANCE SHEET AND NET INTEREST ANALYSIS
Six months ended June 30
---------------------------------------------------------------------
2001 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 $1,864 $68 7.19% $2,948 $116 7.76%
Securities
U.S. Treasury and government agencies and corporations 3,813 111 5.82 1,792 52 5.76
Other debt 5,966 185 6.22 3,660 120 6.52
Other 114 4 6.39 616 21 6.97
------------------------------------------------------------------------------------ ------------------------
Total securities 9,893 300 6.07 6,068 193 6.35
Loans, net of unearned income
Commercial 20,575 797 7.70 21,917 911 8.23
Commercial real estate 2,576 103 7.92 2,690 118 8.67
Consumer 9,090 382 8.49 9,228 389 8.46
Residential mortgage 10,554 384 7.27 12,577 446 7.08
Lease financing 4,024 145 7.19 3,004 109 7.26
Other 490 18 7.36 682 28 8.28
------------------------------------------------------------------------------------ ------------------------
Total loans, net of unearned income 47,309 1,829 7.72 50,098 2,001 7.95
Other 1,592 63 8.03 1,194 41 6.99
------------------------------------------------------------------------------------ ------------------------
Total interest-earning assets/interest income 60,658 2,260 7.44 60,308 2,351 7.76
Noninterest-earning assets
Investment in discontinued operations 103 430
Allowance for credit losses (683) (686)
Cash and due from banks 2,942 2,571
Other assets 8,330 6,307
------------------------------------------------------------------------- -----------
Total assets $71,350 $68,930
------------------------------------------------------------------------- -----------
LIABILITIES, CAPITAL SECURITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities
Interest-bearing deposits
Demand and money market $20,707 296 2.88 $18,125 297 3.30
Savings 1,928 11 1.12 2,123 18 1.69
Retail certificates of deposit 13,190 374 5.73 14,497 386 5.35
Other time 551 18 6.58 639 20 6.40
Deposits in foreign offices 1,248 32 5.05 1,486 45 5.94
------------------------------------------------------------------------------------ ------------------------
Total interest-bearing deposits 37,624 731 3.92 36,870 766 4.17
Borrowed funds
Federal funds purchased 2,775 72 5.14 2,221 67 5.96
Repurchase agreements 1,116 23 4.04 682 19 5.49
Bank notes and senior debt 5,540 158 5.67 6,869 217 6.25
Federal Home Loan Bank borrowings 2,001 52 5.20 1,922 57 5.89
Subordinated debt 2,386 86 7.22 2,398 89 7.44
Other borrowed funds 383 10 5.29 785 26 6.43
------------------------------------------------------------------------------------ ------------------------
Total borrowed funds 14,201 401 5.63 14,877 475 6.33
------------------------------------------------------------------------------------ ------------------------
Total interest-bearing liabilities/interest expense 51,825 1,132 4.38 51,747 1,241 4.79
Noninterest-bearing liabilities and shareholders' equity
Demand and other noninterest-bearing deposits 8,210 8,028
Accrued expenses and other liabilities 3,803 2,341
Mandatorily redeemable capital securities of subsidiary
trusts 848 848
Shareholders' equity 6,664 5,966
------------------------------------------------------------------------- -----------
Total liabilities, capital securities and shareholders' $71,350 $68,930
equity
-----------------------------------------------------------------------------------------------------------------------------------
Interest rate spread 3.06 2.97
Impact of noninterest-bearing sources .64 .68
-----------------------------------------------------------------------------------------------------------------------------------
Net interest income/margin $1,128 3.70% $1,110 3.65%
-----------------------------------------------------------------------------------------------------------------------------------
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 are based on amortized historical
cost (excluding SFAS No. 115 adjustments to fair value).
Loan fees for the six months ended June 30, 2001 and June 30, 2000, were $59
million and $60 million, respectively. For each of the three months ended June
30, 2001, March 31, 2001 and June 30, 2000 loan fees were $30 million, $29
million and $31 million, respectively.
40
-----------------------------------------------------------------------------------------------------------------------------------
Second Quarter 2001 First Quarter 2001 Second Quarter 2000
-----------------------------------------------------------------------------------------------------------------------------------
Average Average Average
Average Yields/ Average Yields/ Average Yields/
Balances Interest Rates Balances Interest Rates Balances Interest Rates
-----------------------------------------------------------------------------------------------------------------------------------
$1,723 $31 7.05% $2,005 $37 7.31% $2,577 $52 8.11%
3,696 54 5.79 3,933 57 5.84 1,648 25 6.11
7,910 122 6.18 4,001 63 6.32 3,742 62 6.58
101 2 7.33 127 2 5.63 619 11 7.02
-------------------------- ------------------------ ---------------------------
11,707 178 6.07 8,061 122 6.08 6,009 98 6.50
20,271 375 7.31 20,882 422 8.09 22,042 464 8.33
2,572 48 7.40 2,580 55 8.44 2,682 59 8.74
9,096 188 8.29 9,085 194 8.70 9,209 198 8.63
8,459 152 7.18 12,673 232 7.32 12,571 223 7.09
4,149 74 7.08 3,897 71 7.32 3,049 55 7.19
459 7 6.66 520 11 7.98 676 14 8.50
-------------------------- ------------------------ ---------------------------
45,006 844 7.46 49,637 985 7.96 50,229 1,013 8.03
1,562 30 7.94 1,831 33 7.20 1,276 22 7.01
-------------------------- ------------------------ ---------------------------
59,998 1,083 7.19 61,534 1,177 7.67 60,091 1,185 7.86
207 448
(684) (683) (689)
2,907 2,977 2,837
8,494 7,957 6,418
----------- ----------- ------------
$70,715 $71,992 $69,105
----------- ----------- ------------
$20,944 134 2.57 $20,468 162 3.20 $18,549 159 3.46
1,936 5 .94 1,919 6 1.31 2,107 9 1.75
12,662 175 5.54 13,724 199 5.90 14,403 195 5.45
537 8 6.48 565 10 6.67 641 10 6.44
1,096 12 4.17 1,402 20 5.75 1,483 24 6.25
-------------------------- ------------------------ ---------------------------
37,175 334 3.60 38,078 397 4.22 37,183 397 4.30
2,604 28 4.31 2,948 44 5.89 2,162 34 6.28
958 9 3.64 1,145 14 4.83 769 11 5.56
5,189 67 5.09 5,896 91 6.19 6,762 110 6.40
2,550 31 4.78 1,576 21 5.46 1,514 24 6.35
2,364 42 7.15 2,408 44 7.09 2,420 45 7.45
365 3 3.32 402 7 7.30 795 14 6.89
-------------------------- ------------------------ ---------------------------
14,030 180 5.09 14,375 221 6.15 14,422 238 6.54
-------------------------- ------------------------ ---------------------------
51,205 514 4.01 52,453 618 4.75 51,605 635 4.92
8,228 8,190 8,357
3,777 3,830 2,290
848 848 848
6,657 6,671 6,005
----------- ----------- ------------
$70,715 $71,992 $69,105
-----------------------------------------------------------------------------------------------------------------------------------
3.18 2.92 2.94
.59 .70 .69
-----------------------------------------------------------------------------------------------------------------------------------
$569 3.77% $559 3.62% $550 3.63%
-----------------------------------------------------------------------------------------------------------------------------------
41
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 June 30, 2001.
Commission File Number 1-9718
THE PNC FINANCIAL SERVICES GROUP, INC.
Incorporated in the Commonwealth of Pennsylvania
IRS Employer Identification No. 25-1435979
Address: One PNC Plaza
249 Fifth Avenue
Pittsburgh, Pennsylvania 15222-2707
Telephone: (412) 762-2000
By filing this amendment ("Amendment No. 1"), the undersigned registrant hereby
amends its Quarterly Report on Form 10-Q for the quarter ended June 30, 2001
("June 2001 Form 10-Q") primarily for the items described in "Restatements" in
the Overview section of the Financial Review and in the "Notes to Consolidated
Financial Statements" of this Amendment No. 1.
By this Amendment No. 1, the undersigned registrant is amending and restating
its entire June 2001 Form 10-Q.
As of July 31, 2001 The PNC Financial Services Group, Inc. had 287,972,782
shares of common stock ($5 par value) outstanding.
The PNC Financial Services Group, Inc. (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months and (2) has been subject to such filing requirements for the
past 90 days.
The following sections of the Financial Review set forth in the cross-reference
index are incorporated in the Quarterly Report on Form 10-Q/A, Amendment No. 1.
Cross-reference Page(s)
-----------------------------------------------------------------
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Statement of Income for the
three months and six months ended June
30, 2001 and 2000 27
Consolidated Balance Sheet as of June
30, 2001 and December 31, 2000 28
Consolidated Statement of Cash Flows for
the six months ended June 30, 2001 and
2000 29
Notes to Consolidated Financial
Statements 30 - 39
Consolidated Average Balance Sheet and
Net Interest Analysis 40 - 41
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of
Operations 3 - 26
Item 3 Quantitative and Qualitative
Disclosures About Market Risk 17 - 24
-----------------------------------------------------------------
PART II OTHER FINANCIAL INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The following exhibit index lists Exhibits filed with this Quarterly Report on
Form 10-Q/A, Amendment No. 1:
*10.5 The Corporation's 1997 Long-Term Incentive Award Plan, as amended
*10.6 The Corporation's 1996 Executive Incentive Award Plan, as amended
*12.1 Computation of Ratio of Earnings to Fixed Charges
*12.2 Computation of Ratio of Earnings to Fixed Charges and Preferred Stock
Dividends
================================================================================
* Previously filed with the Corporation's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2001, and incorporated herein by reference.
Copies of these Exhibits may be obtained electronically at the Securities and
Exchange Commission's home page at www.sec.gov. Copies may also be obtained
without charge by writing to Thomas F. Garbe, Director of Financial Accounting,
at corporate headquarters, by calling (412) 762-1553 or via e-mail at
financial.reporting@pnc.com.
Since June 30, 2001, the Corporation filed a Current Report on Form 8-K dated as
of July 25, 2001, reporting the public offering of $450,000,000 of Floating Rate
Senior Notes due 2003, and $700,000,000 of 5.75% Senior Notes due 2006, filed
pursuant to Item 5.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Amendment No. 1 to be signed on March 29, 2002,
on its behalf by the undersigned thereunto duly authorized.
THE PNC FINANCIAL SERVICES GROUP, INC.
By: /s/ Robert L. Haunschild
-------------------------
Robert L. Haunschild
Chief Financial Officer
42
CORPORATE INFORMATION
THE PNC FINANCIAL SERVICES GROUP, INC.
CORPORATE HEADQUARTERS
The PNC Financial Services Group, Inc.
One PNC Plaza
249 Fifth Avenue
Pittsburgh, Pennsylvania 15222-2707
(412) 762-2000
STOCK LISTING
The PNC Financial Services Group, Inc. common stock is listed on the New York
Stock Exchange under the symbol PNC.
INTERNET INFORMATION
The PNC Financial Services Group, Inc.'s financial reports and information about
its products and services are available on the Internet at www.pnc.com.
FINANCIAL INFORMATION
The Annual Report on Form 10-K is filed with the Securities and Exchange
Commission ("SEC"). Copies of this document and other filings, including
Exhibits thereto, may be obtained electronically at the SEC's home page at
www.sec.gov. Copies may also be obtained without charge by writing to Thomas F.
Garbe, Director of Financial Accounting, at corporate headquarters, by calling
(412) 762-1553 or via e-mail at financial.reporting@pnc.com.
INQUIRIES
For financial services call 1-888-PNC-2265. Individual shareholders should
contact Shareholder Relations at (800) 982-7652.
Analysts and institutional investors should contact William H. Callihan, Vice
President, Investor Relations, at (412) 762-8257 or via e-mail at
investor.relations@pnc.com.
News media representatives and others seeking general information should contact
R. Jeep Bryant, Director of Corporate Communications, at (412) 762-8221 or via
e-mail at corporate.communications@pnc.com.
COMMON STOCK PRICES/DIVIDENDS DECLARED
The table below sets forth by quarter the range of high and low sale and
quarter-end closing prices for The PNC Financial Services Group, Inc. common
stock and the cash dividends declared per common share.
Cash
Dividends
High Low Close Declared
=====================================================================
2001 QUARTER
---------------------------------------------------------------------
First $75.813 $56.000 $67.750 $.48
Second 71.110 62.400 65.790 .48
---------------------------------------------------------------------
Total $.96
=====================================================================
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
43