THE PNC FINANCIAL SERVICES GROUP, INC.
Quarterly Report on Form 10-Q/A, Amendment No. 1
For the quarterly period ended September 30, 2001
Page 1 represents a portion of the third quarter 2001 Financial Review which is
not required by the Form 10-Q/A report and is not "filed" as part of the Form
10-Q/A.
The Quarterly Report on Form 10-Q/A 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 September 30, 2001 ("September 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
September 2001 Form 10-Q.
Three months ended Nine months ended
September 30 September 30
------------------------------ ----------------------------
Dollars in millions, except per share data 2001 2000 2001 2000
------------------------------------------------------------------------------------------------------------------------
FINANCIAL PERFORMANCE
Revenue
Net interest income (taxable-equivalent basis) $568 $534 $1,696 $1,644
Noninterest income 707 700 2,128 2,156
------------------------------ ----------------------------
Total revenue 1,275 1,234 3,824 3,800
Income from continuing operations 247 299 807 900
Discontinued operations 23 5 45
------------------------------ ----------------------------
Income before cumulative effect of accounting change 247 322 812 945
Cumulative effect of accounting change (5)
------------------------------ ----------------------------
Net income $247 $322 $807 $945
============================== ============================
Per common share
DILUTED EARNINGS
Continuing operations $.84 $1.01 $2.73 $3.03
Discontinued operations .08 .02 .15
------------------------------ ----------------------------
Before cumulative effect of accounting change .84 1.09 2.75 3.18
Cumulative effect of accounting change (.02)
------------------------------ ----------------------------
Net income $.84 $1.09 $2.73 $3.18
============================== ============================
Cash dividends declared $.48 $.45 $1.44 $1.35
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SELECTED RATIOS
FROM CONTINUING OPERATIONS
Return on
Average common shareholders' equity 14.83 % 19.99 % 16.49 % 20.67 %
Average assets 1.42 1.72 1.53 1.74
Net interest margin 3.89 3.54 3.76 3.63
Noninterest income to total revenue 55.45 56.73 55.65 56.74
Efficiency (a) 58.10 56.79 57.89 57.32
FROM NET INCOME
Return on
Average common shareholders' equity 14.83 % 21.54 % 16.49 % 21.72 %
Average assets 1.42 1.67 1.51 1.67
Net interest margin 3.89 3.27 3.73 3.38
Noninterest income to total revenue 55.45 59.23 55.74 58.82
Efficiency (b) 58.10 54.50 57.80 55.87
------------------------------------------------------------------------------------------------------------------------
(a) Excludes amortization and distributions on capital securities.
(b) Excludes amortization, distributions on capital securities and residential
mortgage banking risk management activities.
1
September December September
30 31 30
Dollars in millions, except per share data 2001 2000 2000
---------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
Assets $71,812 $69,844 $69,884
Earning assets 57,546 59,373 60,142
Loans, net of unearned income 42,140 50,601 49,791
Securities 11,051 5,902 6,490
Loans held for sale 2,242 1,655 2,127
Deposits 44,918 47,664 47,494
Transaction deposits 30,696 28,771 27,848
Borrowed funds 13,046 11,718 12,299
Shareholders' equity 6,773 6,656 6,383
Common shareholders' equity 6,557 6,344 6,071
Book value per common share 23.09 21.88 21.01
Loans to deposits 94 % 106 % 105 %
CAPITAL RATIOS
Leverage 8.1 % 8.0 % 6.9 %
Common shareholders' equity to total assets 9.13 9.08 8.69
ASSET QUALITY RATIOS
Nonperforming assets to total loans,
loans held for sale and foreclosed assets 1.18 % .71 % .68 %
Allowance for credit losses to total loans 1.71 1.33 1.36
Allowance for credit losses to nonaccrual loans 199.45 208.98 219.16
Net charge-offs to average loans (For the three months .59 .32 .24
ended)
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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. Certain prior-period amounts have been reclassified to conform
with the current year presentation. 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.
PNC continues to aggressively pursue strategies to create a more diverse and
valuable business mix designed to create shareholder value over time. PNC's
focus is on increasing the contribution from more highly-valued businesses such
as asset management and processing while improving the risk/return
characteristics of traditional banking businesses. Earnings from asset
management and processing businesses represented 27% of total business earnings
for the first nine months of 2001 and consolidated noninterest income was 56% of
total revenue for the first nine months of 2001. At the same time, PNC sold its
residential mortgage banking business and has been downsizing certain
institutional lending portfolios resulting in an improvement of the loan to
deposit ratio to 94% at September 30, 2001. Over the past three years, PNC has
reduced loans by $15 billion and unfunded commitments by $32 billion. PNC
continues to evaluate opportunities to reduce lending exposure and further
improve the risk/return characteristics of its lending businesses. All of these
actions have strengthened PNC's position in the most difficult operating
environment since the early 1990's.
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
nine 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 nine months ended September 30, 2001.
In June and September 2001, the Corporation entered into certain transactions
with subsidiaries of a third party financial institution (American International
Group, Inc.) involving the sale of loans and the receipt of preferred interests
in the subsidiaries. At the time of the transactions, the loans were removed
from PNC's balance sheet and the preferred interests in the entities 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
subsidiaries 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. This
restatement reduced income from continuing operations and net income for the
three and nine months ended September 30, 2001 by $51 million or $.18 per
diluted share. Amounts appearing in this Amendment No. 1 reflect the
consolidation of these entities.
Loans in these entities 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 entities 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. Subsequent
charges to adjust the carrying value of the loans held for sale also reflected
as valuation adjustments.
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 nine months ended September 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 September 30, 2001. See "Restatements" in the Notes to Consolidated Financial
Statements for additional information.
3
SUMMARY FINANCIAL RESULTS
Consolidated net income for the first nine months of 2001 was $807 million or
$2.73 per diluted share. Excluding the effect of adopting the new accounting
standard for financial derivatives, net income was $812 million or $2.75 per
diluted share compared with $945 million or $3.18 per diluted share for the
first nine months of 2000. These results include the negative impact of a $59
million or $.20 per diluted share net loss from venture capital activities in
2001. Excluding this loss and the effect of the accounting change, results for
the first nine months of 2001 were $871 million or $2.95 per diluted share.
Return on average common shareholders' equity was 16.50% and return on average
assets was 1.51% for the first nine months of 2001 compared with 21.72% and
1.67%, respectively, for the first nine 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.
Taxable-equivalent net interest income of $1.696 billion for the first nine
months of 2001 increased 3% compared with the first nine months of 2000. The
increase was 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 net interest margin widened 13
basis points to 3.76% for the first nine months of 2001 compared with 3.63% for
the first nine months of 2000. The increase was primarily due to the impact of
the lower rate environment and the benefit of growth in transaction deposits and
downsizing of higher-cost, less valuable retail certificates and wholesale
deposits.
The provision for credit losses was $235 million for the first nine months of
2001 compared with $96 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. A $45 million addition to unallocated
reserves, given the deterioration in overall economic conditions, also
contributed to the increase.
Noninterest income was $2.128 billion for the first nine months of 2001 compared
with $2.156 billion for the same period in 2000. Noninterest income for the
first nine months of 2001 included $134 million of net securities gains, $82
million of equity management losses related to venture capital activities and
charges of $86 million for valuation adjustments on loans held for sale owned by
the subsidiaries of a third party financial institution. See "Restatements" in
the Notes to Consolidated Financial Statements for additional information.
Noninterest expense was $2.351 billion for the first nine months of 2001
compared with $2.319 billion for the first nine months of 2000 and the
efficiency ratio remained essentially flat at 58% and 57% for the nine months
ended 2001 and 2000, respectively.
Total assets were $71.8 billion at September 30, 2001 compared with $69.8
billion at December 31, 2000. Average interest-earning assets were $59.7 billion
for the first nine months of 2001 compared with $60.1 billion for the first nine
months of 2000. A decline in loans and loans held for sale was partially offset
by an increase in securities that are used for balance sheet and interest rate
risk management activities.
Shareholders' equity totaled $6.8 billion at September 30, 2001 and the
regulatory capital ratios were 8.1% for leverage, 8.4% for tier I risk-based and
12.0% for total risk-based capital. During the first nine months of 2001, PNC
repurchased 8.4 million shares of common stock.
Nonperforming assets were $526 million at September 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 was 1.18% at September 30, 2001
compared with .71% at December 31, 2000.
The allowance for credit losses was $720 million and represented 1.71% of total
loans and 199% of nonaccrual loans at September 30, 2001. The comparable amounts
were $675 million, 1.33% and 209%, respectively, at December 31, 2000. Net
charge-offs were $190 million or .55% of average loans for the first nine months
of 2001 compared with $95 million or .25% for the same period in 2000. The
increase was primarily related to commercial loans in 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 were designated for downsizing during 1999, equity management
activities, minority interests, residual asset and liability management
activities, eliminations, unallocated reserves 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
(taxable-equivalent Return on
Earnings basis) Assigned Capital Average Assets
------------------- ---------------------- ---------------------- ----------------------
Nine months ended September 30 - dollars 2001 2000 2001 2000 2001 2000 2001 2000
in millions
----------------------------------------------------------------------------------------------------------------------------------
PNC Bank
Regional Community Banking $525 $430 $1,685 $1,497 26% 22% $40,188 $38,564
Corporate Banking 47 190 484 633 5 21 16,392 16,318
---------------------------------------------------------------------------------- ----------------------
Total PNC Bank 572 620 2,169 2,130 19 22 56,580 54,882
---------------------------------------------------------------------------------- ----------------------
Secured Finance
PNC Real Estate Finance 53 50 161 155 18 17 5,253 5,583
PNC Business Credit 39 37 98 86 32 33 2,431 2,230
---------------------------------------------------------------------------------- ----------------------
Total Secured Finance 92 87 259 241 22 22 7,684 7,813
---------------------------------------------------------------------------------- ----------------------
Total Banking 664 707 2,428 2,371 20 22 64,264 62,695
---------------------------------------------------------------------------------- ----------------------
Asset Management and Processing
PNC Advisors 117 127 562 589 29 31 3,399 3,541
BlackRock 79 63 404 348 25 27 644 492
PFPC 49 31 556 505 31 20 1,759 1,578
---------------------------------------------------------------------------------- ----------------------
Total Asset Management and
Processing 245 221 1,522 1,442 28 28 5,802 5,611
---------------------------------------------------------------------------------- ----------------------
Total business results 909 928 3,950 3,813 21 23 70,066 68,306
Other (102) (28) (126) (13) 416 221
---------------------------------------------------------------------------------- ----------------------
Results from continuing operations 807 900 3,824 3,800 17 21 70,482 68,527
Discontinued operations 5 45 68 459
Cumulative effect of accounting change (5)
---------------------------------------------------------------------------------- ----------------------
Total Consolidated $807 $945 $3,824 $3,800 17 22 $70,550 $68,986
=================================================================================================================================
5
REGIONAL COMMUNITY BANKING
Nine months ended September 30 - dollars in
millions 2001 2000
----------------------------------------------------------------
INCOME STATEMENT
Net interest income $1,093 $1,058
Other noninterest income 507 443
Net securities gains (losses) 85 (4)
----------------------------------------------------------------
Total revenue 1,685 1,497
Provision for credit losses 35 33
Noninterest expense 827 796
----------------------------------------------------------------
Pretax earnings 823 668
Income taxes 298 238
----------------------------------------------------------------
Earnings $525 $430
----------------------------------------------------------------
AVERAGE BALANCE SHEET
Loans
Consumer
Home equity $6,219 $5,360
Indirect automobile 853 1,281
Other consumer 870 873
----------------------------------------------------------------
Total consumer 7,942 7,514
Commercial 3,588 3,676
Residential mortgage 8,691 11,538
Vehicle leasing 1,872 1,255
Other 135 142
----------------------------------------------------------------
Total loans 22,228 24,125
Securities 9,561 5,547
Loans held for sale 1,270 1,316
Assigned assets and other assets 7,129 7,576
----------------------------------------------------------------
Total assets $40,188 $38,564
----------------------------------------------------------------
Deposits
Noninterest-bearing demand $4,515 $4,570
Interest-bearing demand 5,602 5,408
Money market 12,020 9,994
----------------------------------------------------------------
Total transaction deposits 22,137 19,972
Savings 1,870 2,030
Certificates 12,292 13,641
----------------------------------------------------------------
Total deposits 36,299 35,643
Other liabilities 1,177 319
Assigned capital 2,712 2,602
----------------------------------------------------------------
Total funds $40,188 $38,564
----------------------------------------------------------------
PERFORMANCE RATIOS
Return on assigned capital 26% 22%
Noninterest income to total revenue 35 29
Efficiency 47 51
================================================================
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 58% of total business earnings for the
first nine months of 2001 compared with 46% for the first nine months of 2000.
Earnings increased $95 million or 22% to $525 million for the first nine months
of 2001 primarily due to business growth and net securities gains. Excluding net
securities gains from the first nine months of 2001 and net securities losses
from the first nine months of 2000, earnings increased approximately 10%
primarily driven by higher noninterest income, deposit growth and improved
efficiency.
Total revenue increased 13% to $1.685 billion for the first nine months of 2001.
Excluding net securities gains and losses from both periods, revenue increased
7% 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 nine months of 2001 was $35
million compared with $33 million for the same period in 2000.
Total loans decreased in the comparison as growth in home equity loans and
vehicle leases was more than offset by the reduction of residential mortgage
loans due to securitizations and the continued downsizing of the indirect
automobile lending portfolio. The decrease in residential mortgage loans was
offset by an increase in securities.
Total deposits grew 2% 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
Nine months ended September 30 - dollars in 2001 2000
millions
----------------------------------------------------------------
INCOME STATEMENT
Credit-related revenue $211 $304
Noncredit revenue 273 329
----------------------------------------------------------------
Total revenue 484 633
Provision for credit losses 129 50
Noninterest expense 288 291
----------------------------------------------------------------
Pretax earnings 67 292
Income taxes 20 102
----------------------------------------------------------------
Earnings $47 $190
----------------------------------------------------------------
AVERAGE BALANCE SHEET
Loans
Middle market $5,834 $6,140
Large corporate 3,127 3,223
Energy, metals and mining 1,222 1,341
Communications 1,063 1,449
Leasing 2,264 1,768
Other 329 362
----------------------------------------------------------------
Total loans 13,839 14,283
Other assets 2,553 2,035
----------------------------------------------------------------
Total assets $16,392 $16,318
----------------------------------------------------------------
Deposits $4,764 $4,571
Assigned funds and other liabilities 10,399 10,523
Assigned capital 1,229 1,224
----------------------------------------------------------------
Total funds $16,392 $16,318
----------------------------------------------------------------
PERFORMANCE RATIOS
Return on assigned capital 5% 21%
Noncredit revenue to total revenue 56 52
Efficiency 59 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, and on improving the risk/return characteristics
of its lending business. Approximately 35% of Corporate Banking's 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
customer.
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 aggressively evaluate opportunities to reduce lending exposure and
improve the risk/return characteristics of this business. This strategy could
lead to significant changes and write-downs in connection with the execution of
further downsizing actions.
Corporate Banking contributed 5% of total business earnings for the first nine
months of 2001 compared with 21% for the first nine months of 2000. Earnings
declined to $47 million for the first nine months of 2001 compared with $190
million for the first nine months of 2000 primarily due to a higher provision
for credit losses in 2001 related to portfolios that PNC is downsizing and lower
noncredit revenue.
Total revenue of $484 million for the first nine months of 2001 decreased $149
million compared with the same period in 2000. Credit related revenue for the
nine months ended September 30, 2001 included a charge of $82 million related to
valuation adjustments on loans held for sale owned by the subsidiaries of a
third party financial institution. See "Restatements" in the Notes to
Consolidated Financial Statements for additional information. Average loans
decreased in the period-to-period comparison primarily due to reductions in the
large corporate, 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 $56 million
compared with the first nine 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 $129 million for the first nine months of
2001 compared with $50 million for the first nine months of 2000. The higher
provision was primarily related to portfolios that are being downsized. A
sustained weakness 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 $251 million for the first nine months of
2001 compared with $253 million for the first nine 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
$89 million for the first nine months of 2001, a $10 million decrease compared
with the first nine months of 2000 due to weak equity market conditions as well
as the impact of downsizing certain lending portfolios.
7
PNC REAL ESTATE FINANCE
Nine months ended September 30 - dollars in 2001 2000
millions
----------------------------------------------------------------
INCOME STATEMENT
Net interest income $88 $87
Noninterest income
Commercial mortgage banking 45 45
Other 28 23
----------------------------------------------------------------
Total noninterest income 73 68
----------------------------------------------------------------
Total revenue 161 155
Provision for credit losses 3
Noninterest expense 117 102
----------------------------------------------------------------
Pretax earnings 41 53
Income tax (benefit) expense (12) 3
----------------------------------------------------------------
Earnings $53 $50
----------------------------------------------------------------
AVERAGE BALANCE SHEET
Loans
Commercial - real estate related $1,753 $2,021
Commercial real estate 2,321 2,427
----------------------------------------------------------------
Total loans 4,074 4,448
Commercial mortgages held for sale 220 180
Other assets 959 955
----------------------------------------------------------------
Total assets $5,253 $5,583
----------------------------------------------------------------
Deposits $466 $260
Assigned funds and other liabilities 4,392 4,940
Assigned capital 395 383
----------------------------------------------------------------
Total funds $5,253 $5,583
----------------------------------------------------------------
PERFORMANCE RATIOS
Return on assigned capital 18% 17%
Noninterest income to total revenue 45 44
Efficiency 58 53
================================================================
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 provides processing services through
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, ("Columbia") a national syndicator of affordable housing
equity.
On October 17, 2001, PNC announced that it completed the acquisition of certain
lending and servicing-related assets from TRI Acceptance Corporation. The
acquisition will expand PNC Real Estate Finance's reach in multi-family finance,
combining permanent loan capacity with PNC's traditional interim lending
activities and Columbia's tax credit syndication capabilities.
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 nine months of 2001, 45% of
total revenue was generated by fee-based activities. Management continues to
aggressively evaluate opportunities to reduce credit exposure and improve the
risk/return characteristics of this business.
PNC Real Estate Finance contributed 6% of total business earnings for the first
nine months of 2001 compared with 5% for the first nine months of 2000. Earnings
increased $3 million or 6% in the period-to-period comparison primarily due to
growth in processing services. Average loans decreased 8% in the
period-to-period comparison reflecting management's ongoing strategy to reduce
balance sheet leverage.
Total revenue was $161 million for the first nine months of 2001 compared with
$155 million for the first nine months of 2000. The increase of $6 million or 4%
was primarily due to higher commercial mortgage loan servicing fees, reflecting
a larger servicing portfolio. The increase in servicing fees was offset by
higher amortization of servicing intangibles that resulted from the larger
servicing portfolio as well as lower commercial mortgage-backed securitization
gains. The commercial mortgage servicing portfolio increased 32% in the
comparison to $66 billion at September 30, 2001.
COMMERCIAL MORTGAGE SERVICING PORTFOLIO
In billions 2001 2000
----------------------------------------------------------------
January 1 $51 $45
Acquisitions/additions 23 10
Repayments/transfers (8) (5)
----------------------------------------------------------------
September 30 $66 $50
================================================================
The provision for credit losses was $3 million for the first nine months of 2001
and was primarily related to the sale of one nonperforming asset in the third
quarter of 2001.
Noninterest expense was $117 million for the first nine months of 2001 compared
with $102 million in the same period last year. The increase was 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
Nine months ended September 30 - dollars in 2001 2000
millions
----------------------------------------------------------------
INCOME STATEMENT
Net interest income $77 $74
Noninterest income 21 12
----------------------------------------------------------------
Total revenue 98 86
Provision for credit losses 13 7
Noninterest expense 23 22
----------------------------------------------------------------
Pretax earnings 62 57
Income taxes 23 20
----------------------------------------------------------------
Earnings $39 $37
----------------------------------------------------------------
AVERAGE BALANCE SHEET
Loans $2,304 $2,158
Other assets 127 72
----------------------------------------------------------------
Total assets $2,431 $2,230
----------------------------------------------------------------
Deposits $81 $62
Assigned funds and other liabilities 2,189 2,020
Assigned capital 161 148
----------------------------------------------------------------
Total funds $2,431 $2,230
----------------------------------------------------------------
PERFORMANCE RATIOS
Return on assigned capital 32% 33%
Noninterest income to total revenue 21 14
Efficiency 22 24
================================================================
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 portfolio
acquisitions, expansion of existing offices as well as the addition of new
marketing locations. The average loan portfolio grew 7% to $2.3 billion for the
first nine months of 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 4% of total business earnings for the first nine
months of 2001 and 2000. Earnings increased $2 million or 5% in the
period-to-period comparison to $39 million for the first nine months of 2001 as
higher revenue was partially offset by an increase in the provision for credit
losses.
Revenue was $98 million for the first nine months of 2001, a $12 million or 14%
increase compared with the first nine months of 2000 primarily due to higher
noninterest income. The increase in noninterest income primarily resulted from
gains on equity interests received as compensation in conjunction with lending
relationships. Noninterest income for the nine months ended September 30, 2001
also included a charge of $4 million related to valuation adjustments on loans
held for sale owned by subsidiaries of a third party financial institution. See
"Restatements" in the Notes to Consolidated Financial Statements for additional
information.
The provision for credit losses increased $6 million to $13 million for the
first nine 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 $23 million and the efficiency ratio improved to 22% for
the first nine months of 2001 compared with $22 million and 24%, respectively,
for the first nine 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
Nine months ended September 30 - dollars in 2001 2000
millions
----------------------------------------------------------------
INCOME STATEMENT
Net interest income $99 $102
Noninterest income
Investment management and trust 302 307
Brokerage 100 132
Other 61 48
----------------------------------------------------------------
Total noninterest income 463 487
----------------------------------------------------------------
Total revenue 562 589
Provision for credit losses 1 3
Noninterest expense 376 385
----------------------------------------------------------------
Pretax earnings 185 201
Income taxes 68 74
----------------------------------------------------------------
Earnings $117 $127
----------------------------------------------------------------
AVERAGE BALANCE SHEET
Loans
Commercial $543 $623
Consumer 1,098 960
Residential mortgage 884 969
Other 395 547
----------------------------------------------------------------
Total loans 2,920 3,099
Other assets 479 442
----------------------------------------------------------------
Total assets $3,399 $3,541
----------------------------------------------------------------
Deposits $2,078 $2,048
Assigned funds and other liabilities 774 943
Assigned capital 547 550
----------------------------------------------------------------
Total funds $3,399 $3,541
----------------------------------------------------------------
PERFORMANCE RATIOS
Return on assigned capital 29% 31%
Noninterest income to total revenue 82 83
Efficiency 66 65
================================================================
PNC Advisors provides a full range of tailored investment products and services
to affluent individuals and families including full-service brokerage through
J.J.B. Hilliard, W.L. Lyons, Inc. ("Hilliard Lyons") and investment advisory
services to the ultra-affluent through Hawthorn. PNC Advisors also serves as
investment manager and trustee for employee benefit plans and charitable and
endowment assets. PNC Advisors is focused on selectively expanding Hilliard
Lyons and Hawthorn, increasing market share in PNC's primary geographic region
and leveraging its expansive distribution platform.
PNC Advisors contributed 13% of total business earnings for the first nine
months of 2001 compared with 14% for the first nine months of 2000. Earnings of
$117 million for the first nine months of 2001 decreased 8% compared with the
same period last year due to the impact of weak equity markets.
Revenue decreased $27 million in the period-to-period comparison primarily 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 $9 million in the period-to-period comparison
primarily due to lower production-based compensation and expense management
initiatives.
ASSETS UNDER MANAGEMENT (a)
September 30 - in billions 2001 2000
----------------------------------------------------------------
Personal investment management and trust $46 $51
Institutional trust 13 15
----------------------------------------------------------------
Total $59 $66
================================================================
(a) Assets under management do not include brokerage assets administered.
Assets under management decreased $7 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 $26 billion at September 30,
2001, compared with $28 billion at September 30, 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
Nine months ended September 30 - dollars in 2001 2000
millions
----------------------------------------------------------------
INCOME STATEMENT
Investment advisory and administrative fees $376 $330
Other income 28 18
----------------------------------------------------------------
Total revenue 404 348
Operating expense 222 179
Fund administration
and servicing costs - affiliates 47 58
Amortization 8 8
----------------------------------------------------------------
Total expense 277 245
----------------------------------------------------------------
Operating income 127 103
Nonoperating income 7 4
----------------------------------------------------------------
Pretax earnings 134 107
Income taxes 55 44
----------------------------------------------------------------
Earnings $79 $63
----------------------------------------------------------------
PERIOD-END BALANCE SHEET
Intangible assets $184 $195
Other assets 460 297
----------------------------------------------------------------
Total assets $644 $492
----------------------------------------------------------------
Other liabilities $186 $148
Stockholders' equity 458 344
----------------------------------------------------------------
Total liabilities and stockholders' $644 $492
equity
----------------------------------------------------------------
PERFORMANCE DATA
Return on equity 25% 27%
Operating margin (a) 36 36
Diluted earnings per share $1.22 $.97
=================================================================
(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 $226 billion of assets under management at September 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 9% of total business earnings for the first nine months of
2001 compared with 7% for the first nine months of 2000. Earnings increased 26%
in the period-to-period comparison primarily due to an 18% increase in assets
under management. New client mandates and additional funding from existing
clients was $31 billion or 89% of the increase in assets under management.
Total revenue for the first nine months of 2001 increased $56 million or 16%
compared with the first nine 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
September 30 - in billions 2001 2000
----------------------------------------------------------------
Separate accounts
Fixed income $119 $97
Liquidity 7 5
Liquidity - securities lending 8 11
Equity 8 7
Alternative investment products 5 3
----------------------------------------------------------------
Total separate accounts 147 123
----------------------------------------------------------------
Mutual funds (a)
Fixed income 14 14
Liquidity 56 38
Equity 9 16
----------------------------------------------------------------
Total mutual funds 79 68
----------------------------------------------------------------
Total assets under management $226 $191
================================================================
(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
Nine months ended September 30 - dollars 2001 2000
in millions
----------------------------------------------------------------
INCOME STATEMENT
Fund servicing revenue $556 $505
Operating expense 396 380
Amortization 19 24
----------------------------------------------------------------
Operating income 141 101
Nonoperating income (a) 11 21
Debt financing 71 71
----------------------------------------------------------------
Pretax earnings 81 51
Income taxes 32 20
----------------------------------------------------------------
Earnings $49 $31
----------------------------------------------------------------
AVERAGE BALANCE SHEET
Intangible assets $1,072 $1,110
Other assets 687 468
----------------------------------------------------------------
Total assets $1,759 $1,578
----------------------------------------------------------------
Deposits $79 $139
Assigned funds and other liabilities 1,472 1,231
Assigned capital 208 208
----------------------------------------------------------------
Total funds $1,759 $1,578
----------------------------------------------------------------
PERFORMANCE RATIOS
Operating margin 25% 20%
Return on assigned capital 31 20
================================================================
(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 nine months of 2001
and 3% for the first nine months of 2000. Earnings increased $18 million or 58%
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 nine 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 $556 million for the first nine months of 2001 increased $51 million
or 10% compared with the first nine months of 2000. An increase in
accounting/administration revenue, driven by new client growth, more than offset
the impact of lower custody assets. Growth rates in this business are expected
to slow as a result of lower market valuations and competitive pricing pressure.
See Fund Servicing in the Risk Factors section of this Financial Review for
additional information regarding matters that could impact fund servicing
revenue.
Operating expense increased 4% in the period-to-period comparison primarily due
to business expansion partially offset by the comparative impact of one-time
integration costs in the prior-year period.
SERVICING STATISTICS
September 30 2001 2000
----------------------------------------------------------------
Accounting/administration
assets ($ in billions) (a) $500 $460
Custody assets ($ in billions) 359 434
Shareholder accounts (in millions) 47 43
----------------------------------------------------------------
(a) Includes net assets serviced offshore of approximately $16 billion and $8
billion at September 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
--------------------------- -------------------------- -----------------------------
Nine months ended September 30 - dollars 2001 2000 Change 2001 2000 Change 2001 2000 Change
in millions
------------------------------------------------------------------------------------------------------------------------------------
Interest-earning assets
Loans held for sale $1,894 $2,681 $(787) $92 $163 $(71) 6.38% 8.10% (172)bp
Securities 10,141 6,105 4,036 456 292 164 5.99 6.38 (39)
Loans, net of unearned income
Commercial 20,144 21,878 (1,734) 1,130 1,383 (253) 7.40 8.31 (91)
Commercial real estate 2,567 2,689 (122) 146 179 (33) 7.50 8.73 (123)
Consumer 9,095 9,210 (115) 563 589 (26) 8.28 8.55 (27)
Residential mortgage 9,616 12,519 (2,903) 522 668 (146) 7.24 7.11 13
Lease financing 4,144 3,082 1,062 220 168 52 7.07 7.25 (18)
Other 478 670 (192) 25 42 (17) 6.93 8.40 (147)
--------------------------------------------------------------------- ------------------------
Total loans, net of unearned
income 46,044 50,048 (4,004) 2,606 3,029 (423) 7.51 8.01 (50)
Other 1,637 1,278 359 93 71 22 7.61 7.39 22
--------------------------------------------------------------------- ------------------------
Total interest-earning assets/
interest income 59,716 60,112 (396) 3,247 3,555 (308) 7.22 7.84 (62)
Noninterest-earning assets 10,834 8,874 1,960
----------------------------------------------------------------------
Total assets $70,550 $68,986 $1,564
======================================================================
Interest-bearing liabilities
Deposits
Demand and money market $20,994 $18,389 $2,605 419 472 (53) 2.66 3.43 (77)
Savings 1,927 2,088 (161) 15 27 (12) 1.03 1.73 (70)
Retail certificates of deposit 12,716 14,591 (1,875) 516 603 (87) 5.43 5.52 (9)
Other time 534 633 (99) 26 31 (5) 6.48 6.45 3
Deposits in foreign offices 948 1,437 (489) 35 67 (32) 4.86 6.12 (126)
---------------------------------------------------------------------- ------------------------
Total interest-bearing deposits 37,119 37,138 (19) 1,011 1,200 (189) 3.64 4.31 (67)
Borrowed funds 13,637 14,422 (785) 540 711 (171) 5.23 6.49 (126)
---------------------------------------------------------------------- ------------------------
Total interest-bearing liabilities/
interest expense 50,756 51,560 (804) 1,551 1,911 (360) 4.07 4.92 (85)
------------------------ --------------------------
Noninterest-bearing liabilities,
capital securities and shareholders' 19,794 17,426 2,368
equity
----------------------------------------------------------------------
Total liabilities, capital
securities and shareholders' $70,550 $68,986 $1,564
equity
======================================================================
Interest rate spread 3.15 2.92 23
Impact of noninterest-bearing sources .61 .71 (10)
-------------------------
Net interest income/margin $1,696 $1,644 $52 3.76% 3.63% 13bp
================================================================================================================================
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 $1.696 billion for the first nine
months of 2001 increased 3% compared with the first nine months of 2000. The
increase was 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 net interest margin widened 13
basis points to 3.76% for the first nine months of 2001 compared with 3.63% for
the first nine months of 2000. The increase was primarily due to the impact of
the lower rate environment and the benefit of growth in transaction deposits and
downsizing of higher-cost, less valuable retail certificates and wholesale
deposits. See Interest Rate Risk in the Risk Management section of this
Financial Review for additional information regarding interest rate risk.
Loans represented 77% of average interest-earning assets for the first nine
months of 2001 compared with 83% for the first nine 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
nine months of 2001.
Securities represented 17% of average interest-earning assets for the first nine
months of 2001 compared with 10% for the first nine months of 2000. The increase
was primarily due to 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 66% of
total sources of funds for the first nine 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 nine 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 nine months of 2001 decreased
$785 million compared with the first nine months of 2000 as lower bank notes and
senior debt were partially offset by increases in Federal Home Loan Bank
borrowings and repurchase agreements.
PROVISION FOR CREDIT LOSSES
The provision for credit losses was $235 million for the first nine months of
2001 compared with $96 million for the first nine months of 2000. The increase
was primarily related to institutional lending portfolios that PNC is downsizing
and a $45 million addition to unallocated reserves, given the deterioration in
economic conditions. See Credit Risk in the Risk Management section of this
Financial Review for additional information regarding credit risk.
NONINTEREST INCOME
Noninterest income was $2.128 billion for the first nine months of 2001 compared
with $2.156 billion for the same period in 2000. Noninterest income for the
first nine months of 2001 included $134 million of net securities gains, $82
million of equity management losses related to venture capital activities and
charges of $86 million for valuation adjustments on loans held for sale owned by
the subsidiaries of a third party financial institution. See "Restatements" in
the Notes to Consolidated Financial Statements for additional information.
Asset management fees of $645 million for the first nine months of 2001
increased $55 million or 9% primarily driven by new institutional business and
strong fixed-income performance at BlackRock. Consolidated assets under
management were $270 billion at September 30, 2001, a 13% increase compared with
September 30, 2000. Fund servicing fees were $545 million for the first nine
months of 2001, a $58 million or 12% increase compared with the first nine
months of 2000 primarily driven by new client growth.
Service charges on deposits increased 7% to $160 million for the first nine
months of 2001 primarily due to an increase in transaction deposit accounts.
Brokerage fees were $163 million for the first nine months of 2001 compared with
$192 million for the first nine months of 2000. The decrease was primarily due
to a decline in equity markets activity. Consumer services revenue of $171
million for the first nine months of 2001 increased $18 million or 12% compared
with the first nine months of 2000 primarily due to the expansion of PNC's ATM
network and the increase in transaction deposit accounts.
Corporate services revenue was $149 million for the first nine months of 2001
compared with $248 million for the first nine months of 2000. Higher commercial
mortgage servicing revenue was more than offset by valuation adjustments of
loans held for sale and other assets and lower capital markets revenue. Revenue
in 2001 was adversely impacted by valuation adjustments of $86 million related
to loans held for sale owned by the subsidiaries of a third party financial
institution. See "Restatements" in the Notes to Consolidated Financial
Statements for additional information.
Equity management, which is comprised of venture capital activities, reflected a
net loss of $82 million for the first nine months of 2001 compared with $132
million of income for the first nine months of 2000. The decrease primarily
resulted from a decline in the estimated fair value of partnership investments.
At September 30, 2001, equity management investments totaling approximately $683
million, including net unrealized appreciation of $31 million, were comprised of
approximately 60% direct investments and 40% partnership investments. These
valuations are subject to market conditions and may be volatile. PNC is
currently evaluating strategies to mitigate the impact of the revenue volatility
of this business.
Net securities gains were $134 million for the first nine months of 2001 and
were partially offset by valuation adjustments and write-downs of other assets
and e-commerce investments totaling $35 million that are reflected in corporate
services and other noninterest income.
Other noninterest income was $243 million for the first nine months of 2001
compared with $200 million for the first nine months of 2000. The increase was
primarily due to higher revenue from trading activities and residential mortgage
loan securitizations.
NONINTEREST EXPENSE
Noninterest expense was $2.351 billion for the first nine months of 2001
compared with $2.319 billion for the first nine months of 2000 and the
efficiency ratio remained essentially flat at 58% and 57% for the nine months
ended 2001 and 2000, respectively. The increase in noninterest expense was
primarily in businesses that have stronger revenue growth including the Regional
Community Bank, BlackRock and PFPC. Average full-time equivalent employees
totaled approximately 24,600 and 24,000 for the first nine 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 $42.1 billion at September 30, 2001, a decrease of $8.5 billion 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
September 30 December 31
In millions 2001 2000
----------------------------------------------------------------
Commercial
Manufacturing $4,567 $5,581
Retail/wholesale 4,293 4,413
Service providers 2,386 2,944
Real estate related 1,826 1,783
Financial services 1,608 1,726
Communications 934 1,296
Health care 658 722
Other 2,312 2,742
----------------------------------------------------------------
Total commercial 18,584 21,207
----------------------------------------------------------------
Commercial real estate
Mortgage 591 673
Real estate project 2,024 1,910
----------------------------------------------------------------
Total commercial real estate 2,615 2,583
----------------------------------------------------------------
Consumer
Home equity 6,883 6,228
Automobile 860 1,166
Other 1,378 1,739
----------------------------------------------------------------
Total consumer 9,121 9,133
----------------------------------------------------------------
Residential mortgage 6,815 13,264
Lease financing 5,663 4,845
Other 485 568
Unearned income (1,143) (999)
----------------------------------------------------------------
Total, net of unearned income $42,140 $50,601
================================================================
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 September 30, 2001, remaining
outstandings associated with this initiative were $321 million, of which $271
million were classified as loans with the remainder included in loans held for
sale. Total remaining exposure related to this initiative was $1.3 billion at
September 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 September 30, 2001, remaining outstandings and exposure
associated with this initiative were $1.6 billion and $4.5 billion,
respectively.
At September 30, 2001, approximately $489 million of loans held by the
subsidiaries 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 $111 million at
September 30, 2001.
NET UNFUNDED COMMITMENTS (a)
September 30 December 31
In millions 2001 2000
-----------------------------------------------------------------
Commercial $21,009 $24,253
Commercial real estate 969 1,039
Consumer 4,750 4,414
Lease financing 123 123
Other 150 173
-----------------------------------------------------------------
Total $27,001 $30,002
=================================================================
(a)Excludes unfunded commitments related to loans designated for downsizing in
1999 and 2001 and unfunded commitments related to loans held by the
subsidiaries 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, and total $7.4 billion at September 30, 2001 and $7.2 billion at
December 31, 2000.
Net outstanding letters of credit totaled $4.1 billion and $4.0 billion at
September 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 $3.9 billion at September 30, 2001 and $1.7 billion at December 31,
2000.
SECURITIES
Total securities at September 30, 2001 were $11.1 billion compared with $5.9
billion at December 31, 2000. Total securities represented 15% of total assets
at September 30, 2001 compared with 8% at December 31, 2000. The increase was
primarily due to residential mortgage loan securitizations and purchases of
asset-backed securities during the first nine months of 2001. The expected
weighted-average life of securities available for sale was 2 years and 11 months
at September 30, 2001 compared with 4 years and 5 months at December 31, 2000.
At September 30, 2001, the securities available for sale balance of $10.8
billion included a net unrealized gain of $75 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 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 subsidiaries of a third party financial institution, which are
consolidated in PNC's financial statements. The expected weighted-average life
of securities held to maturity was 19 years and 6 months at September 30, 2001.
PNC had no securities held to maturity at December 31, 2000.
DETAILS OF SECURITIES
Amortized Fair
In millions Cost Value
---------------------------------------------------------------
SEPTEMBER 30, 2001
SECURITIES AVAILABLE FOR SALE
Debt securities
U.S. Treasury and government agencies $1,053 $1,059
Mortgage-backed 6,509 6,561
Asset-backed 2,472 2,501
State and municipal 65 68
Other debt 73 74
Corporate stocks and other 533 517
---------------------------------------------------------------
Total securities available for sale $10,705 $10,780
===============================================================
SECURITIES HELD TO MATURITY
Debt securities
U.S. Treasury and government agencies $198 $206
Other debt 73 73
---------------------------------------------------------------
Total securities held to maturity $271 $279
===============================================================
DECEMBER 31, 2000
Debt securities
U.S. Treasury and government agencies $313 $313
Mortgage-backed 4,037 4,002
Asset-backed 902 893
State and municipal 94 96
Other debt 73 73
Corporate stocks and other 537 525
---------------------------------------------------------------
Total securities available for sale $5,956 $5,902
===============================================================
FUNDING SOURCES
Total funding sources were $58.0 billion at September 30, 2001 and decreased
$1.4 billion compared with December 31, 2000. Demand 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
September 30 December 31
In millions 2001 2000
----------------------------------------------------------------
Deposits
Demand and money market $30,696 $28,771
Savings 1,923 1,915
Retail certificates of deposit 11,577 14,175
Other time 495 567
Deposits in foreign offices 227 2,236
----------------------------------------------------------------
Total deposits 44,918 47,664
----------------------------------------------------------------
Borrowed funds
Federal funds purchased 1,904 1,445
Repurchase agreements 672 607
Bank notes and senior debt 5,344 6,110
Federal Home Loan Bank borrowings 2,457 500
Subordinated debt 2,368 2,407
Other borrowed funds 301 649
----------------------------------------------------------------
Total borrowed funds 13,046 11,718
----------------------------------------------------------------
Total $57,964 $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 September 30, 2001, the Corporation and each bank subsidiary were
considered well capitalized based on regulatory capital ratio requirements.
RISK-BASED CAPITAL
September 30 December 31
Dollars in millions 2001 2000
------------------------------------------------------------------
Capital components
Shareholders' equity
Common $6,557 $6,344
Preferred 216 312
Trust preferred capital securities 848 848
Goodwill and other (2,192) (2,214)
Net unrealized securities (gains) (53) 77
losses
------------------------------------------------------------------
Tier I risk-based capital 5,376 5,367
Subordinated debt 1,616 1,811
Minority interest 29
Eligible allowance for credit losses 720 667
------------------------------------------------------------------
Total risk-based capital $7,741 $7,845
==================================================================
Assets
Risk-weighted assets and
off-balance-sheet instruments,
and market risk equivalent assets $64,345 $62,430
Average tangible assets 66,665 66,809
==================================================================
Capital ratios
Tier I risk-based 8.4% 8.6%
Total risk-based 12.0 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 October 4, 2001, PNC redeemed all outstanding shares of Fixed/Adjustable Rate
Noncumulative Preferred Stock Series F for approximately $205 million.
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.
During the first nine months of 2001, PNC repurchased 8.4 million shares of its
common stock.
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. A sustained weakness or further weakening of the economy
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 level of nonperforming assets, net charge-offs
and provision for credit losses. 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 or
volatility in the equity markets could negatively affect noninterest revenues.
TERRORIST ACTIVITIES
The impact of the September 11th terrorist attacks or any future terrorist
activities and responses to such activities cannot be predicted at this time
with respect to severity or duration. The impact could adversely affect the
Corporation in a number of ways including, among others, an increase in
delinquencies, bankruptcies or defaults that could result in a higher level of
nonperforming assets, net charge-offs and provision for credit losses.
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.
17
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.
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 sustained weakness or further weakening
or volatility 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:
- anticipated cost savings or potential revenue enhancements that may not be
fully realized or realized within the expected time frame;
- key employee, customer or revenue loss following an acquisition that may be
greater than expected; and
- 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
September 30 December 31
Dollars in millions 2001 2000
----------------------------------------------------------------
Nonaccrual loans
Commercial $324 $312
Commercial real estate 13 3
Consumer 4 2
Residential mortgage 6 4
Lease financing 14 2
----------------------------------------------------------------
Total nonaccrual loans 361 323
Nonperforming loans held for sale(a) 152 33
Foreclosed and other assets
Commercial real estate 2 3
Residential mortgage 2 8
Other 9 5
----------------------------------------------------------------
Total foreclosed and other assets 13 16
----------------------------------------------------------------
Total nonperforming assets $526 $372
================================================================
Nonaccrual loans to total loans .86% .64%
Nonperforming assets to total loans,
loans held for sale and foreclosed 1.18 .71
assets
Nonperforming assets to total assets .73 .53
================================================================
(a) Includes $6 million of a troubled debt restructured loan
held for sale as of September 30, 2001.
The above table excludes $37 million and $18 million of equity management assets
carried at estimated fair value at September 30, 2001 and December 31, 2000,
respectively. The amount of nonperforming loans that were current as to
principal and interest was $91 million at September 30, 2001 and $67 million at
December 31, 2000. At September 30, 2001, approximately 40% of nonperforming
assets were from portfolios that were designated for downsizing.
18
A sustained weakness 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.
CHANGE IN NONPERFORMING ASSETS
In millions 2001 2000
----------------------------------------------------------------
January 1 $372 $325
Transferred from accrual 589 291
Returned to performing (14) (3)
Principal reductions (159) (125)
Sales (25) (31)
Charge-offs and other (237) (103)
----------------------------------------------------------------
September 30 $526 $354
================================================================
ACCRUING LOANS PAST DUE 90 DAYS OR MORE
Amount Percent of Loans
------------------------- ------------------------
September 30 December 31 September 30 December 31
Dollars in millions 2001 2000 2001 2000
---------------------------------------------------------------------
Commercial $37 $46 .20% .22%
Commercial real estate 11 6 .42 .23
Consumer 23 24 .25 .26
Residential mortgage 42 36 .62 .27
Lease financing 2 1 .04 .03
-----------------------------------------------------
Total $115 $113 .27 .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 $146 million at September 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 nine months of 2001 and the
evaluation of the allowance for credit losses as of September 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 20% of the total allowance and .35% of total loans
at September 30, 2001 compared with 20% and .26%, respectively, at December 31,
2000. During the third quarter of 2001, PNC added $45 million to unallocated
reserves given the deterioration in economic conditions.
ROLLFORWARD OF ALLOWANCE FOR CREDIT LOSSES
In millions 2001 2000
---------------------------------------------------------------
January 1 $675 $674
Charge-offs (219) (131)
Recoveries 29 36
---------------------------------------------------------------
Net charge-offs (190) (95)
Provision for credit losses 235 96
---------------------------------------------------------------
September 30 $720 $675
===============================================================
The allowance as a percent of nonaccrual loans and total loans was 199% and
1.71%, respectively, at September 30, 2001. The comparable year-end 2000
percentages were 209% and 1.33%, respectively.
CHARGE-OFFS AND RECOVERIES
Percent of
Nine months ended September 30 Net Average
Dollars in millions Charge-offs Recoveries Charge-offs Loans
---------------------------------------------------------------------------
2001
Commercial $165 $13 $152 1.01%
Commercial real estate 6 1 5 .26
Consumer 31 13 18 .26
Residential mortgage 1 1 .01
Lease financing 16 2 14 .45
-----------------------------------------------------------
Total $219 $29 $190 .55
===========================================================================
2000
Commercial $86 $14 $72 .44%
Commercial real estate 2 4 (2) (.10)
Consumer 34 16 18 .26
Residential mortgage 4 1 3 .03
Lease financing 5 1 4 .17
-----------------------------------------------------------
Total $131 $36 $95 .25
===========================================================================
Net charge-offs were $190 million or .55% of average loans for the first nine
months of 2001 compared with $95 million or .25% for the same period in 2000.
The increase was primarily related to loans in institutional lending portfolios
that PNC is downsizing.
19
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 associated
with commercial lending activities. At September 30, 2001, credit default swaps
of $140 million in notional value were used by the Corporation to hedge credit
risk associated with commercial lending activities.
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 September 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 .3%. 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 1.8%.
The Corporation models additional interest rate scenarios covering a wider range
of rate movements to identify yield curve, term structure and basis risk
exposures. These scenarios are developed based on historical rate relationships
or management's expectations regarding the future direction and level of
interest rates. Depending on market conditions and other factors, these
scenarios may be modeled more or less frequently. Such analyses are used 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 September
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 .2% 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 September 30,
2001, such assets totaled $14.9 billion, with $6.4 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 September 30, 2001, approximately $10.8 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
September 30, 2001, the Corporation had unused capacity under effective shelf
registration statements of approximately $4.3 billion of debt and equity
securities and $400 million of trust preferred capital securities. On October
29, 2001, PNC issued $600 million of Floating Rate Senior Notes due 2004 and
$400 million of 5.75% Senior Notes due 2006, reducing unused shelf capacity to
$3.3 billion. In addition, the Corporation had an unused line of credit of $500
million at September 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 $312 million at September 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 underwriting and "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 $1.2
million at September 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 nine 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
December 31 January 1
Dollars in millions 2000 Adjustments (a) 2001 Additions Maturities Terminations
---------------------------------------------------------------------------------------------------------------------
Interest rate risk management
Interest rate swaps
Receive fixed $4,756 $180 $4,936 $5,900 $(1,618) $(120)
Pay fixed 1 248 249 247 (345)
Basis swaps 2,230 (1,773) 457 190 (480)
Interest rate caps 308 (243) 65 44 (84)
Interest rate floors 3,238 (238) 3,000 60 (3,048)
Futures contracts 416 (116)
---------------------------------------------------------------------------------------------------------------------
Total interest rate risk
management 10,533 (1,826) 8,707 6,857 (1,618) (4,193)
---------------------------------------------------------------------------------------------------------------------
Commercial mortgage banking risk
management
Interest rate swaps 311 311 846 (949)
Total rate of return swaps 75 75 225 (125)
---------------------------------------------------------------------------------------------------------------------
Total commercial mortgage
banking risk management 386 386 1,071 (125) (949)
Student lending activities
Forward contracts 347 (347)
Credit-related activities
Credit default swaps 4,391 (4,391)
---------------------------------------------------------------------------------------------------------------------
Total $15,657 $(6,564) $9,093 $7,928 $(1,743) $(5,142)
=====================================================================================================================
Weighted-
September 30 Average
Dollars in millions 2001 Maturity
---------------------------------------------------------------
Interest rate risk management
Interest rate swaps
Receive fixed $9,098 2 yrs. 10 mos.
Pay fixed 151 3 yrs. 5 mos.
Basis swaps 167 3 yrs. 6 mos.
Interest rate caps 25 4 yrs. 7 mos.
Interest rate floors 12 2 yrs. 3 mos.
Futures contracts 300 9 mos.
-------------------------------------
Total interest rate risk
management 9,753
-------------------------------------
Commercial mortgage banking risk
management
Interest rate swaps 208 9 yrs. 3 mos.
Total rate of return swaps 175 4 mos.
-------------------------------------
Total commercial mortgage
banking risk management 383
Student lending activities
Forward contracts
Credit-related activities
Credit default swaps
-------------------------------------
Total $10,136
===============================================================
(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 September 30, 2001.
FINANCIAL DERIVATIVES
Weighted-Average
Interest Rates
Notional ------------------------
September 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 $7,085 $209 3.30% 5.25%
Pay fixed designated to loans 151 (9) 5.92 3.87
Basis swaps designated to loans 167 3.88 3.88
Interest rate caps designated to loans (b) 25 NM NM
Interest rate floors designated to loans (c) 12 NM NM
Future contracts designated to loans 300 NM NM
----------------------------------------------------------------------------------------------------
Total asset rate conversion 7,740 200
----------------------------------------------------------------------------------------------------
Liability rate conversion
Interest rate swaps (a)
Receive fixed designated to borrowed funds 2,013 186 4.74 6.23
----------------------------------------------------------------------------------------------------
Total liability rate conversion 2,013 186
----------------------------------------------------------------------------------------------------
Total interest rate risk management 9,753 386
----------------------------------------------------------------------------------------------------
Commercial mortgage banking risk management
Pay fixed interest rate swaps designated to loans (a) 208 (9) 5.71 5.22
Pay total rate of return swaps designated to loans (a) 175 (4) 6.10 2.03
----------------------------------------------------------------------------------------------------
Total commercial mortgage banking risk management 383 (13)
----------------------------------------------------------------------------------------------------
Total financial derivatives $10,136 $373
=================================================================================================================================
(a) The floating rate portion of interest rate contracts is based on
money-market indices. As a percent of notional value, 76% were based on
1-month LIBOR, 23% on 3-month LIBOR and the remainder on other short-term
indices.
(b) Interest rate caps with notional values of $15 million require the
counterparty to pay the Corporation the excess, if any, of 3-month LIBOR
over a weighted-average strike of 6.40%. In addition, interest rate caps
with notional values of $6 million require the counterparty to pay the
excess, if any, of 1-month LIBOR over a weighted-average strike of 6.00%. At
September 30, 2001, 3-month LIBOR was 2.59%.
(c) Interest rate floors with notional values of $5 million require the
counterparty to pay the excess, if any, weighted-average strike of 5.50%
over 1-month LIBOR. In addition, interest rate floors with notional values
of $5 million require the counterparty to pay the excess, if any,
weighted-average strike of 4.50% over 3-month LIBOR. At September 30, 2001,
1-month LIBOR was 2.63% and 3-month LIBOR was 2.59%.
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 September 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 $18,338 $379 $(379) $(8)
Caps/floors
Sold 3,849 (35) $(35) (22)
Purchased 3,118 28 28 19
Foreign exchange 4,925 64 (54) 10 12
Other 2,402 38 (32) 6 3
---------------------------------------------------------------------------------------------------------------------------------
Total customer-related 32,632 509 (500) 9 4
Other 6,595 21 (4) 17 19
---------------------------------------------------------------------------------------------------------------------------------
Total other derivatives $39,227 $530 $(504) $26 $23
=================================================================================================================================
(a) Represents average for nine months ended September 30, 2001.
24
THIRD QUARTER 2001 VS. 2000
Earnings for the third quarter of 2001 were $247 million or $.84 per diluted
share compared with earnings of $299 million or $1.01 per diluted share for the
third quarter of 2000. Excluding net losses from venture capital activities,
third quarter 2001 earnings were $.87 per diluted share. Return on average
common shareholders' equity was 14.83% and return on average assets was 1.42%
for the third quarter of 2001 compared with 19.99% and 1.72%, respectively, for
the third quarter of 2000.
Taxable-equivalent net interest income of $568 million for the third quarter of
2001 increased $34 million or 6% compared with the third quarter of 2000. The
increase was 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 net interest margin widened 35
basis points to 3.89% primarily due to the impact of the lower rate environment
and the benefit of growth in transaction deposits and downsizing of higher-cost,
less valuable retail certificates and wholesale deposits.
The provision for credit losses was $110 million for the third quarter of 2001
compared with $30 million for the third quarter of 2000. The increase in the
provision was primarily due to a $45 million addition to unallocated reserves
given the deterioration in overall economic conditions. The remainder of the
increase in the provision for credit losses primarily related to commercial
loans in portfolios that are being downsized.
Noninterest income was $707 million for the third quarter of 2001 compared with
$700 million for the prior-year quarter. Noninterest income for the third
quarter of 2001 included $88 million of net securities gains, $13 million of
equity management losses related to venture capital activities and $85 million
of charges for valuation adjustments on loans held for sale owned by the
subsidiaries of a third party financial institution.
Asset management fees of $208 million for the third quarter of 2001 remained
flat compared with the prior-year quarter as growth in new institutional
business at BlackRock was 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 third quarter of 2001 increased $14 million or 8% compared
with the third quarter of 2000 primarily due to new client growth.
Service charges on deposits were $56 million for the third quarter of 2001, up
12% compared with the same period last year primarily due to an increase in
transaction deposit accounts. Brokerage fees decreased $7 million or 11%
compared with the third quarter of 2000 as the impact of a decline in equity
markets activity was partially offset by an increase in annuity commissions at
the Regional Community Bank. Consumer services revenue of $58 million for the
third quarter of 2001 increased $3 million or 5% 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 reflected net losses of $3 million for the third quarter of
2001 compared with net gains of $86 million for the third quarter of 2000. The
decrease was primarily due to $85 million of valuation adjustments in the third
quarter of 2001 related to loans held for sale owned by the subsidiaries of a
third party financial institution and the impact of weaker capital market
conditions.
Equity management reflected net losses of $13 million for the third quarter of
2001 compared with $3 million of net losses for the third quarter of 2000. The
increase in net losses primarily resulted from a decline in the estimated fair
value of partnership investments.
Net securities gains were $88 million for the third quarter of 2001 compared
with $7 million for the third quarter of 2000. Other noninterest income was $77
million for the third quarter of 2001 compared with $68 million for the third
quarter of 2000.
Noninterest expense was $787 million and the efficiency ratio was 58% in the
third quarter of 2001 compared with $747 million and 57%, respectively, during
the third quarter of 2000. The increase in noninterest expense was primarily in
businesses that had stronger revenue growth including the Regional Community
Bank, BlackRock and PFPC.
Total assets were $71.8 billion at September 30, 2001 compared with $69.9
billion at September 30, 2000. Average interest-earning assets were $57.9
billion for the third quarter of 2001 compared with $59.7 billion for the third
quarter of 2000. The decrease was primarily due to a $2.5 billion decrease in
commercial loans related to initiatives to downsize certain higher-risk,
non-strategic portfolios. Average securities increased by nearly $5 billion and
residential mortgage loans decreased by a corresponding amount due to the
securitization of residential mortgage loans following the sale of PNC Mortgage.
Average deposits were $44.6 billion and represented 65% of total sources of
funds for the third quarter of 2001 compared with $45.9 billion and 66%,
respectively, in the third quarter of 2000. While total deposits decreased $1.3
billion, an increase in transaction deposits of $2.8 billion or 10% was more
than offset by a $4.1 billion decrease in higher-cost retail certificates and
wholesale deposits.
Average borrowed funds declined 7% to $12.5 billion for the third quarter of
2001 compared with $13.5 billion for the third quarter of 2000 as PNC continues
to reduce its reliance on wholesale funding.
25
Nonperforming assets were $526 million at September 30, 2001 compared with $354
million at September 30, 2000. The ratio of nonperforming assets to total loans,
loans held for sale and foreclosed assets was 1.18% at September 30, 2001
compared with .68% at September 30, 2000.
The allowance for credit losses was $720 million and represented 1.71% of
period-end loans and 199% of nonperforming loans at September 30, 2001. The
comparable ratios were 1.36% and 219%, respectively, at September 30, 2000. Net
charge-offs were $65 million or .59% of average loans in the third quarter of
2001. The comparable amounts were $30 million or .24%, respectively, in the
third quarter of 2000. The increase in net charge-offs was primarily related to
commercial loans in portfolios that PNC is downsizing.
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," "feel,"
"expect," "anticipate," "intend," "outlook," "estimate," "forecast," "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 political, 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, the adequacy of
intellectual property protection and costs associated with obtaining rights
in intellectual property claimed by others;
(13) actions of the Federal Reserve Board and legislative and regulatory
actions and reforms; and
(14) terrorist activities, including the September 11 terrorist attacks, which
may adversely affect the general economy, financial and capital markets,
specific industries, and PNC. The Corporation cannot predict the severity
or duration of effects stemming from such activities or any actions taken
in connection with them.
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 Nine months ended
September 30 September 30
------------------------------- -------------------------------
In millions, except per share data 2001 2000 2001 2000
----------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Loans and fees on loans $776 $1,025 $2,596 $3,018
Securities 155 99 454 290
Loans held for sale 24 47 92 163
Other 29 30 93 71
----------------------------------------------------------------------------------------------------------------------------------
Total interest income 984 1,201 3,235 3,542
----------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Deposits 280 434 1,011 1,200
Borrowed funds 139 236 540 711
----------------------------------------------------------------------------------------------------------------------------------
Total interest expense 419 670 1,551 1,911
----------------------------------------------------------------------------------------------------------------------------------
Net interest income 565 531 1,684 1,631
Provision for credit losses 110 30 235 96
----------------------------------------------------------------------------------------------------------------------------------
Net interest income less provision for credit losses 455 501 1,449 1,535
----------------------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Asset management 208 208 645 590
Fund servicing 182 168 545 487
Service charges on deposits 56 50 160 150
Brokerage 54 61 163 192
Consumer services 58 55 171 153
Corporate services (3) 86 149 248
Equity management (13) (3) (82) 132
Net securities gains 88 7 134 4
Other 77 68 243 200
----------------------------------------------------------------------------------------------------------------------------------
Total noninterest income 707 700 2,128 2,156
----------------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Staff expense 419 399 1,258 1,206
Net occupancy 55 50 162 151
Equipment 64 54 181 165
Amortization 26 27 79 83
Marketing 13 16 38 48
Distributions on capital securities 15 17 48 50
Other 195 184 585 616
----------------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 787 747 2,351 2,319
----------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes 375 454 1,226 1,372
Income taxes 128 155 419 472
----------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations 247 299 807 900
----------------------------------------------------------------------------------------------------------------------------------
Income from discontinued operations (less applicable income
taxes of $15, $0 and $30) 23 5 45
----------------------------------------------------------------------------------------------------------------------------------
Net income before cumulative effect of accounting change 247 322 812 945
Cumulative effect of accounting change (less applicable
income tax benefit of $2) (5)
----------------------------------------------------------------------------------------------------------------------------------
Net income $247 $322 $807 $945
----------------------------------------------------------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE
Continuing operations
Basic $.85 $1.02 $2.76 $3.05
Diluted .84 1.01 2.73 3.03
Net income
Basic $.85 $1.10 $2.76 $3.21
Diluted .84 1.09 2.73 3.18
CASH DIVIDENDS DECLARED PER COMMON SHARE .48 .45 1.44 1.35
AVERAGE COMMON SHARES OUTSTANDING
Basic 286 289 288 290
Diluted 289 292 291 293
==================================================================================================================================
See accompanying Notes to Consolidated Financial Statements.
27
Consolidated Balance Sheet
THE PNC FINANCIAL SERVICES GROUP, INC.
September 30 December 31
In millions, except par value 2001 2000
---------------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $3,513 $3,662
Short-term investments 1,616 1,151
Loans held for sale 2,242 1,655
Securities 11,051 5,902
Loans, net of unearned income of $1,143 and $999 42,140 50,601
Allowance for credit losses (720) (675)
---------------------------------------------------------------------------------------------------------------------------------
Net loans 41,420 49,926
Goodwill and other amortizable assets 2,393 2,468
Investment in discontinued operations 356
Other 9,577 4,724
---------------------------------------------------------------------------------------------------------------------------------
Total assets $71,812 $69,844
=================================================================================================================================
LIABILITIES
Deposits
Noninterest-bearing $8,828 $8,490
Interest-bearing 36,090 39,174
---------------------------------------------------------------------------------------------------------------------------------
Total deposits 44,918 47,664
Borrowed funds
Federal funds purchased 1,904 1,445
Repurchase agreements 672 607
Bank notes and senior debt 5,344 6,110
Federal Home Loan Bank borrowings 2,457 500
Subordinated debt 2,368 2,407
Other borrowed funds 301 649
---------------------------------------------------------------------------------------------------------------------------------
Total borrowed funds 13,046 11,718
Other 6,227 2,958
---------------------------------------------------------------------------------------------------------------------------------
Total liabilities 64,191 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 1,267 1,303
Retained earnings 7,115 6,736
Deferred benefit expense (26) (25)
Accumulated other comprehensive income (loss) from continuing operations 152 (43)
Accumulated other comprehensive loss from discontinued operations (45)
Common stock held in treasury at cost: 69 and 63 shares (3,504) (3,041)
---------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 6,773 6,656
---------------------------------------------------------------------------------------------------------------------------------
Total liabilities, capital securities and shareholders' equity $71,812 $69,844
=================================================================================================================================
See accompanying Notes to Consolidated Financial Statements.
28
Consolidated Statement of Cash Flows
THE PNC FINANCIAL SERVICES GROUP, INC.
Nine months ended September 30 - in millions 2001 2000
-------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $807 $945
Discontinued operations (5) (45)
Cumulative effect of accounting change 5
-------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations 807 900
Adjustments to reconcile income from continuing operations
to net cash provided by operating activities
Provision for credit losses 235 96
Depreciation, amortization and accretion 220 252
Deferred income taxes 245 286
Net securities gains (131) (6)
Valuation adjustments 94 24
Change in
Loans held for sale (104) 1,326
Other (999) (1,129)
-------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 367 1,749
-------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Net change in loans 191 (425)
Repayment of securities 1,733 679
Sales
Securities 18,901 4,648
Loans 3,845 187
Foreclosed assets 13 18
Purchases
Securities (22,850) (5,810)
Loans (246)
Net cash received (paid) for acquisitions/divestitures 503 (4)
Other (57) (191)
-------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities 2,033 (898)
-------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net change in
Noninterest-bearing deposits 338 348
Interest-bearing deposits (3,084) 1,344
Federal funds purchased 459 60
Repurchase agreements 65 200
Sales/issuances
Bank notes and senior debt 1,147 2,848
Federal Home Loan Bank borrowings 3,123 1,781
Subordinated debt 1 593
Other borrowed funds 27,438 28,985
Common stock 154 118
Repayments/maturities
Bank notes and senior debt (1,915) (3,715)
Federal Home Loan Bank borrowings (1,155) (3,456)
Subordinated debt (200) (514)
Other borrowed funds (27,787) (28,683)
Acquisition of treasury stock (608) (327)
Series F preferred stock tender offer (96)
Cash dividends paid (429) (407)
-------------------------------------------------------------------------------------------------------------------------------
Net cash used by financing activities (2,549) (825)
-------------------------------------------------------------------------------------------------------------------------------
(DECREASE) INCREASE IN CASH AND DUE FROM BANKS (149) 26
Cash and due from banks at beginning of year 3,662 3,080
-------------------------------------------------------------------------------------------------------------------------------
Cash and due from banks at end of period $3,513 $3,106
===============================================================================================================================
CASH PAID FOR
Interest $1,525 $1,946
Income taxes 105 235
NON-CASH ITEMS
Transfer of residential mortgage loans to securities 3,775
Transfer from loans to loans held for sale (577)
Transfer from loans to other assets 5 18
===============================================================================================================================
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, senior debt 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. Risk exposures from customer positions are 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. The positions of customer and other derivatives
are recorded at 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
Notes to Consolidated Financial Statements
THE PNC FINANCIAL SERVICES GROUP, INC.
RESTATEMENTS
In connection with the repositioning of its institutional lending businesses,
PNC completed transactions in June 2001 and September 2001 in which assets were
sold or transferred to subsidiaries of a third party financial institution with
PNC receiving preferred interests in the subsidiaries. The transactions involved
the sale of loan assets of $592 million of which $132 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 $24 million on loans and
valuation adjustments of $4 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 $108
million prior to sale. In addition to the loan assets, PNC also transferred cash
amounting to $320 million. In return, PNC received one hundred percent of the
Class A convertible preferred shares in each 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 each of the entities, 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
each entity. The proceeds received by the applicable entity from the issuance of
the Class A preferred and all of the Class B shares were used by each entity 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 each
of the entities 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 transactions, the loans were removed from PNC's balance sheet
and the preferred interests in the entities 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 subsidiaries 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. This restatement
reduced income from continuing operations and net income for the three and nine
months ended September 30, 2001 by $51 million or $.18 per diluted share. The
effects of the restatement on the consolidated financial statements for the
third quarter of 2001 are included in this Amendment No. 1.
In consolidation, all loan assets of the third party subsidiaries are included
in loans held for sale. Subsequent charges to adjust the carrying value of the
loans held for sale were reflected as valuation adjustments. The following table
summarizes the charges related to the assets in these entities for the first
nine months of 2001.
CHARGES RELATED TO THIRD PARTY SUBSIDIARIES
Third Second
Quarter Quarter
In millions 2001 2001 Total
-----------------------------------------------------------
At time of sale:
Charge-offs $9 $15 $24
Valuation adjustments 3 1 4
-----------------------------------------------------------
12 16 28
Valuation adjustments
subsequent to sale 82 82
-----------------------------------------------------------
Total $94 $16 $110
===========================================================
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 nine months ended September 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 September 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
Nine months ended September 30 - in 2001 2000
millions
--------------------------------------------------------------
Total income from operations after tax $15 $45
Net loss on disposal, after tax (a) (10)
--------------------------------------------------------------
Total income from discontinued
operations $5 $45
==============================================================
(a)Includes recognition of $35 million of previously unrealized securities
losses in accumulated other comprehensive income.
32
Notes to Consolidated Financial Statements
THE PNC FINANCIAL SERVICES GROUP, INC.
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
=============================================================
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.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations," which requires that the fair value of a liability be recognized
when incurred for the retirement of a long-lived asset and the value of the
related asset be increased by that amount. The statement also requires that the
liability be maintained at its present value in subsequent periods and outlines
certain disclosures for such obligations. The adoption of this statement, which
is effective January 1, 2003, is not expected to have a material impact on the
Corporation's financial statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," which replaces SFAS No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Assets to be Disposed Of." This
statement primarily defines one accounting model for long-lived assets to be
disposed of by sale, including discontinued operations, and addresses
implementation issues regarding the impairment of long-lived assets. The
adoption of this statement, which is effective January 1, 2002, is not expected
to have a material impact on the Corporation's financial statements.
CASH FLOWS
During the first nine 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 nine 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 underwriting and "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 nine months of 2001 totaled $118 million
compared with $68 million for the prior-year period and was included in
noninterest income as follows:
Nine months ended September 30 - in 2001 2000
millions
--------------------------------------------------------------
Corporate services $5 $7
Equity management 2
Other noninterest income
Securities trading (a) 40 32
Derivatives trading 54 11
Foreign exchange 19 16
--------------------------------------------------------------
Net trading income $118 $68
==============================================================
(a)Securities trading primarily includes income from principal transactions,
underwriting services and "market making."
33
Notes to Consolidated Financial Statements
THE PNC FINANCIAL SERVICES GROUP, INC.
SECURITIES
Unrealized
Amortized ------------------------------------- Fair
In millions Cost Gains Losses Value
-----------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 2001
SECURITIES AVAILABLE FOR SALE
Debt securities
U.S. Treasury and government agencies $1,053 $6 $1,059
Mortgage-backed 6,509 53 $(1) 6,561
Asset-backed 2,472 30 (1) 2,501
State and municipal 65 3 68
Other debt 73 1 74
-----------------------------------------------------------------------------------------------------------------------
Total debt securities 10,172 93 (2) 10,263
Corporate stocks and other 533 52 (68) 517
-----------------------------------------------------------------------------------------------------------------------
Total securities available for sale $10,705 $145 $(70) $10,780
=======================================================================================================================
SECURITIES HELD TO MATURITY
Debt securities
U.S. Treasury and government agencies $198 $8 $206
Other debt 73 73
-----------------------------------------------------------------------------------------------------------------------
Total debt securities 271 8 279
-----------------------------------------------------------------------------------------------------------------------
Total securities held to maturity $271 $8 $279
=======================================================================================================================
DECEMBER 31, 2000
SECURITIES AVAILABLE FOR SALE
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 September 30, 2001 was $11.1 billion compared with $5.9
billion at December 31, 2000. Total securities represented 15% of total assets
at September 30, 2001 compared with 8% at December 31, 2000. The expected
weighted-average life of securities available for sale was 2 years and 11 months
at September 30, 2001 compared with 4 years and 5 months at December 31, 2000.
At September 30, 2001, the securities available for sale balance of $10.8
billion included a net unrealized gain of $75 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 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 $134 million for the first nine months of 2001 compared with $4
million for the first nine months of 2000. Net securities losses of $3 million
for the first nine months of 2001, and net securities gains of $2 million for
the first nine 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 subsidiaries of a third party financial institution, which are
consolidated in PNC's financial statements. The expected weighted-average life
of securities held to maturity was 19 years and 6 months at September 30, 2001.
PNC had no securities held to maturity at December 31, 2000.
34
NONPERFORMING ASSETS
Nonperforming assets were as follows:
September 30 December 31
In millions 2001 2000
------------------------------------------------------------------
Nonaccrual loans $361 $323
Nonperforming loans held for sale(a) 152 33
Foreclosed and other assets 13 16
------------------------------------------------------------------
Total nonperforming assets $526 $372
==================================================================
(a) Includes $6 million of a troubled debt restructured loan held
for sale as of September 30, 2001.
The above table excludes $37 million and $18 million of equity management assets
carried at estimated fair value at September 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 (165) (86)
Commercial real estate (6) (2)
Consumer (31) (34)
Residential mortgage (1) (4)
Lease financing (16) (5)
------------------------------------------------------------------
Total charge-offs (219) (131)
Recoveries
Commercial 13 14
Commercial real estate 1 4
Consumer 13 16
Residential mortgage 1
Lease financing 2 1
------------------------------------------------------------------
Total recoveries 29 36
------------------------------------------------------------------
Net charge-offs
Commercial (152) (72)
Commercial real estate (5) 2
Consumer (18) (18)
Residential mortgage (1) (3)
Lease financing (14) (4)
------------------------------------------------------------------
Total net charge-offs (190) (95)
Provision for credit losses 235 96
------------------------------------------------------------------
Allowance at September 30 $720 $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 nine months of 2001.
During the next twelve months, the Corporation expects to reclassify to earnings
$110 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 September 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 $459 million for the third
quarter of 2001 and $1.002 billion for the first nine months of 2001, compared
with $345 million and $940 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:
Nine months ended September Pretax Tax After-tax
30, 2001 Amount Benefit Amount
In millions (Expense)
----------------------------------------------------------------
Unrealized securities gains $123 $(44) $79
Less: Reclassification
adjustment for losses
realized in net income (8) 3 (5)
----------------------------------------------------------------
Net unrealized securities
gains 131 (47) 84
----------------------------------------------------------------
SFAS No. 133 transition
adjustment (6) 2 (4)
Unrealized gains on cash flow
hedge derivatives 149 (52) 97
Less: Reclassification
adjustment for losses
realized in net income (27) 9 (18)
----------------------------------------------------------------
Net unrealized gains on cash
flow hedge derivatives 170 (59) 111
----------------------------------------------------------------
Other comprehensive income
from continuing operations $301 $(106) $195
================================================================
Pretax Tax After-tax
Year ended December 31, 2000 Amount Benefit Amount
In millions (Expense)
----------------------------------------------------------------
Unrealized securities gains $127 $(41) $86
Less: Reclassification
adjustment for losses
realized in net income (3) 1 (2)
----------------------------------------------------------------
Net unrealized securities
gains 130 (42) 88
Minimum pension liability
adjustment 2 (1) 1
----------------------------------------------------------------
Other comprehensive income
from continuing operations $132 $(43) $89
================================================================
The accumulated balances related to each component of other comprehensive income
(loss) are as follows:
September 30 December 31
In millions 2001 2000
-----------------------------------------------------------------
Net unrealized securities gains (losses) $52 $(32)
Net unrealized gains on cash flow hedge
derivatives 111
Minimum pension liability adjustment (11) (11)
Accumulated other comprehensive
income (loss) from continuing
operations $152 $(43)
=================================================================
36
EARNINGS PER SHARE
The following table sets forth basic and diluted earnings per share
calculations.
Three months Nine months
ended ended
September 30 September 30
---------------------- ------------------
In millions, except share and per share data 2001 2000 2001 2000
---------------------------------------------------------------------------------------------------------------------------------
CALCULATION OF BASIC EARNINGS PER COMMON SHARE
Income from continuing operations $247 $299 $807 $900
Less: Preferred dividends declared 3 5 13 14
---------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations applicable to basic earnings per common share 244 294 794 886
Income from discontinued operations applicable to basic earnings per common share 23 5 45
Cumulative effect of accounting change applicable to basic earnings per common share (5)
---------------------------------------------------------------------------------------------------------------------------------
Net income applicable to basic earnings per common share $244 $317 $794 $931
Basic weighted-average common shares outstanding (in thousands) 286,282 288,958 287,908 290,213
Basic earnings per common share from continuing operations $.85 $1.02 $2.76 $3.05
Basic earnings per common share from discontinued operations .08 .02 .16
Basic earnings per common share from cumulative effect of accounting change (.02)
---------------------------------------------------------------------------------------------------------------------------------
Basic earnings per common share $.85 $1.10 $2.76 $3.21
=================================================================================================================================
CALCULATION OF DILUTED EARNINGS PER COMMON SHARE
Income from continuing operations $247 $299 $807 $900
Less: Dividends declared on nonconvertible preferred stock Series F 3 5 12 14
---------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations applicable to diluted earnings per common share 244 294 795 886
Income from discontinued operations applicable to diluted earnings per common share 23 5 45
Cumulative effect of accounting change applicable to diluted earnings per common share (5)
---------------------------------------------------------------------------------------------------------------------------------
Net income applicable to diluted earnings per common share $244 $317 $795 $931
Basic weighted-average common shares outstanding (in thousands) 286,282 288,958 287,908 290,213
Weighted-average common shares to be issued using average market price and assuming:
Conversion of preferred stock Series A and B 103 118 107 120
Conversion of preferred stock Series C and D 861 974 882 1,005
Conversion of debentures 17 19 17 20
Exercise of stock options 1,530 1,906 1,873 1,215
Incentive share awards 421 55 347 163
---------------------------------------------------------------------------------------------------------------------------------
Diluted weighted-average common shares outstanding (in thousands) 289,214 292,030 291,134 292,736
Diluted earnings per common share from continuing operations $.84 $1.01 $2.73 $3.03
Diluted earnings per common share from discontinued operations .08 .02 .15
Diluted earnings per common share from cumulative effect of accounting change (.02)
---------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per common share $.84 $1.09 $2.73 $3.18
=================================================================================================================================
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 were designated for downsizing during 1999, equity management
activities, minority interests, residual asset and liability management
activities, eliminations, unallocated reserves 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 provides processing services through
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 $226 billion of assets under management at September 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 September 30 Community Corporate Estate Business PNC
In millions Banking Banking Finance Credit Advisors BlackRock PFPC Other Total
----------------------------------------------------------------------------------------------------------------------------------
2001
INCOME STATEMENT
Net interest income (a) $375 $117 $31 $26 $31 $2 $(19) $5 $568
Noninterest income 210 (16) 24 1 142 135 183 28 707
----------------------------------------------------------------------------------------------------------------------------------
Total revenue 585 101 55 27 173 137 164 33 1,275
Provision for credit losses 15 41 5 5 44 110
Depreciation and amortization 20 3 5 1 5 7 12 14 67
Other noninterest expense 256 89 36 6 115 85 124 9 720
----------------------------------------------------------------------------------------------------------------------------------
Pretax earnings 294 (32) 9 15 53 45 28 (34) 378
Income taxes 108 (14) (6) 6 19 18 11 (11) 131
----------------------------------------------------------------------------------------------------------------------------------
Earnings $186 $(18) $15 $9 $34 $27 $17 $(23) $247
==================================================================================================================================
Inter-segment revenue $1 $1 $14 $5 $1 $(22)
==================================================================================================================================
AVERAGE ASSETS $39,926 $15,947 $5,178 $2,433 $3,358 $644 $1,792 $(302) $68,976
==================================================================================================================================
2000
INCOME STATEMENT
Net interest income (a) $355 $145 $28 $25 $34 $2 $(12) $(43) $534
Noninterest income 151 68 24 4 157 127 169 700
----------------------------------------------------------------------------------------------------------------------------------
Total revenue 506 213 52 29 191 129 157 (43) 1,234
Provision for credit losses 11 12 5 2 30
Depreciation and amortization 21 3 4 1 4 5 12 16 66
Other noninterest expense 241 92 31 7 123 86 120 (19) 681
----------------------------------------------------------------------------------------------------------------------------------
Pretax earnings 233 106 17 16 64 38 25 (42) 457
Income taxes 84 36 5 23 15 10 (15) 158
----------------------------------------------------------------------------------------------------------------------------------
Earnings $149 $70 $17 $11 $41 $23 $15 $(27) $299
==================================================================================================================================
Inter-segment revenue $1 $1 $21 $3 $(26)
==================================================================================================================================
AVERAGE ASSETS $39,320 $16,729 $5,541 $2,343 $3,470 $492 $1,560 $(872) $68,583
==================================================================================================================================
Nine months ended September 30
In millions
----------------------------------------------------------------------------------------------------------------------------------
2001
INCOME STATEMENT
Net interest income (a) $1,093 $385 $88 $77 $99 $7 $(50) $(3) $1,696
Noninterest income 592 99 73 21 463 404 546 (70) 2,128
----------------------------------------------------------------------------------------------------------------------------------
Total revenue 1,685 484 161 98 562 411 496 (73) 3,824
Provision for credit losses 35 129 3 13 1 54 235
Depreciation and amortization 62 10 16 2 13 19 33 43 198
Other noninterest expense 765 278 101 21 363 258 382 (15) 2,153
----------------------------------------------------------------------------------------------------------------------------------
Pretax earnings 823 67 41 62 185 134 81 (155) 1,238
Income taxes 298 20 (12) 23 68 55 32 (53) 431
----------------------------------------------------------------------------------------------------------------------------------
Earnings $525 $47 $53 $39 $117 $79 $49 $(102) $807
==================================================================================================================================
Inter-segment revenue $3 $3 $49 $13 $4 $(72)
==================================================================================================================================
AVERAGE ASSETS $40,188 $16,392 $5,253 $2,431 $3,399 $644 $1,759 $416 $70,482
==================================================================================================================================
2000
INCOME STATEMENT
Net interest income (a) $1,058 $417 $87 $74 $102 $4 $(34) $(64) $1,644
Noninterest income 439 216 68 12 487 348 489 97 2,156
----------------------------------------------------------------------------------------------------------------------------------
Total revenue 1,497 633 155 86 589 352 455 33 3,800
Provision for credit losses 33 50 7 3 3 96
Depreciation and amortization 63 10 14 2 11 15 38 42 195
Other noninterest expense 733 281 88 20 374 230 366 32 2,124
----------------------------------------------------------------------------------------------------------------------------------
Pretax earnings 668 292 53 57 201 107 51 (44) 1,385
Income taxes 238 102 3 20 74 44 20 (16) 485
----------------------------------------------------------------------------------------------------------------------------------
Earnings $430 $190 $50 $37 $127 $63 $31 $(28) $900
==================================================================================================================================
Inter-segment revenue $3 $3 $64 $9 $(79)
==================================================================================================================================
AVERAGE ASSETS $38,564 $16,318 $5,583 $2,230 $3,541 $492 $1,578 $221 $68,527
==================================================================================================================================
(a) Taxable-equivalent basis
39
Statistical Information
THE PNC FINANCIAL SERVICES GROUP, INC.
CONSOLIDATED AVERAGE BALANCE SHEET AND NET INTEREST ANALYSIS
Nine months ended September 30
------------------------------------------------------------------------
2001 2000
---------------------------------- -------------------------------------
Taxable-equivalent basis Average Average Average Average
Dollars in millions Balances Interest Yields/Rates Balances Interest Yields/Rates
-----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Interest-earning assets
Loans held for sale $1,894 $92 6.38% $2,681 $163 8.10%
Securities
Securities available for sale
U.S. Treasury and government agencies and
corporations 3,846 167 5.77 1,748 77 5.89
Other debt 6,158 282 6.11 3,752 185 6.56
State, municipal and other 106 5 6.79 605 30 6.68
------------------------------------------------------------------------------- ------------------------
Total securities available for sale 10,110 454 5.99 6,105 292 6.38
Securities held to maturity 31 2 6.84
------------------------------------------------------------------------------- ------------------------
Total securities 10,141 456 5.99
Loans, net of unearned income
Commercial 20,144 1,130 7.40 21,878 1,383 8.31
Commercial real estate 2,567 146 7.50 2,689 179 8.73
Consumer 9,095 563 8.28 9,210 589 8.55
Residential mortgage 9,616 522 7.24 12,519 668 7.11
Lease financing 4,144 220 7.07 3,082 168 7.25
Other 478 25 6.93 670 42 8.40
------------------------------------------------------------------------------- ------------------------
Total loans, net of unearned income 46,044 2,606 7.51 50,048 3,029 8.01
Other 1,637 93 7.61 1,278 71 7.39
------------------------------------------------------------------------------- ------------------------
Total interest-earning assets/interest income 59,716 3,247 7.22 60,112 3,555 7.84
Noninterest-earning assets
Investment in discontinued operations 68 459
Allowance for credit losses (682) (684)
Cash and due from banks 2,935 2,665
Other assets 8,513 6,434
------------------------------------------------------------------------------- ---------
Total assets $70,550 $68,986
------------------------------------------------------------------------------- ---------
LIABILITIES, CAPITAL SECURITIES AND SHAREHOLDERS'
EQUITY
Interest-bearing liabilities
Interest-bearing deposits
Demand and money market $20,994 419 2.66 $18,389 472 3.43
Savings 1,927 15 1.03 2,088 27 1.73
Retail certificates of deposit 12,716 516 5.43 14,591 603 5.52
Other time 534 26 6.48 633 31 6.45
Deposits in foreign offices 948 35 4.86 1,437 67 6.12
------------------------------------------------------------------------------- ------------------------
Total interest-bearing deposits 37,119 1,011 3.64 37,138 1,200 4.31
Borrowed funds
Federal funds purchased 2,344 86 4.81 2,115 99 6.13
Repurchase agreements 1,041 30 3.71 737 32 5.68
Bank notes and senior debt 5,349 215 5.31 6,675 325 6.41
Federal Home Loan Bank borrowings 2,155 74 4.54 1,648 78 6.18
Subordinated debt 2,368 127 7.14 2,405 134 7.44
Other borrowed funds 380 8 2.90 842 43 6.71
------------------------------------------------------------------------------- ------------------------
Total borrowed funds 13,637 540 5.23 14,422 711 6.49
------------------------------------------------------------------------------- ------------------------
Total interest-bearing liabilities/interest expense 50,756 1,551 4.07 51,560 1,911 4.92
Noninterest-bearing liabilities and shareholders' equity
Demand and other noninterest-bearing deposits 8,290 8,098
Accrued expenses and other liabilities 3,965 2,440
Mandatorily redeemable capital securities of subsidiary 848 848
trusts
Shareholders' equity 6,691 6,040
------------------------------------------------------------------------------- ---------
Total liabilities, capital securities and shareholders' $70,550 $68,986
equity
----------------------------------------------------------------------------------------------------------------------------------
Interest rate spread 3.15 2.92
Impact of noninterest-bearing sources .61 .71
----------------------------------------------------------------------------------------------------------------------------------
Net interest income/margin $1,696 3.76% $1,644 3.63%
----------------------------------------------------------------------------------------------------------------------------------
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 nine months ended September 30, 2001 and September 30, 2000
were both $89 million. For each of the three months ended September 30, 2001,
June 30, 2001 and September 30, 2000 loan fees were $29 million, $30 million and
$29 million, respectively.
40
-----------------------------------------------------------------------
Third Quarter 2001 Second Quarter 2001
-----------------------------------------------------------------------
Taxable-equivalent basis Average Average Average Average
Dollars in millions Balances Interest Yields/Rates Balances Interest Yields/Rates
----------------------------------------------------------------------------------------- --------------------------------
ASSETS
Interest-earning assets $1,955 $24 4.83% $1,723 $31 7.05%
Loans held for sale
Securities
Securities available for sale
U.S. Treasury and government agencies and
corporations 3,908 56 5.69 3,696 54 5.79
Other debt 6,538 97 5.93 7,910 122 6.18
State, municipal and other 91 1 7.75 101 2 7.33
-------------------------------------------------- ----------------------- ---------------------
Total securities available for sale 10,537 154 5.86 11,707 178 6.07
Securities held to maturity 92 2 6.92
-------------------------------------------------- ----------------------- ---------------------
Total securities 10,629 156 5.87 11,707 178 6.07
Loans, net of unearned income
Commercial 19,296 333 6.76 20,271 375 7.31
Commercial real estate 2,548 43 6.67 2,572 48 7.40
Consumer 9,102 181 7.86 9,096 188 8.29
Residential mortgage 7,771 138 7.11 8,459 152 7.18
Lease financing 4,381 75 6.76 4,149 74 7.08
Other 456 7 6.04 459 7 6.66
-------------------------------------------------- ----------------------- ---------------------
Total loans, net of unearned income 43,554 777 7.04 45,006 844 7.46
Other 1,725 30 6.86 1,562 30 7.94
-------------------------------------------------- ----------------------- ---------------------
Total interest-earning assets/interest income 57,863 987 6.75 59,998 1,083 7.19
Noninterest-earning assets
Investment in discontinued operations
Allowance for credit losses (678) (684)
Cash and due from banks 2,921 2,907
Other assets 8,870 8,494
-------------------------------------------------- ------------- ----------
Total assets $68,976 $70,715
-------------------------------------------------- ------------- ----------
LIABILITIES, CAPITAL SECURITIES AND SHAREHOLDERS'
EQUITY
Interest-bearing liabilities
Interest-bearing deposits
Demand and money market $21,559 123 2.25 $20,944 134 2.57
Savings 1,925 4 .84 1,936 5 .94
Retail certificates of deposit 11,785 142 4.79 12,662 175 5.54
Other time 501 8 6.26 537 8 6.48
Deposits in foreign offices 357 3 3.54 1,096 12 4.17
-------------------------------------------------- ----------------------- ---------------------
Total interest-bearing deposits 36,127 280 3.07 37,175 334 3.60
Borrowed funds
Federal funds purchased 1,497 14 3.60 2,604 28 4.31
Repurchase agreements 893 7 2.90 958 9 3.64
Bank notes and senior debt 4,973 57 4.51 5,189 67 5.09
Federal Home Loan Bank borrowings 2,459 22 3.48 2,550 31 4.78
Subordinated debt 2,332 41 6.98 2,364 42 7.15
Other borrowed funds 373 (2) (1.93) 365 3 3.32
-------------------------------------------------- ----------------------- ---------------------
Total borrowed funds 12,527 139 4.35 14,030 180 5.09
-------------------------------------------------- ----------------------- ---------------------
Total interest-bearing liabilities/interest
expense 48,654 419 3.40 51,205 514 4.01
Noninterest-bearing liabilities and shareholders'
equity
Demand and other noninterest-bearing deposits 8,448 8,228
Accrued expenses and other liabilities 4,283 3,777
Mandatorily redeemable capital securities of
sibsidiary trusts 848 848
Shareholders' equity 6,743 6,657
-------------------------------------------------- ------------- ----------
Total liabilities, capital securities and
shareholders' equity $68,976 $70,715
-------------------------------------------------- -------------------------------------- ------------------------------
Interest rate spread 3.35 3.18
Impact of noninterest-bearing sources .54 .59
-------------------------------------------------- -------------------------------------- ------------------------------
Net interest income/margin $568 3.89% $569 3.77%
-------------------------------------------------- -------------------------------------- ------------------------------
--------------------------------------------
Third Quarter 2000
--------------------------------------------
Taxable-equivalent basis Average Average
Dollars in millions Balances Interest Yields/Rates
----------------------------------------------------------------------------------------------------
ASSETS
Interest-earning assets $2,151 $47 8.77%
Loans held for sale
Securities
Securities available for sale
U.S. Treasury and government agencies and
corporations 1,662 25 5.97
Other debt 3,934 65 6.65
State, municipal and other 583 9 6.08
------------------------------------------------------ ----------------------------
Total securities available for sale 6,179 99 6.41
Securities held to maturity
------------------------------------------------------ ----------------------------
Total securities 6,179 99 6.41
Loans, net of unearned income
Commercial 21,800 472 8.47
Commercial real estate 2,688 61 8.85
Consumer 9,174 201 8.72
Residential mortgage 12,405 222 7.16
Lease financing 3,238 58 7.24
Other 646 14 8.64
------------------------------------------------------ ----------------------------
Total loans, net of unearned income 49,951 1,028 8.13
Other 1,445 30 8.05
------------------------------------------------------ ----------------------------
Total interest-earning assets/interest income 59,726 1,204 7.98
Noninterest-earning assets
Investment in discontinued operations 515
Allowance for credit losses (680)
Cash and due from banks 2,848
Other assets 6,689
-------------------------------------------------------- -------------
Total assets $69,098
-------------------------------------------------------- -------------
LIABILITIES, CAPITAL SECURITIES AND SHAREHOLDERS'
EQUITY
Interest-bearing liabilities
Interest-bearing deposits
Demand and money market $18,914 175 3.68
Savings 2,020 9 1.81
Retail certificates of deposit 14,776 217 5.85
Other time 619 10 6.55
Deposits in foreign offices 1,342 23 6.50
------------------------------------------------------ ----------------------------
Total interest-bearing deposits 37,671 434 4.58
Borrowed funds
Federal funds purchased 1,904 32 6.51
Repurchase agreements 846 14 5.84
Bank notes and senior debt 6,290 108 6.75
Federal Home Loan Bank borrowings 1,105 20 7.16
Subordinated debt 2,419 45 7.44
Other borrowed funds 954 17 7.18
------------------------------------------------------ ----------------------------
Total borrowed funds 13,518 236 6.85
------------------------------------------------------ ----------------------------
Total interest-bearing liabilities/interest expense 51,189 670 5.18
Noninterest-bearing liabilities and shareholders' equity
Demand and other noninterest-bearing deposits 8,239
Accrued expenses and other liabilities 2,637
Mandatorily redeemable capital securities of subsidiary
trusts 848
Shareholders' equity 6,185
-------------------------------------------------------- -------------
Total liabilities, capital securities and
shareholders' equity $69,098
-------------------------------------------------------- -------------
Interest rate spread 2.80
Impact of noninterest-bearing sources .74
----------------------------------------------------------------------------------------------------
Net interest income/margin $534 3.54%
----------------------------------------------------------------------------------------------------
41
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 September 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 September 30,
2001 ("September 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 September 2001 Form 10-Q.
As of October 31, 2001 The PNC Financial Services Group, Inc. had 284,067,222
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 nine months ended
September 30, 2001 and 2000 27
Consolidated Balance Sheet as of September
30, 2001 and December 31, 2000 28
Consolidated Statement of Cash Flows for
the nine months ended September 30,
2001 and 2000 29
Notes to Consolidated Financial 30 - 38
Statements
Consolidated Average Balance Sheet and
Net Interest Analysis 39 - 40
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:
*10.15 Forms of Second Amendment to Change in Control
Severance Agreements
12.1 Computation of Ratio of Earnings to Fixed Charges
12.2 Computation of Ratio of Earnings to Fixed Charges and
Preferred Stock Dividends
*99 The Corporation's Employee Stock Purchase Plan, as
amended
===============================================================
* Previously filed with the Corporation's Quarterly Report on Form 10-Q for the
quarter ended September 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.
The Corporation filed the following Report on Form 8-K since June 30, 2001:
Form 8-K dated as of July 25, 2001, reporting on entering into underwriting
agreements with respect to 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, and on
the form of notes and related guarantees, filed pursuant to Item 5.
Form 8-K dated as of October 29, 2001, reporting on entering into underwriting
agreements with respect to the public offering of $600,000,000 of Floating Rate
Senior Notes due 2004, and $400,000,000 of 5.75% Senior Notes due 2006, and on
the form of notes and related guarantees, 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 Corporation's 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
2001 QUARTER High Low Close Declared
--------------------------------------------------------------------
First $75.813 $56.000 $67.750 $.48
Second 71.110 62.400 65.790 .48
Third 70.390 51.140 57.250 .48
--------------------------------------------------------------------
Total $1.44
====================================================================
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