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THE PNC FINANCIAL SERVICES GROUP, INC.
Quarterly Report on Form 10-Q
For the quarterly period ended March 31, 2000
Page 1 represents a portion of the first quarter 2000 Financial Review which is
not required by the Form 10-Q report and is not "filed" as part of the Form
10-Q.
The Quarterly Report on Form 10-Q and cross reference index is on page ___.
2
CONSOLIDATED FINANCIAL HIGHLIGHTS
1999 1999
Three months ended March 31 - dollars in millions, except per share data 2000 Core Reported
- --------------------------------------------------------------------------------------------------------------------------
FINANCIAL PERFORMANCE
Revenue
Net interest income (taxable-equivalent basis) $565 $664 $664
Noninterest income 789 583 731
Total revenue 1,354 1,247 1,395
Net income 308 293 325
Cash earnings* 337 312 344
Per common share
Basic earnings 1.04 .95 1.06
Diluted earnings 1.03 .94 1.05
Diluted cash earnings* 1.13 1.01 1.11
Cash dividends declared .45 .41 .41
*Excluding amortization of goodwill
- --------------------------------------------------------------------------------------------------------------------------
SELECTED RATIOS
Return on
Average common shareholders' equity 21.71% 20.63% 22.94%
Average assets 1.66 1.54 1.71
Net interest margin 3.46 3.86 3.86
Noninterest income to total revenue 58.27 46.75 52.40
Efficiency ** 57.36 52.06 53.45
** Excluding amortization, distributions on capital securities and
residential mortgage banking risk management activities
==========================================================================================================================
March 31 December 31 March 31
Dollars in millions, except per share data 2000 1999 1999
- --------------------------------------------------------------------------------------------------------------------------
PERIOD-END BALANCE SHEET DATA
Assets $74,307 $75,413 $74,868
Earning assets 64,065 64,671 66,710
Loans, net of unearned income 50,653 50,046 52,800
Securities available for sale 7,666 7,611 9,170
Loans held for sale 4,648 5,798 3,599
Deposits 46,701 46,668 45,799
Borrowed funds 18,094 19,347 19,935
Shareholders' equity 6,039 5,946 5,931
Common shareholders' equity 5,726 5,633 5,617
Book value per common share 19.68 19.23 18.78
CAPITAL RATIOS
Leverage 6.67% 6.61% 7.28%
Common shareholders' equity to total assets 7.71 7.47 7.50
ASSET QUALITY RATIOS
Nonperforming assets to total loans, loans held
for sale and foreclosed assets .64% .61% .58%
Allowance for credit losses to total loans 1.33 1.35 1.27
Allowance for credit losses to nonaccrual loans 219.54 225.42 230.93
Net charge-offs to average loans .25 .23 .56
==========================================================================================================================
THE PNC FINANCIAL SERVICES GROUP, INC.
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3
Financial Review
This Financial Review should be read in conjunction with The PNC Financial
Services Group, Inc. and subsidiaries' ("Corporation" or "PNC") unaudited
Consolidated Financial Statements included herein and the Financial Review and
audited Consolidated Financial Statements included in the Corporation's 1999
Annual Report.
OVERVIEW
THE PNC FINANCIAL SERVICES GROUP, INC.
The Corporation is one of the largest diversified financial services companies
in the United States operating regional banking, corporate banking, secured
finance, asset management and mortgage banking businesses that provide products
and services nationally and in PNC's primary geographic markets in Pennsylvania,
New Jersey, Delaware, Ohio and Kentucky.
Financial services organizations today are challenged to demonstrate that they
can generate sustainable and consistent earnings growth in an increasingly
competitive and volatile environment. PNC has responded to these challenges by
transitioning to a diversified national financial services organization driven
by businesses that are increasingly national in scope and less balance sheet
dependent. Increasing contributions from fee-based businesses including asset
management, processing and private banking have enhanced PNC's revenue and
earnings mix. In addition, the Corporation seeks to enhance consolidated value
by leveraging technology, information, branding, marketing and financial
resources across all businesses.
As part of this transition, the Corporation implemented a number of initiatives
designed to reshape the traditional bank franchise as well as grow
non-traditional, largely fee-based businesses with greater growth potential that
are national in scope. These include the sale of the credit card business,
exiting certain non-strategic wholesale lending businesses and the continued
downsizing of the indirect automobile lending portfolio. PNC also acquired
Investor Services Group ("ISG"). The combination of ISG with PFPC, the
Corporation's investment servicing subsidiary, created one of the nation's
leading full-service processors for pooled investment products.
As a result, PNC's noninterest income increased to 58% of total revenue for the
first quarter of 2000. These actions have also resulted in a reduction in the
loan to deposit ratio to 108% at March 31, 2000 from 121% prior to the
implementation of these initiatives at September 30, 1998.
SUMMARY FINANCIAL RESULTS
Consolidated net income for the first three months of 2000 was $308 million or
$1.03 per diluted share, a 10% increase compared with core earnings per diluted
share for the first quarter of 1999. Return on average common shareholders'
equity was 21.71% and return on average assets was 1.66% for the first quarter
of 2000 compared with core returns of 20.63% and 1.54%, respectively, a year
ago. Cash earnings per diluted share, which exclude goodwill amortization, were
$1.13 for the first quarter of 2000, a 12% increase compared with core cash
earnings per diluted share a year ago.
Reported earnings for the first quarter of 1999 were $325 million or $1.05 per
diluted share. Core earnings per diluted share were $.94 and core cash earnings
per diluted share were $1.01 in the first quarter of 1999. Core earnings exclude
$290 million of gains on the sales of the credit card business and an equity
interest in Electronic Payment Services, Inc. ("EPS") that were partially offset
by $142 million of valuation adjustments associated with exiting certain
non-strategic wholesale lending businesses and $98 million of costs related to
efficiency initiatives in 1999.
Taxable-equivalent net interest income was $565 million for the first quarter of
2000, a $99 million decrease compared with the first quarter of 1999. The net
interest margin was 3.46% for the first quarter of 2000 compared with 3.86% in
the first quarter of 1999. The decreases were primarily due to the downsizing of
certain credit-related businesses in 1999 and funding costs related to the ISG
acquisition.
The provision for credit losses of $31 million in the first quarter of 2000 was
equal to net charge-offs.
Noninterest income was $789 million for the first quarter of 2000, a $206
million or 35% increase in the quarter-to-quarter comparison, excluding noncore
items in 1999. The increase was primarily driven by strong growth in fee-based
businesses, the impact of the ISG acquisition and higher equity management
revenue.
Noninterest expense was $847 million and the efficiency ratio was 57.4% in the
first quarter of 2000 compared with $725 million and 52.1%, respectively, in the
first quarter of 1999, excluding noncore items. The quarter-to-quarter increases
were primarily related to the ISG acquisition and higher expenses commensurate
with fee-based revenue growth.
Total assets were $74.3 billion at March 31, 2000 compared with $75.4 billion at
December 31, 1999. The decrease was primarily due to lower commercial and
residential mortgage loans held for sale.
THE PNC FINANCIAL SERVICES GROUP, INC.
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Financial Review
Shareholders' equity totaled $6.0 billion, the leverage ratio was 6.67% and Tier
I and total risk-based capital ratios were 7.25% and 11.34%, respectively, at
March 31, 2000.
Overall asset quality remained relatively stable during the first quarter of
2000. The ratio of nonperforming assets to total loans, loans held for sale and
foreclosed assets was .64% at March 31, 2000 compared with .61% at December 31,
1999. Nonperforming assets were $355 million at March 31, 2000 compared with
$338 million at December 31, 1999. The allowance for credit losses was $674
million and represented 1.33% of period-end loans and 220% of nonaccrual loans
at March 31, 2000. The comparable amounts were 1.35% and 225%, respectively, at
December 31, 1999. Net charge-offs were $31 million or .25% of average loans in
the first quarter of 2000 compared with $30 million or .23%, respectively, in
the fourth quarter of 1999.
FORWARD-LOOKING STATEMENTS
This report includes forward-looking statements within the meaning of the
Private Securities Litigation Reform Act with respect to financial performance
and other financial and business matters. Forward-looking statements are
typically identified by words or phrases such as "believe," "expect,"
"anticipate," "intend," "estimate," "position" and variations of such words and
similar expressions, or future or conditional verbs such as "will," "would,"
"should," "could," "may" or similar expressions. The Corporation cautions that
these forward-looking statements are subject to numerous assumptions, risks and
uncertainties, all of which change over time, and the Corporation assumes no
duty to update forward-looking statements. Actual results could differ
materially from those anticipated in these forward-looking statements and future
results could differ from historic performance.
In addition to factors previously disclosed by the Corporation and those
identified elsewhere herein, the following factors, among others, could cause
actual results to differ materially from forward-looking statements or historic
performance: increased credit risk; the introduction, withdrawal, success and
timing of business initiatives and strategies; competitive conditions; the
inability to sustain revenue and earnings growth; the inability to realize cost
savings or revenues and implement integration plans associated with acquisitions
and divestitures; economic conditions; changes in interest rates and financial
and capital markets; inflation; investment performance; customer
disintermediation; customer borrowing, repayment, investment and deposit
practices; customer acceptance of PNC products and services; and the impact,
extent and timing of technological changes, capital management activities, and
actions of the Federal Reserve Board and legislative and regulatory actions and
reforms.
THE PNC FINANCIAL SERVICES GROUP, INC.
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REVIEW OF BUSINESSES
PNC operates eight major businesses engaged in regional banking, corporate
banking, secured finance, asset management, and mortgage banking activities:
Regional Banking, Corporate Banking, PNC Real Estate Finance, PNC Business
Credit, PNC Advisors, BlackRock, PFPC and PNC Mortgage.
Business results are based on PNC's management accounting practices and the
Corporation's current management structure. There is no comprehensive,
authoritative body of guidance for management accounting equivalent to generally
accepted accounting principles; therefore, PNC's business results are not
necessarily comparable with similar information for any other financial services
institution. Financial results are presented as if each business operated on a
stand-alone basis.
The presentation of business results was changed during the first quarter of
2000 to reflect the Corporation's current operating strategy and recent
organizational changes. Middle market and equipment leasing activities
(previously included in Regional Banking) are reported in Corporate Banking. In
addition, PNC Real Estate Finance and PNC Business Credit are reported
separately within PNC Secured Finance. Regional real estate lending activities
(previously included in Regional Banking) are reported in PNC Real Estate
Finance. Business financial results for the first quarter of 2000 and 1999 are
presented consistent with this structure.
The management accounting process uses various balance sheet and income
statement assignments and transfers to measure performance of the businesses.
Methodologies change from time to time as management accounting practices are
enhanced and businesses change. Securities or borrowings and related net
interest income are assigned based on the net asset or liability position of
each business. Capital is assigned based on management's assessment of inherent
risks and equity levels at independent companies providing similar products and
services. The allowance for credit losses is allocated to the businesses based
on risk inherent in the loan portfolios. Support areas not directly aligned with
the businesses are allocated primarily based on the utilization of services.
Total business financial results differ from consolidated financial results
primarily due to differences between management accounting practices and
generally accepted accounting principles, divested and exited businesses, equity
management activities, minority interests, residual asset and liability
management activities, eliminations and unassigned items, the impact of which is
reflected in Other.
RESULTS OF BUSINESSES
Return on
Earnings Revenue * Assigned Capital Average Assets
----------------------- --------------------- --------------------- ----------------------
Three months ended March 31 - dollars 2000 1999 2000 1999 2000 1999 2000 1999
in millions
- ----------------------------------------- --------- ------------ ---------- ---------- --------- ----------- ----------- ----------
PNC Bank
Regional Banking $129 $116 $477 473 20% 19% $37,866 $37,525
Corporate Banking 64 54 214 172 22 19 15,950 15,679
- ---------------------------------------- ---------- ------------ ---------- ---------- ----------- ----------
Total PNC Bank 193 170 691 645 21 19 53,816 53,204
PNC Secured Finance
PNC Real Estate Finance 13 15 46 48 14 15 5,382 5,634
PNC Business Credit 13 8 28 18 38 30 2,084 1,597
- ---------------------------------------- ---------- ------------ ---------- ---------- ----------- ----------
Total PNC Secured Finance 26 23 74 66 20 18 7,466 7,231
Asset Management
PNC Advisors 41 36 204 179 30 26 3,598 3,249
BlackRock 19 12 108 88 26 43 388 400
PFPC 6 11 165 54 12 44 1,603 268
- ---------------------------------------- ---------- ------------ ---------- ---------- ----------- ----------
Total Asset Management 66 59 477 321 25 31 5,589 3,917
PNC Mortgage 6 11 76 101 6 10 6,333 7,084
- ---------------------------------------- ---------- ------------ ---------- ---------- ----------- ----------
Total businesses 291 263 1,318 1,133 20 20 73,204 71,436
Other 17 30 36 114 1,473 5,522
- ---------------------------------------- ---------- ------------ ---------- ---------- ----------- ----------
Total consolidated - core 308 293 1,354 1,247 22 21 74,677 76,958
Gain on sale of credit card business 125 193
Gain on sale of equity interest in EPS 63 97
Wholesale lending repositioning (92) (142)
Costs related to efficiency initiatives (64)
- ---------------------------------------- ---------- ------------ ---------- ---------- --------- ----------- ----------- ----------
Total consolidated - reported $308 $ 325 $1,354 $1,395 22 23 $74,677 $76,958
- ---------------------------------------- ---------- ------------ ---------- ---------- --------- ----------- ----------- ----------
* Taxable-equivalent basis
THE PNC FINANCIAL SERVICES GROUP, INC.
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Financial Review
REGIONAL BANKING
Three months ended March 31 -
dollars in millions 2000 1999
- ------------------------------------------------------------------
INCOME STATEMENT
Net interest income $344 $352
Noninterest income 133 121
- ------------------------------------------------------------------
Total revenue 477 473
Provision for credit losses 12 18
Noninterest expense 264 271
- ------------------------------------------------------------------
Pretax earnings 201 184
Income taxes 72 68
- ------------------------------------------------------------------
Earnings $129 $116
- ------------------------------------------------------------------
AVERAGE BALANCE SHEET
Loans
Consumer
Home equity $5,252 $5,055
Indirect 1,435 2,287
Education 97 1,348
Other consumer 786 672
- ------------------------------------------------------------------
Total consumer 7,570 9,362
Commercial 3,725 3,771
Residential mortgage 11,603 11,125
Other 1,320 1,188
- ------------------------------------------------------------------
Total loans 24,218 25,446
Securities available for sale 5,676 4,822
Loans held for sale 1,429
Assigned assets and other assets 6,543 7,257
- ------------------------------------------------------------------
Total assets $37,866 $37,525
- ------------------------------------------------------------------
Deposits
Noninterest-bearing demand $4,594 $5,224
Interest-bearing demand 5,274 4,607
Money market 9,482 8,422
Savings 2,077 2,460
Certificates 13,611 13,679
- ------------------------------------------------------------------
Total net deposits 35,038 34,392
Other liabilities 274 601
Assigned capital 2,554 2,532
- ------------------------------------------------------------------
Total funds $37,866 $37,525
- ------------------------------------------------------------------
PERFORMANCE RATIOS
Return on assigned capital 20% 19%
Noninterest income to total revenue 28 26
Efficiency 53 55
==================================================================
Regional Banking provides credit, deposit, branch-based brokerage and electronic
banking products and services to retail customers as well as credit, treasury
management and capital markets products and services to small businesses
primarily within PNC's geographic footprint.
Regional Banking's strategic focus is on driving sustainable revenue growth
while aggressively managing the revenue/expense relationship. Regional Banking
utilizes knowledge-based marketing capabilities to analyze customer demographic
information, transaction histories and delivery preferences to develop
customized banking packages focused on improving customer satisfaction and
profitability.
Regional Banking has also invested heavily in building a sales culture and
infrastructure while improving efficiency. Capital investments have been
redistributed strategically with a greater proportion going towards the
development of alternative delivery capabilities consistent with customer
preferences.
Regional Banking contributed 45% of total business earnings for the first three
months of 2000 compared with 44% for the first three months of 1999. Earnings
increased 11% to $129 million for the first three months of 2000 and performance
ratios improved.
Total revenue was $477 million for the first three months of 2000 compared with
$473 million for the first three months of 1999. The increase was primarily due
to a $12 million or 10% increase in noninterest income that was driven by higher
consumer service and brokerage fees, partially offset by the downsizing of the
indirect automobile lending portfolio and the comparative impact of branch sales
in 1999.
Consumer loans declined primarily due to the continued downsizing of the
indirect automobile lending portfolio as well as the decision to sell education
loans in repayment that were reclassified to held for sale. Interest-bearing
demand and money market deposits increased $1.7 billion or 13% primarily due to
the impact of strategic marketing initiatives, which reflects PNC's focus on
deepening customer relationships.
Regional Banking engages in credit and deposit activities that are affected by,
among other things, economic and financial market conditions. Accordingly,
changes in the economy or financial markets could impact asset quality and
results of operations.
THE PNC FINANCIAL SERVICES GROUP, INC.
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CORPORATE BANKING
Three months ended March 31 -
dollars in millions 2000 1999
- -----------------------------------------------------------------
INCOME STATEMENT
Credit-related revenue $99 $88
Noncredit revenue 115 84
- -----------------------------------------------------------------
Total revenue 214 172
Provision for credit losses 15 3
Noninterest expense 101 84
- -----------------------------------------------------------------
Pretax earnings 98 85
Income taxes 34 31
- -----------------------------------------------------------------
Earnings $64 $54
- -----------------------------------------------------------------
AVERAGE BALANCE SHEET
Loans
Middle market $5,545 $5,469
Specialized industries 3,814 4,064
Large corporate 2,684 2,573
Leasing 1,719 1,288
Other 247 430
- -----------------------------------------------------------------
Total loans 14,009 13,824
Other assets 1,941 1,855
- -----------------------------------------------------------------
Total assets $15,950 $15,679
- -----------------------------------------------------------------
Net deposits $4,526 $4,371
Assigned funds and other liabilities 10,228 10,132
Assigned capital 1,196 1,176
- -----------------------------------------------------------------
Total funds $15,950 $15,679
- -----------------------------------------------------------------
PERFORMANCE RATIOS
Return on assigned capital 22% 19%
Noncredit revenue to total revenue 54 49
Efficiency 47 48
=================================================================
Corporate Banking provides specialized credit, equipment leasing, treasury
management and capital markets products and services to large and mid-sized
corporations, institutions and government entities primarily within PNC's
geographic region.
The strategic focus for Corporate Banking is to emphasize higher-margin
noncredit products and services, especially treasury management and capital
markets, as well as disciplined balance sheet growth primarily driven through
the expansion of equipment leasing.
Corporate Banking made the decision to exit certain non-strategic wholesale
lending businesses during 1999. These activities are excluded from business
results in both periods and reported in Other.
Corporate Banking contributed 22% of total business earnings for the first three
months of 2000 compared with 21% for the first three months of 1999. Earnings
increased $10 million or 19% to $64 million for the first three months of 2000
and performance ratios improved.
Total revenue of $214 million for the first three months of 2000 increased $42
million or 24% compared with the first three months of 1999. Credit-related
revenue increased 13% in the quarter-to-quarter comparison driven by higher
loans in the middle market, large corporate and leasing segments. Noncredit
revenue, which includes noninterest income and the benefit of compensating
balances received in lieu of fees, was $115 million for the first three months
of 2000, a $31 million or 37% increase compared with the first three months of
1999 primarily driven by increases in treasury management and capital markets
fees, as well as revenue associated with equity investments. Noncredit revenue
comprised 54% of total revenue for the first three months of 2000 reflecting the
emphasis on sales of fee-based products.
The provision for credit losses was $15 million for the first three months of
2000, a $12 million increase compared with the prior-year quarter due to a
higher level of net charge-offs.
The increase in noninterest expense in the quarter-to-quarter comparison was
commensurate with revenue growth.
Treasury management and capital markets products offered through Corporate
Banking are sold by several businesses across the Corporation and related
revenue is included in the results of those businesses. Consolidated revenue
from treasury management was $85 million for the first three months of 2000, a
20% increase compared with the first three months of 1999. Consolidated revenue
from capital markets was $34 million for the first three months of 2000, a 34%
increase compared with the first three months of 1999.
Corporate Banking engages in credit and capital markets activities that are
impacted by, among other things, economic and financial market conditions.
Accordingly, changes in the economy or financial markets could impact asset
quality and results of operations.
THE PNC FINANCIAL SERVICES GROUP, INC.
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Financial Review
PNC REAL ESTATE FINANCE
Three months ended March 31 -
dollars in millions 2000 1999
- ----------------------------------------------------------------
INCOME STATEMENT
Net interest income $27 $30
Noninterest income
Net commercial mortgage banking 12 9
Other 7 9
- ----------------------------------------------------------------
Total noninterest income 19 18
- ----------------------------------------------------------------
Total revenue 46 48
Provision for credit losses
Noninterest expense 35 29
- ----------------------------------------------------------------
Pretax earnings 11 19
Income taxes (2) 4
- ----------------------------------------------------------------
Earnings $13 $15
- ----------------------------------------------------------------
AVERAGE BALANCE SHEET
Loans
Commercial - real estate related $2,019 $2,390
Commercial real estate 2,438 2,530
- ----------------------------------------------------------------
Total loans 4,457 4,920
Commercial mortgages held for sale 99 62
Other assets 826 652
- ----------------------------------------------------------------
Total assets $5,382 $5,634
- ----------------------------------------------------------------
Deposits $226 $199
Assigned funds and other liabilities 4,770 5,035
Assigned capital 386 400
- ----------------------------------------------------------------
Total funds $5,382 $5,634
- ----------------------------------------------------------------
PERFORMANCE RATIOS
Return on assigned capital 14% 15%
Noninterest income to total revenue 41 38
Efficiency 61 48
================================================================
PNC Real Estate Finance provides credit, capital markets, treasury management
and loan servicing products and services to private developers, real estate
investment trusts, pension funds and the affordable housing market nationally.
Over the past several years, through customer segmentation and strategic
acquisitions, PNC Real Estate Finance has redeployed capital historically
assigned to lending activities in PNC's primary geographic markets to fee-based
businesses focused on loan servicing and securitization on a national basis.
PNC Real Estate Finance made the decision to exit the cyclical mortgage
warehouse lending business and certain non-strategic commercial real estate
portfolios at the end of 1999. These activities are excluded from business
results in both periods and reported in Other.
PNC Real Estate Finance contributed 4% of total business earnings for the first
three months of 2000 compared with 6% for the first three months of 1999.
Earnings were $13 million for the first three months of 2000 compared with $15
million for the first three months of 1999.
Total revenue was $46 million for the first three months of 2000 compared with
$48 million for the first three months of 1999 as increases in treasury
management, affordable housing and commercial mortgage servicing fees in 2000
were more than offset by the comparative impact of gains from workout activities
in 1999. There were no gains from commercial mortgage-backed securitizations in
the first quarter of 2000 or 1999.
Noninterest expense was $35 million for the first three months of 2000 compared
with $29 million in the same period last year. The increase was primarily due to
passive losses on low income housing equity investments, the comparative impact
of legal expense recoveries from loan workout activities in 1999 and investments
in technology to support the loan servicing platform. The increase in passive
losses on low income housing investments was more than offset by related tax
credits that resulted in an income tax benefit for the first three months of
2000.
COMMERCIAL MORTGAGE SERVICING PORTFOLIO
In billions 2000 1999
- ----------------------------------------------------------------
January 1 $45 $39
Acquisitions/additions 3 4
Repayments/transfers (2) (3)
- ----------------------------------------------------------------
March 31 $46 $40
================================================================
At March 31, 2000, the commercial mortgage servicing portfolio was $46 billion,
a 15% increase compared with March 31, 1999.
PNC Real Estate Finance engages in credit and capital markets activities that
are impacted by, among other things, economic and financial market conditions.
Accordingly, changes in the economy or financial markets could impact asset
quality and results of operations.
THE PNC FINANCIAL SERVICES GROUP, INC.
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PNC BUSINESS CREDIT
Three months ended March 31 -
dollars in millions 2000 1999
- ----------------------------------------------------------------
INCOME STATEMENT
Net interest income $24 $16
Noninterest income 4 2
- ----------------------------------------------------------------
Total revenue 28 18
Provision for credit losses
Noninterest expense 7 6
- ----------------------------------------------------------------
Pretax earnings 21 12
Income taxes 8 4
- ----------------------------------------------------------------
Earnings $13 $8
- ----------------------------------------------------------------
AVERAGE BALANCE SHEET
Loans $1,999 $1,565
Other assets 85 32
- ----------------------------------------------------------------
Total assets $2,084 $1,597
- ----------------------------------------------------------------
Deposits $44 $41
Assigned funds and other liabilities 1,902 1,447
Assigned capital 138 109
- ----------------------------------------------------------------
Total funds $2,084 $1,597
- ----------------------------------------------------------------
PERFORMANCE RATIOS
Return on assigned capital 38% 30%
Noninterest income to total revenue 14 11
Efficiency 21 28
================================================================
PNC Business Credit provides asset-based lending, capital markets and treasury
management products and services to middle market customers on a national basis.
PNC Business Credit's strategic focus is to build scale in this business through
the disciplined expansion of existing offices as well as the addition of new
marketing locations.
PNC Business Credit contributed 4% of total business earnings for the first
three months of 2000 compared with 3% for the first three months of 1999.
Earnings increased $5 million or 63% to $13 million for the first three months
of 2000 compared with the first three months of 1999.
Revenue was $28 million for the first three months of 2000, a $10 million or 56%
increase compared with the first three months of 1999 primarily due to the
impact of higher loan outstandings associated with the strategic expansion of
this business.
Noninterest expense was $7 million and the efficiency ratio improved to 21% for
the first three months of 2000 compared with $6 million and 28%, respectively,
in the same period last year. The return on assigned capital improved to 38% for
the first three months of 2000 due to strong revenue growth and improved
efficiency.
PNC Business Credit engages in credit and capital markets activities that are
impacted by, among other things, economic and financial market conditions.
Accordingly, changes in the economy or financial markets could impact asset
quality and results of operations.
THE PNC FINANCIAL SERVICES GROUP, INC.
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10
Financial Review
PNC ADVISORS
Three months ended March 31 -
dollars in millions 2000 1999
- ----------------------------------------------------------------
INCOME STATEMENT
Net interest income $35 $33
Noninterest income
Investment management and trust 100 94
Brokerage 50 36
Other 19 16
- ----------------------------------------------------------------
Total noninterest income 169 146
- ----------------------------------------------------------------
Total revenue 204 179
Provision for credit losses 3 1
Noninterest expense 135 120
- ----------------------------------------------------------------
Pretax earnings 66 58
Income taxes 25 22
- ----------------------------------------------------------------
Earnings $41 $36
- ----------------------------------------------------------------
AVERAGE BALANCE SHEET
Loans
Residential mortgage $978 $1,004
Consumer 954 952
Commercial 658 621
Other 552 255
- ----------------------------------------------------------------
Total loans 3,142 2,832
Other assets 456 417
- ----------------------------------------------------------------
Total assets $3,598 $3,249
- ----------------------------------------------------------------
Deposits $2,084 $2,431
Assigned funds and other liabilities 967 262
Assigned capital 547 556
- ----------------------------------------------------------------
Total funds $3,598 $3,249
- ----------------------------------------------------------------
PERFORMANCE RATIOS
Return on assigned capital 30% 26%
Noninterest income to total revenue 83 82
Efficiency 65 66
================================================================
PNC Advisors offers customized investment management, high-end brokerage,
personal trust, estate planning and traditional banking services to affluent and
wealthy individuals, and investment management, trust and administrative
services to pension funds, 401(k) plans and charitable organizations.
PNC Advisors strives to be the "financial advisor of choice" in the growing
affluent market, providing a full range of high-quality, customized and
predominantly fee-based investment products and services. PNC Advisors continues
to expand Hilliard Lyons, PNC's high-end brokerage company that serves the
affluent, throughout the Corporation's geographic region, which includes some of
the nation's wealthiest metropolitan areas.
PNC Advisors contributed 14% of total business earnings for the first three
months of 2000 and 1999. Earnings of $41 million for the first three months of
2000 increased $5 million or 14% compared with the same period last year.
Revenue increased $25 million or 14% for the first three months of 2000 compared
with the first three months of 1999. The increase was primarily driven by higher
brokerage revenue resulting from the expansion of PNC Advisors' brokerage
distribution network and significant activity in the equity markets. Higher
investment management and trust revenue, primarily resulting from new business,
also contributed to higher noninterest income. Noninterest expense increased in
the quarter-to-quarter comparison commensurate with revenue growth.
ASSETS UNDER MANAGEMENT*
March 31 - in billions 2000 1999
- ----------------------------------------------------------------
Personal investment management and trust $59 $57
Institutional trust 11 9
- ----------------------------------------------------------------
Total $70 $66
================================================================
* Assets under management do not include brokerage assets administered.
At March 31, 2000, PNC Advisors managed $70 billion of assets, a 6% increase
compared with March 31, 1999 primarily due to new business. Brokerage assets
administered by PNC Advisors increased $3 billion in the period-to-period
comparison to $28 billion at March 31, 2000 reflecting increased asset gathering
at Hilliard Lyons.
PNC Advisors revenue and financial results are affected by, among other things,
the relative investment performance of assets under management, the appreciation
or depreciation in the net asset values of assets under management and financial
market conditions. Accordingly, future results could differ materially from
historic performance.
THE PNC FINANCIAL SERVICES GROUP, INC.
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BLACKROCK
Three months ended March 31 -
dollars in millions 2000 1999
- ----------------------------------------------------------------
INCOME STATEMENT
Investment advisory and administrative fees $102 $83
Other income 6 5
- ----------------------------------------------------------------
Total revenue 108 88
Operating expense 54 44
Fund administration
and servicing costs - affiliates 20 18
Goodwill amortization 2 2
- ----------------------------------------------------------------
Total expense 76 64
Operating income 32 24
Nonoperating income (expense) 1 (3)
- ----------------------------------------------------------------
Pretax earnings 33 21
Income taxes 14 9
- ----------------------------------------------------------------
Earnings $19 $12
- ----------------------------------------------------------------
PERIOD-END BALANCE SHEET
Goodwill $192 $201
Other assets 196 199
- ----------------------------------------------------------------
Total assets $388 $400
- ----------------------------------------------------------------
Borrowings $178
Other liabilities $88 104
Shareholders' equity 300 118
- ----------------------------------------------------------------
Total funds $388 $400
- ----------------------------------------------------------------
PERFORMANCE RATIOS
Return on equity 26% 43%
Operating margin* 36 34
Diluted earnings per share $.30 $.22
================================================================
* Excludes the impact of affiliate fund administration and servicing costs.
BlackRock manages assets for institutions and individuals through a variety of
fixed income, liquidity, equity and alternative investment products, including
BlackRock's flagship fund families.
BlackRock contributed 7% of total business earnings for the first three months
of 2000 compared with 4% for the first three months of 1999. Earnings of $19
million for the first three months of 2000 increased 57% compared with the same
period last year. Total revenue for the first three months of 2000 increased $20
million or 23% compared with the first three months of 1999 primarily due to
strong growth in investment advisory and administrative fees resulting from new
asset management mandates, which represented $27 billion of the $32 billion or
23% increase in assets under management. The increase in operating expense in
the quarter-to-quarter comparison supported revenue growth.
At March 31, 2000, BlackRock managed $172 billion of assets for individual and
institutional investors.
ASSETS UNDER MANAGEMENT
March 31 - in billions 2000 1999
- ----------------------------------------------------------------
Separate Accounts
Fixed income* $80 $64
Liquidity 19 14
Equity 6 2
- ----------------------------------------------------------------
Total Separate Accounts 105 80
Mutual Funds
Fixed income 14 14
Liquidity 37 34
Equity 16 12
- ----------------------------------------------------------------
Total Mutual Funds 67 60
- ----------------------------------------------------------------
Total assets under management $172 $140
- ----------------------------------------------------------------
Proprietary mutual funds
BlackRock Funds $29 $25
Provident Institutional Funds 26 23
- ----------------------------------------------------------------
Total proprietary mutual funds $55 $48
================================================================
* Includes alternative investment products.
BlackRock revenue and financial results are impacted by, among other things, the
relative investment performance of BlackRock's sponsored investment products and
separately managed accounts, the appreciation or depreciation in the net asset
values of assets under management and financial market conditions. Accordingly,
future results could differ materially from historic performance.
BlackRock, Inc. is a publicly traded company that is 70% owned by PNC.
BlackRock's common stock is listed on the New York Stock Exchange under the
symbol BLK. Additional information about BlackRock is available in its filings
with the Securities and Exchange Commission ("SEC") and may be obtained
electronically at the SEC's home page at www.sec.gov.
THE PNC FINANCIAL SERVICES GROUP, INC.
----
10
12
Financial Review
PFPC
Three months ended March 31 -
dollars in millions 2000 1999
- ----------------------------------------------------------------
INCOME STATEMENT
Revenue $165 $54
Operating expense 128 35
- ----------------------------------------------------------------
Operating income 37 19
Debt financing 20
Amortization 7 1
- ----------------------------------------------------------------
Pretax earnings 10 18
Income taxes 4 7
- ----------------------------------------------------------------
Earnings $6 $11
- ----------------------------------------------------------------
AVERAGE BALANCE SHEET
Total assets $1,603 $268
- ----------------------------------------------------------------
Deposits $136 $149
Assigned funds and other liabilities 1,261 18
Assigned capital 206 101
- ----------------------------------------------------------------
Total funds $1,603 $268
- ----------------------------------------------------------------
PERFORMANCE RATIOS
Return on assigned capital 12% 44%
Operating margin 22 35
================================================================
PFPC, the Corporation's investment servicing subsidiary, provides a wide range
of processing services to the investment management community. PFPC provides
customized services to clients in the United States and to the global funds
marketplace through its Dublin, Ireland operation.
On December 1, 1999, PFPC acquired Investor Services Group ("ISG"), one of the
nation's leading providers of back-office services to mutual funds and
retirement plans. The acquisition added two key related businesses, as well as
retirement plan servicing, to PFPC's expanding operations. The integration of
ISG into PFPC continues as scheduled.
PFPC contributed 2% of total business earnings for the first three months of
2000 compared with 4% for the first three months of 1999. Earnings decreased $5
million in the quarter-to-quarter comparison primarily due to the impact of the
ISG acquisition. Excluding the net impact of ISG, earnings increased 23% in the
quarter-to-quarter comparison.
Revenue increased $111 million to $165 million for the first three months of
2000 compared with the first three months of 1999. The acquisition of ISG
accounted for $97 million of the increase in revenue. The remaining increase was
driven by new business, existing client growth and market appreciation.
Operating expense increased in the quarter-to-quarter comparison and performance
ratios were impacted by the ISG acquisition and infrastructure costs associated
with business expansion.
SERVICING STATISTICS
March 31 2000 1999
- ----------------------------------------------------------------
Accounting/administration ($ in billions) $448 $266
Custody ($ in billions) $425 $338
Transfer agency
shareholder accounts (in millions) 39 3
================================================================
The increases in accounting/administration assets serviced and transfer agency
shareholder accounts were primarily due to the ISG acquisition.
PFPC revenue and financial results are affected by, among other things, the
number and value of customer accounts serviced and financial market conditions.
Accordingly, future results could differ materially from historic performance.
THE PNC FINANCIAL SERVICES GROUP, INC.
----
11
13
PNC MORTGAGE
Three months ended March 31 -
dollars in millions 2000 1999
- ----------------------------------------------------------------
INCOME STATEMENT
Net mortgage banking revenue
Residential mortgage servicing $99 $75
Origination and securitization 12 58
MSR amortization, net of servicing hedge (40) (57)
- ----------------------------------------------------------------
Net mortgage banking revenue 71 76
Net interest income 5 25
- ----------------------------------------------------------------
Total revenue 76 101
Operating expense 65 83
- ----------------------------------------------------------------
Pretax earnings 11 18
Income taxes 5 7
- ----------------------------------------------------------------
Earnings $6 $11
- ----------------------------------------------------------------
AVERAGE BALANCE SHEET
Residential mortgages held for sale $2,115 $2,948
Securities available for sale 1,883 2,669
Mortgage servicing rights and other assets 2,335 1,467
- ----------------------------------------------------------------
Total assets $6,333 $7,084
- ----------------------------------------------------------------
Escrow deposits $959 $1,220
Assigned funds and other liabilities 4,962 5,404
Assigned capital 412 460
- ----------------------------------------------------------------
Total funds $6,333 $7,084
- ----------------------------------------------------------------
PERFORMANCE RATIOS
Return on assigned capital 6% 10%
Net mortgage banking revenue to total revenue 93 75
Efficiency 56 53
================================================================
PNC Mortgage originates, purchases and services residential mortgages and
related products. PNC Mortgage also acquires and securitizes residential
mortgages as private-label, mortgage-backed securities and performs the master
servicing of those securities for investors.
PNC Mortgage's strategic focus is on expanding sales of a broader array of
financial products while leveraging its technology platform and servicing
capabilities to manage the revenue/expense relationship for traditional mortgage
products.
PNC Mortgage contributed 2% of total business earnings for the first three
months of 2000 compared with 4% for the first three months of 1999. Earnings
decreased in the comparison due to lower origination and related securitization
volume resulting from lower refinancing activity. The decrease in origination
and securitization income was partially offset by higher residential mortgage
servicing revenue due to the impact of a larger servicing portfolio.
Operating expense decreased $18 million or 21% in the quarter-to-quarter
comparison due to operating expense reduction initiatives associated with lower
origination volume.
During the first three months of 2000, PNC Mortgage funded $2 billion of
residential mortgages, with 38% consisting of retail originations. The
comparable amounts were $6 billion and 40%, respectively, for the first three
months of 1999. Production volume for the first three months of 2000 consisted
of $1 billion of originated loans and $1 billion of mortgages acquired through
correspondent and contractual flow agreements. The corresponding amounts for the
first three months of 1999 were $2 billion and $4 billion, respectively.
RESIDENTIAL MORTGAGE SERVICING PORTFOLIO
In billions 2000 1999
- ----------------------------------------------------------------
January 1 $75 $62
Production volume 2 6
Acquisitions 3 2
Repayments (2) (4)
- ----------------------------------------------------------------
March 31 $78 $66
================================================================
At March 31, 2000, the residential mortgage servicing portfolio totaled $78
billion. Loans included in this portfolio that were serviced for others totaled
$70 billion and had a weighted-average coupon of 7.61%. Capitalized residential
mortgage servicing rights ("MSR") totaled $1.6 billion at March 31, 2000, and
had an estimated fair value of $1.8 billion. The master servicing portfolio grew
18% in the quarter-to-quarter comparison to $36 billion at March 31, 2000.
The value of MSR and related amortization are affected by changes in interest
rates. If interest rates decline and the rate of prepayments increases, the
underlying servicing fees and related MSR value also would decline. In a period
of rising interest rates, a converse relationship would be expected. PNC
Mortgage seeks to manage this risk by using financial instruments as hedges
designed to move in the opposite direction of expected MSR value changes.
Changes in interest rates also can affect the level of mortgage originations
that generally are expected to decline as interest rates increase, and increase
as interest rates decline.
THE PNC FINANCIAL SERVICES GROUP, INC.
----
12
14
Financial Review
CONSOLIDATED INCOME STATEMENT REVIEW
NET INTEREST INCOME ANALYSIS
Taxable-equivalent basis Average Balances Interest Income/Expense Average Yields/Rates
Three months ended March 31 - ------------------------------ -------------------------- -----------------------------
dollars in millions 2000 1999 Change 2000 1999 Change 2000 1999 Change
- ------------------------------------------------------------------------------------------------------------------------------------
Interest-earning assets
Loans held for sale $5,434 $3,383 $2,051 $107 $56 $51 7.86% 6.68% 118bp
Securities available for sale 8,011 7,755 256 118 107 11 5.91 5.55 36
Loans, net of unearned income
Consumer 9,261 10,955 (1,694) 192 222 (30) 8.33 8.21 12
Credit card 2,724 (2,724) 100 (100) 14.91 NM
Residential mortgage 12,947 12,184 763 229 216 13 7.07 7.09 (2)
Commercial 21,793 24,574 (2,781) 447 462 (15) 8.12 7.52 60
Commercial real estate 2,698 3,398 (700) 59 65 (6) 8.60 7.70 90
Lease financing 2,958 2,443 515 54 44 10 7.33 7.17 16
Other 688 417 271 14 8 6 8.09 7.69 40
- ------------------------------------------------------------------------------------------------------
Total loans, net of unearned income 50,345 56,695 (6,350) 995 1,117 (122) 7.87 7.91 (4)
Other 1,173 1,005 168 22 16 6 7.60 6.19 141
- ------------------------------------------------------------------------------------------------------
Total interest-earning assets/
interest income 64,963 68,838 (3,875) 1,242 1,296 (54) 7.62 7.56 6
Noninterest-earning assets 9,714 8,120 1,594
- --------------------------------------------------------------------------
Total assets $74,677 $76,958 $(2,281)
==========================================================================
Interest-bearing liabilities
Deposits
Demand and money market $18,355 $16,825 $1,530 138 113 25 3.03 2.73 30
Savings 2,138 2,535 (397) 9 10 (1) 1.64 1.63 1
Retail certificates of deposit 14,591 14,652 (61) 191 184 7 5.25 5.08 17
Other time 637 2,610 (1,973) 10 35 (25) 6.36 5.35 101
Deposits in foreign offices 1,489 759 730 21 9 12 5.63 4.78 85
- ------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 37,210 37,381 (171) 369 351 18 3.98 3.80 18
Borrowed funds 20,096 21,584 (1,488) 308 281 27 6.08 5.21 87
- ------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities/ interest expense 57,306 58,965 (1,659) 677 632 45 4.72 4.31 41
--------------------------------------------------------
Noninterest-bearing liabilities, capital
securities and shareholders' equity 17,371 17,993 (622)
- --------------------------------------------------------------------------
Total liabilities, capital securities
and shareholders' equity $74,677 $76,958 $(2,281)
==========================================================================
Interest rate spread 2.90 3.25 (35)
Impact of noninterest-bearing sources .56 .61 (5)
-----------------------------
Net interest income/margin $565 $664 $(99) 3.46% 3.86% (40)bp
====================================================================================================================================
NM - not meaningful
NET INTEREST INCOME Changes in net interest income and margin result from the
interaction between the volume and composition of earning assets, related yields
and associated funding costs. Accordingly, portfolio size, composition and
related yields earned and funding costs can have a significant impact on net
interest income and margin.
Taxable-equivalent net interest income was $565 million for the first quarter of
2000, a $99 million decrease compared with the first quarter of 1999. The net
interest margin was 3.46% for the first quarter of 2000 compared with 3.86% in
the first quarter of 1999. The decreases were primarily due to the sale of the
credit card business in 1999 and the impact of funding cost associated with the
ISG acquisition. As a result of the credit card sale and the exit and downsizing
of certain credit-related businesses in 1999, loans represented 77% of average
earning assets for the first three months of 2000 compared with 82% for the
prior-year period. Average loans held for sale increased $2.1 billion in the
quarter-to-quarter comparison, reflecting the decision to exit certain
non-strategic wholesale lending businesses during 1999. Securities available for
sale represented 10% of average earning assets in the first quarter of 2000
compared with 8% in the first quarter of 1999, excluding securities used to
hedge residential mortgage servicing rights.
Funding cost is affected by the volume and composition of funding sources as
well as related rates paid thereon. Average deposits comprised 61% and 60% of
total sources of funds for the first three months of 2000 and 1999,
respectively, with the remainder primarily comprised of wholesale funding
obtained at prevailing market rates. The average loan to deposit ratio declined
to 111% for the first three months of 2000 compared with 122% for the first
three months of 1999.
THE PNC FINANCIAL SERVICES GROUP, INC.
----
13
15
Average demand and money market deposits increased $1.5 billion or 9% to $18.4
billion for the first three months of 2000, primarily reflecting the impact of
strategic marketing initiatives to grow more valuable transaction accounts,
while other time deposits decreased in the quarter-to-quarter comparison.
Average borrowed funds for the first three months of 2000 decreased $1.5 billion
compared with the first three months of 1999 as lower bank notes and repurchase
agreements more than offset increases in Federal Home Loan Bank borrowings and
subordinated debt. The increase in subordinated debt was related to funding the
ISG acquisition.
PROVISION FOR CREDIT LOSSES The provision for credit losses was $31 million for
the first three months of 2000 compared with $78 million for the first three
months of 1999. Net charge-offs were $31 million or .25% of average loans for
the first three months of 2000 compared with $78 million or .56%, respectively,
for the first three months of 1999. The decreases were primarily due to the sale
of the credit card business in the first quarter of 1999. Excluding credit
cards, net charge-offs were .15% of average loans for the first three months of
1999.
NONINTEREST INCOME Noninterest income was $789 million for the first three
months of 2000 and represented 58% of total revenue. Noninterest income
increased $206 million or 35% in the quarter-to-quarter comparison, excluding
$290 million of gains on the sales of the credit card business and an equity
interest in EPS that were partially offset by $142 million of valuation
adjustments associated with exiting certain non-strategic wholesale lending
businesses in 1999. The increase was primarily driven by strong growth in
fee-based businesses, the impact of the ISG acquisition and equity management
revenue.
Asset management fees of $186 million for the first three months of 2000
increased $25 million or 16% driven by new business and market appreciation.
Assets under management were $220 billion at March 31, 2000, a 21% increase
compared with March 31, 1999. Fund servicing fees were $155 million for the
first quarter of 2000, a $103 million increase compared with the first quarter
of 1999 primarily driven by the ISG acquisition, new business and market
appreciation.
Brokerage fees of $71 million for the first three months of 2000 increased $15
million or 27% reflecting the expansion of Hilliard Lyons' distribution network
and the impact of significant activity in the equity markets. Consumer services
revenue of $51 million for the first three months of 2000 remained consistent in
the quarter-to-quarter comparison, excluding credit card fees in the first three
months of 1999.
Corporate services revenue of $82 million for the first three months of 2000
increased $10 million or 14% in the quarter-to-quarter comparison, excluding
valuation adjustments related to the exit of certain non-strategic wholesale
lending businesses in 1999. The increase included, among other things,
double-digit increases in capital markets and treasury management fees.
Net residential mortgage banking revenue of $54 million for the first three
months of 2000 decreased $6 million compared with the prior-year quarter as an
increase in net servicing revenue was more than offset by the impact of lower
refinancing activity.
Equity management revenue was $87 million for the first three months of 2000
compared with $9 million in the first three months of 1999. The majority of the
revenue in the first three months of 2000 resulted from realized gains.
Other noninterest income of $56 million for the first three months of 2000
increased $7 million in the quarter-to-quarter comparison, excluding non-core
items in the first quarter of 1999.
NONINTEREST EXPENSE Noninterest expense was $847 million in the first three
months of 2000 compared with $725 million in the first three months of 1999,
excluding $98 million of costs related to efficiency initiatives last year. The
efficiency ratio was 57.4% in the first three months of 2000 compared with 52.1%
in the prior-year quarter, excluding non-core items. The quarter-to-quarter
increases were primarily related to the ISG acquisition and higher expenses
commensurate with fee-based revenue growth. Average full-time equivalent
employees totaled approximately 26,100 and 25,500 for the first three months of
2000 and 1999, respectively. The increase was primarily due to the net impact of
the ISG acquisition, partially offset by the impact of efficiency initiatives in
the traditional banking and mortgage banking businesses.
THE PNC FINANCIAL SERVICES GROUP, INC.
----
14
16
Financial Review
CONSOLIDATED BALANCE SHEET REVIEW
LOANS Loans outstanding of $50.7 billion at March 31, 2000 increased $.6 billion
from year-end 1999 primarily due to an increase in commercial and residential
mortgage loans. Total outstandings and exposure designated for exit during 1999
totaled $3.7 billion and $10.5 billion, respectively. At March 31, 2000, the
remaining outstandings and exposure associated with this initiative totaled $2.1
billion and $6.2 billion, respectively. Loans that were designated for exit in
1999 and reclassified to held for sale are excluded from the following table.
DETAILS OF LOANS
March 31 December 31
In millions 2000 1999
- -----------------------------------------------------------------
Consumer
Home equity $6,126 $6,068
Automobile 1,530 1,691
Other 1,536 1,598
- -----------------------------------------------------------------
Total consumer 9,192 9,357
Residential mortgage 13,085 12,869
Commercial
Manufacturing 5,430 5,355
Retail/wholesale 4,417 4,301
Service providers 3,021 3,208
Real estate related 2,815 2,862
Communications 1,341 1,370
Health care 798 772
Financial services 1,291 1,300
Other 2,920 2,300
- -----------------------------------------------------------------
Total commercial 22,033 21,468
Commercial real estate
Mortgage 717 761
Real estate project 1,948 1,969
- -----------------------------------------------------------------
Total commercial real estate 2,665 2,730
Lease financing 3,701 3,663
Other 701 683
Unearned income (724) (724)
- -----------------------------------------------------------------
Total, net of unearned income $50,653 $50,046
=================================================================
Loan portfolio composition continued to be geographically diversified among
numerous industries and types of businesses.
NET UNFUNDED COMMITMENTS
March 31 December 31
In millions 2000 1999
- ---------------------------------------------------------------------
Consumer $4,672 $4,603
Residential mortgage 1,520 648
Commercial 24,151 23,953
Commercial real estate 397 38
Lease financing 103 136
Other 308 1,513
- ---------------------------------------------------------------------
Total $31,151 $30,891
=====================================================================
Commitments to extend credit represent arrangements to lend funds provided there
is no violation of specified contractual conditions. Commercial commitments are
reported net of participations, assignments and syndications, primarily to
financial institutions, totaling $7.0 billion and $7.2 billion at March 31, 2000
and December 31, 1999, respectively. Unfunded commitments related to loans
designated for exit totaling $4.1 billion at March 31, 2000 and $4.8 billion at
December 31, 1999, are excluded from the above table.
Net outstanding letters of credit totaled $4.2 billion and $4.6 billion at March
31, 2000 and December 31, 1999, respectively, and consisted primarily of standby
letters of credit, which commit the Corporation to make payments on behalf of
customers when certain specified future events occur.
SECURITIES AVAILABLE FOR SALE The fair value of the securities available for
sale portfolio increased $55 million from December 31, 1999 to $7.7 billion at
March 31, 2000. Total securities used to hedge residential MSR were $1.8 billion
at March 31, 2000. Portfolio securities represented 8% of total assets at March
31, 2000. The expected weighted-average life of the portfolio securities
decreased to 4 years and 3 months at March 31, 2000, compared with 4 years and 7
months at year-end 1999. The expected weighted-average life of total securities
available for sale decreased to 5 years and 4 months at March 31, 2000 compared
with 5 years and 7 months at year-end 1999.
DETAILS OF SECURITIES AVAILABLE FOR SALE
Amortized Fair
In millions Cost Value
- ----------------------------------------------------------------
March 31, 2000
PORTFOLIO SECURITIES
Debt securities
U.S. Treasury and government agencies $159 $153
Mortgage-backed 3,777 3,613
Asset-backed 1,320 1,286
State and municipal 135 132
Other debt 39 38
Corporate stocks and other 673 684
- ----------------------------------------------------------------
Total $6,103 $5,906
================================================================
MORTGAGE BANKING RISK MANAGEMENT
Debt securities
U.S. Treasury and government agencies $1,885 $1,698
Mortgage-backed 66 62
- ----------------------------------------------------------------
Total $1,951 $1,760
- ----------------------------------------------------------------
Total securities available for sale $8,054 $7,666
================================================================
December 31, 1999
PORTFOLIO SECURITIES
Debt securities
U.S. Treasury and government agencies $411 $400
Mortgage-backed 3,918 3,769
Asset-backed 1,051 1,027
State and municipal 134 131
Other debt 40 39
Corporate stocks and other 590 594
- ----------------------------------------------------------------
Total $6,144 $5,960
================================================================
MORTGAGE BANKING RISK MANAGEMENT
Debt securities
U.S. Treasury and government agencies $1,791 $1,587
Mortgage-backed 68 64
- ----------------------------------------------------------------
Total $1,859 $1,651
- ----------------------------------------------------------------
Total securities available for sale $8,003 $7,611
================================================================
THE PNC FINANCIAL SERVICES GROUP, INC.
----
15
17
FUNDING SOURCES Total funding sources were $64.8 billion at March 31, 2000, a
decrease of $1.2 billion compared with December 31, 1999, primarily resulting
from reduced deposits in foreign offices and Federal Home Loan Bank ("FHLB")
borrowings.
DETAILS OF FUNDING SOURCES
March 31 December 31
In millions 2000 1999
- ----------------------------------------------------------------
Deposits
Demand, savings and money market $29,280 $28,689
Retail certificates of deposit 14,552 14,153
Other time 645 633
Deposits in foreign offices 2,224 3,193
- ----------------------------------------------------------------
Total deposits 46,701 46,668
Borrowed funds
Federal funds purchased 909 1,281
Repurchase agreements 770 1,122
Bank notes and senior debt 7,001 6,975
Federal Home Loan Bank borrowings 6,156 6,656
Subordinated debt 2,425 2,327
Other borrowed funds 833 986
- ----------------------------------------------------------------
Total borrowed funds 18,094 19,347
- ----------------------------------------------------------------
Total $64,795 $66,015
================================================================
CAPITAL The access to and cost of funding new business initiatives including
acquisitions, the ability to engage in expanded activities, the ability to pay
dividends, deposit insurance costs, and the level and nature of regulatory
oversight depend, in large part, on a financial institution's capital strength.
At March 31, 2000, the Corporation and each bank subsidiary were considered well
capitalized based on regulatory capital ratio requirements.
RISK-BASED CAPITAL
March 31 - dollars in millions 2000 1999
- ----------------------------------------------------------------
Capital components
Shareholders' equity
Common $5,726 $5,617
Preferred 313 314
Trust preferred capital securities 848 848
Goodwill and other (2,278) (1,348)
Net unrealized securities losses 251 82
- ----------------------------------------------------------------
Tier I risk-based capital 4,860 5,513
Subordinated debt 2,080 1,780
Eligible allowance for credit losses 662 672
- ----------------------------------------------------------------
Total risk-based capital $7,602 $7,965
================================================================
Assets
Risk-weighted assets and
off-balance-sheet instruments $67,049 $67,056
Average tangible assets 72,872 75,770
================================================================
Capital ratios
Tier I risk-based 7.25% 8.22%
Total risk-based 11.34 11.88
Leverage 6.67 7.28
================================================================
The capital position is managed through balance sheet size and composition,
issuance of debt and equity instruments, treasury stock activities, dividend
policies and retention of earnings.
During the first quarter of 2000, PNC repurchased 2.7 million shares of common
stock. On February 17, 2000, the Board of Directors authorized the Corporation
to purchase up to 10 million shares of common stock through February 28, 2001.
Approximately 8.3 million shares remain under this authorization.
RISK MANAGEMENT
In the normal course of business, the Corporation assumes various types of risk,
the most significant of which are credit, liquidity, interest rate and market
risk. To manage these risks, PNC has risk management processes designed to
provide for risk identification, measurement, monitoring and control.
CREDIT RISK Credit risk represents the possibility that a borrower or
counterparty may not perform in accordance with contractual terms. Credit risk
is inherent in the financial services business and results from extending credit
to customers, purchasing securities and entering into off-balance-sheet
financial derivative transactions. The Corporation seeks to manage credit risk
through, among other things, diversification, limiting exposure to any single
industry or customer, requiring collateral or selling participations to third
parties, and purchasing credit-related derivatives.
NONPERFORMING ASSETS
March 31 December 31
Dollars in millions 2000 1999
- ------------------------------------------------------------------
Nonaccrual loans
Commercial $240 $219
Residential mortgage 49 56
Commercial real estate
Real estate project 7 13
Mortgage 6 8
Consumer 3 2
Lease financing 2 1
- ------------------------------------------------------------------
Total nonaccrual loans 307 299
Foreclosed and other assets
Residential mortgage 12 12
Commercial real estate 5 5
Other 31 22
- ------------------------------------------------------------------
Total foreclosed and other assets 48 39
- ------------------------------------------------------------------
Total nonperforming assets $355 $338
==================================================================
Nonaccrual loans to total loans .61% .60%
Nonperforming assets to total loans,
loans held for sale and foreclosed .64 .61
assets
Nonperforming assets to total assets .48 .45
==================================================================
The above table excludes $18 million and $13 million of equity management assets
at March 31, 2000 and December 31, 1999, respectively, carried at fair value.
The amount of nonperforming loans that were current as to principal and interest
was $25 million at March 31, 2000, and $42 million at December 31, 1999. There
were no troubled debt restructured loans outstanding as of either period end.
THE PNC FINANCIAL SERVICES GROUP, INC.
----
16
18
Financial Review
CHANGE IN NONPERFORMING ASSETS
In millions 2000 1999
- ----------------------------------------------------------------
January 1 $338 $332
Transferred from accrual 117 74
Returned to performing (2) (1)
Principal reductions (46) (53)
Sales (9) (10)
Charge-offs and other (43) (14)
- ----------------------------------------------------------------
March 31 $355 $328
================================================================
ACCRUING LOANS PAST DUE 90 DAYS OR MORE
Amount Percent of Loans
------------------------------------------------
March 31 December 31 March 31 December 31
Dollars in millions 2000 1999 2000 1999
- ---------------------------------------------------------------------
Consumer $20 $25 .22% .27%
Residential mortgage 41 34 .31 .26
Commercial 42 30 .19 .14
Commercial real estate 3 5 .11 .18
Lease financing 4 2 .13 .05
- ---------------------------------------------
Total $110 $96 .22 .19
======================================================================
ALLOWANCE FOR CREDIT LOSSES In determining the adequacy of the allowance for
credit losses, the Corporation makes specific allocations to impaired loans and
to pools of watchlist and nonwatchlist loans for various credit risk factors.
Allocations to loan pools are developed by business segment and risk rating and
are based on historical loss trends and management's judgment concerning those
trends and other relevant factors. Those factors may include, among other
things, actual versus estimated losses, current regional and national economic
conditions, business segment and portfolio concentrations, industry competition
and consolidation, and the impact of government regulations. Consumer and
residential mortgage loan allocations are made at a total portfolio level based
on historical loss experience adjusted for portfolio activity and current
economic conditions.
While PNC's commercial and consumer pool reserve methodologies strive to reflect
all risk factors, there continues to be a certain element of risk associated
with, but not limited to, potential estimation or judgmental errors. Unallocated
reserves provide coverage for such risks. While allocations are made to specific
loans and pools of loans, the total reserve is available for all credit losses.
Senior management's Reserve Adequacy Committee provides oversight for the
allowance evaluation process including quarterly evaluations, and methodology
and estimation changes. The results of the evaluations are reported to the
Credit Committee of the Board of Directors.
The provision for credit losses for the first quarter of 2000 and the evaluation
of the allowance for credit losses as of March 31, 2000 reflected changes in
loan portfolio composition and changes in asset quality. The unallocated portion
of the allowance for credit losses at March 31, 2000 represented 20% of the
total allowance and .26% of total loans compared with 20% and .27%,
respectively, at December 31, 1999.
ROLLFORWARD OF ALLOWANCE FOR CREDIT LOSSES
In millions 2000 1999
- ----------------------------------------------------------------
January 1 $674 $753
Charge-offs (45) (97)
Recoveries 14 19
- ----------------------------------------------------------------
Net charge-offs (31) (78)
Provision for credit losses 31 78
Divestitures (81)
- ----------------------------------------------------------------
March 31 $674 $672
================================================================
The allowance as a percent of nonaccrual loans and period-end loans was 220% and
1.33%, respectively, at March 31, 2000. The comparable year-end 1999 amounts
were 225% and 1.35%, respectively.
CHARGE-OFFS AND RECOVERIES
Three months ended Percent of
March 31 Net Average
Dollars in millions Charge-offs Recoveries Charge-offs Loans
- ----------------------------------------------------------------------
2000
Consumer $12 $6 $ 6 .26%
Residential mortgage 2 2 .06
Commercial 29 7 22 .41
Lease financing 2 1 1 .14
- ---------------------------------------------------------
Total $45 $14 $31 .25
- ----------------------------------------------------------------------
1999
Consumer $18 $7 $11 .41%
Credit card 60 2 58 8.64
Residential mortgage 4 1 3 .10
Commercial 12 7 5 .08
Commercial real estate 1 1
Lease financing 2 1 1 .17
- ---------------------------------------------------------
Total $97 $19 $78 .56
======================================================================
The actual level of net charge-offs and the provision for credit losses in
future periods can be affected by many business and economic factors and may
differ from current or historical experience.
THE PNC FINANCIAL SERVICES GROUP, INC.
----
17
19
LIQUIDITY RISK Liquidity represents the Corporation's ability to obtain
cost-effective funding to meet the needs of customers as well as the
Corporation's financial obligations. Liquidity is centrally managed by Asset and
Liability Management, with oversight provided by the Corporate Asset and
Liability Committee and the Finance Committee of the Board of Directors.
Access to capital markets funding sources is a key factor affecting liquidity
management. Access to such markets is in part based on the Corporation's credit
ratings, which are influenced by a number of factors including capital ratios,
credit quality, and earnings. Additional factors that impact liquidity include
the maturity structure of existing assets, liabilities, and off-balance-sheet
positions, the level of liquid investment securities and loans available for
sale, and the Corporation's ability to securitize and sell various types of
loans.
Liquidity can also be provided through the sale of liquid assets, which consist
of short-term investments, loans held for sale and securities available for
sale. At March 31, 2000, such assets totaled $13.3 billion with $4.1 billion
pledged as collateral for borrowing, trust and other commitments. Liquidity can
also be obtained through secured advances from the FHLB, of which PNC is a
member. These borrowings are generally secured by residential mortgages and
mortgage-backed securities. At March 31, 2000, approximately $8.0 billion of
residential mortgages were available as collateral for borrowings from the FHLB.
Funding can also be obtained through alternative forms of borrowing, including
Federal funds purchased, repurchase agreements and short-term and long-term debt
issuances.
Liquidity for the parent company and subsidiaries is also generated through the
issuance of securities in public or private markets and lines of credit. During
the first quarter of 2000, the Corporation issued $100 million of subordinated
debt. At March 31, 2000, the Corporation had unused capacity under effective
shelf registration statements of approximately $1.4 billion of debt and equity
securities and $400 million of trust preferred capital securities. In addition,
the Corporation had an unused line of credit of $500 million.
The principal source of parent company revenue and cash flow is dividends from
subsidiary banks. PNC Bancorp, Inc. is a wholly-owned subsidiary of the parent
company and is the holding company for all bank subsidiaries. There are legal
limitations on the ability of bank subsidiaries to pay dividends and make other
distributions to PNC Bancorp, Inc. and in turn the parent company. Without
regulatory approval, the amount available for dividend payments to PNC Bancorp,
Inc. by all bank subsidiaries was $130 million at March 31, 2000. Dividends may
also be impacted by capital needs, regulatory requirements, corporate policies,
contractual restrictions and other factors.
Management believes the Corporation has sufficient liquidity to meet current
obligations to borrowers, depositors, debt holders and others. The impact of
replacing maturing liabilities is reflected in the income simulation model in
the overall asset and liability management process.
INTEREST RATE RISK Interest rate risk arises primarily through the Corporation's
traditional business activities of extending loans and accepting deposits. Many
factors, including economic and financial conditions, movements in market
interest rates and consumer preferences, affect the spread between interest
earned on assets and interest paid on liabilities. In managing interest rate
risk, the Corporation seeks to minimize its reliance on a particular interest
rate scenario as a source of earnings while maximizing net interest income and
net interest margin. To further these objectives, the Corporation uses
securities purchases and sales, long-term and short-term funding, financial
derivatives and other capital markets instruments.
Interest rate risk is centrally managed by Asset and Liability Management. The
Corporation actively measures and monitors components of interest rate risk
including term structure or repricing risk, yield curve or nonparallel rate
shift risk, basis risk and options risk. Senior management's Corporate Asset and
Liability Committee provides strategic direction to Asset and Liability
Management and, in doing so, reviews capital markets activities and interest
rate risk exposures. The Finance Committee of the Board of Directors is
responsible for overseeing the Corporation's interest rate risk management
process.
THE PNC FINANCIAL SERVICES GROUP, INC.
----
18
20
Financial Review
The Corporation measures and manages both the short-term and long-term effects
of changing interest rates. An income simulation model is used to measure the
sensitivity of net interest income to changing interest rates over the next
twenty-four month period. An economic value of equity model is used to measure
the sensitivity of the value of existing on-balance-sheet and off-balance-sheet
positions to changing interest rates.
The income simulation model is the primary tool used to measure the direction
and magnitude of changes in net interest income resulting from changes in
interest rates. Forecasting net interest income and its sensitivity to changes
in interest rates requires that the Corporation make assumptions about the
volume and characteristics of new business and the behavior of existing
positions. These business assumptions are based on the Corporation's experience,
business plans and published industry experience. Key assumptions employed in
the model include prepayment speeds on mortgage-related assets and consumer
loans, loan volumes and pricing, deposit volumes and pricing, the expected life
and repricing characteristics of nonmaturity loans and deposits, and
management's financial and capital plans.
Because these assumptions are inherently uncertain, the model cannot precisely
estimate net interest income or precisely predict the effect of higher or lower
interest rates on net interest income. Actual results will differ from simulated
results due to the timing, magnitude and frequency of interest rate changes, the
difference between actual experience and the assumed volume and characteristics
of new business and behavior of existing positions, and changes in market
conditions and management strategies, among other factors.
The Corporation's interest rate risk management policies provide that net
interest income should not decrease by more than 3% if interest rates gradually
increase or decrease from current rates by 100 basis points over a twelve-month
period. At March 31, 2000, if interest rates were to gradually increase by 100
basis points over the next twelve months, the model indicated that net interest
income would decrease by .6%. If interest rates were to gradually decrease by
100 basis points over the next twelve months, the model indicated that net
interest income would increase by .8%.
The Corporation models additional interest rate scenarios covering a wider range
of rate movements to identify yield curve, term structure and basis risk
exposures. These scenarios are developed based on historical rate relationships
or management's expectations regarding the future direction and level of
interest rates. Depending on market conditions and other factors, these
scenarios may be modeled more or less frequently. Such analyses are used in
conjunction with the net interest income simulation model and economic value of
equity model to identify inherent risk and develop appropriate strategies.
An economic value of equity model is used by the Corporation to value all
current on-balance-sheet and off-balance-sheet positions under a range of
instantaneous interest rate changes. The resulting change in the value of equity
is the measure of overall long-term interest rate risk inherent in the
Corporation's existing on-balance-sheet and off-balance-sheet positions. The
Corporation uses the economic value of equity model to complement the net
interest income simulation modeling process.
The Corporation's risk management policies provide that the change in economic
value of equity should not decline by more than 1.5% of the book value of assets
for a 200 basis point instantaneous increase or decrease in interest rates.
Based on the results of the economic value of equity model at March 31, 2000, if
interest rates were to instantaneously increase by 200 basis points, the model
indicated that the economic value of existing on-balance-sheet and
off-balance-sheet positions would decline by 1.0% of assets. If interest rates
were to instantaneously decrease by 200 basis points, the model indicated that
the economic value of existing on-balance-sheet and off-balance-sheet positions
would increase by .2% of assets.
MARKET RISK Most of PNC's trading activities are designed to provide capital
markets services for customers. The performance of PNC's trading operations is
predominantly based on providing services to customers and not on positioning
the Corporation's portfolio for gains from market movements.
Market risk associated with trading, capital markets and foreign exchange
activities is managed using a value-at-risk approach that combines interest rate
risk, foreign exchange rate risk, spread risk and volatility risk. Exposure is
measured as the potential loss due to a two standard deviation, one-day move.
The combined period-end value-at-risk of all trading operations using this
measurement was less than $850 thousand at March 31, 2000.
THE PNC FINANCIAL SERVICES GROUP, INC.
----
19
21
FINANCIAL DERIVATIVES A variety of off-balance-sheet financial derivatives are
used as part of the overall risk management process to manage the interest rate,
market and credit risk inherent in the Corporation's business activities.
Interest rate swaps and purchased interest rate caps and floors are the primary
instruments used for interest rate risk management. Interest rate swaps are
agreements to exchange fixed and floating interest rate payments calculated on a
notional principal amount. The floating rate is based on a money market index,
primarily short-term LIBOR. Purchased interest rate caps and floors are
agreements where, for a fee, the counterparty agrees to pay the Corporation the
amount, if any, by which a specified market interest rate exceeds or is less
than a defined rate applied to a notional amount, respectively.
Forward contracts provide for the delivery of financial instruments at a
specified future date and at a specified price or yield. Such contracts are
primarily used to manage risk positions associated with certain residential
mortgage banking and student lending activities.
Credit-related derivatives provide, for a fee, an assumption of a portion of the
credit risk associated with the underlying financial instruments. Such contracts
are primarily used to manage credit risk and regulatory capital associated with
commercial lending activities.
Financial derivatives involve, to varying degrees, interest rate, market and
credit risk in excess of the amount on the balance sheet, but less than the
notional amount of the contract. For interest rate swaps, caps and floors, only
periodic cash payments and, with respect to caps and floors, premiums, are
exchanged. Therefore, cash requirements and exposure to credit risk are
significantly less than the notional value.
During the first three months of 2000, financial derivatives used in interest
rate risk management decreased net interest income by $5 million compared with a
$16 million increase in the prior-year period.
The following table sets forth changes in the notional value of
off-balance-sheet financial derivatives used for risk management during the
first three months of 2000.
FINANCIAL DERIVATIVES ACTIVITY Weighted-
Average
2000 - dollars in millions January 1 Additions Maturities Terminations March 31 Maturity
- -----------------------------------------------------------------------------------------------------------------------------------
Interest rate risk management
Interest rate swaps
Receive fixed $7,413 $350 $(1,050) $6,713 2 yrs. 9 mos.
Pay fixed 5 5 9 mos.
Basis swaps 1,650 23 1,673 3 yrs. 3 mos.
Interest rate caps 474 (43) $(9) 422 4 yrs.
Interest rate floors 3,311 (13) (7) 3,291 2 yrs. 2 mos.
- -------------------------------------------------------------------------------------------------------------------
Total interest rate risk management 12,853 373 (1,106) (16) 12,104
Mortgage banking risk management
Residential
Forward contracts
Commitments to purchase loans 304 6,023 (5,708) 619 2 mos.
Commitments to sell loans 1,194 7,051 (6,628) 1,617 2 mos.
Options 96 132 (122) 106 2 mos.
Options - MSR 7,675 7,675 3 yrs. 5 mos.
- -------------------------------------------------------------------------------------------------------------------
Total residential 9,269 13,206 (12,458) 10,017
Commercial - interest rate swaps 643 693 (85) (445) 806 7 yrs. 1 mo.
- -------------------------------------------------------------------------------------------------------------------
Total mortgage banking risk management 9,912 13,899 (12,543) (445) 10,823
Student lending activities
Forward contracts 681 67 (321) 427 2 yrs. 1 mo.
Credit-related activities
Credit default swaps 4,315 10 4,325 1 yr. 5 mos.
- -------------------------------------------------------------------------------------------------------------------
Total $27,761 $14,349 $(13,649) $(782) $27,679
===================================================================================================================================
THE PNC FINANCIAL SERVICES GROUP, INC.
----
20
22
Financial Review
The following table sets forth, by designated assets and liabilities, the
notional value and the estimated fair value of financial derivatives used for
risk management. Weighted-average interest rates presented are those expected to
be in effect based on the implied forward yield curve at March 31, 2000.
FINANCIAL DERIVATIVES
Weighted-Average Interest Rates
Notional Estimated -------------------------------
March 31, 2000 - dollars in millions Value Fair Value Paid Received
- --------------------------------------------------------------------------------------------------------------------------------
Interest rate risk management
Asset rate conversion
Interest rate swaps (1)
Receive fixed designated to loans $5,000 $(67) 6.96% 5.52%
Basis swaps designated to other earning assets 249 3 6.44 6.95
Interest rate caps designated to loans (2) 422 12 NM NM
Interest rate floors designated to loans (3) 3,291 (1) NM NM
- ----------------------------------------------------------------------------------------------------
Total asset rate conversion 8,962 (53)
Liability rate conversion
Interest rate swaps (1)
Receive fixed designated to:
Interest-bearing deposits 150 (2) 7.01 6.65
Borrowed funds 1,563 (35) 7.02 6.49
Pay fixed designated to borrowed funds 5 2 6.09 7.36
Basis swaps designated to borrowed funds 1,424 6 6.93 7.01
- ----------------------------------------------------------------------------------------------------
Total liability rate conversion 3,142 (29)
- ----------------------------------------------------------------------------------------------------
Total interest rate risk management 12,104 (82)
Mortgage banking risk management
Residential
Forward contracts
Commitments to purchase loans 619 5 NM NM
Commitments to sell loans 1,617 (6) NM NM
Options 106 2 NM NM
Options - MSR (3) 7,675 34 NM NM
- ----------------------------------------------------------------------------------------------------
Total residential 10,017 35
Commercial
Pay fixed interest rate swaps designated to
securities (1) 444 26 6.09 7.13
Pay fixed interest rate swaps designated to loans (1) 362 16 6.51 6.81
- ----------------------------------------------------------------------------------------------------
Total commercial 806 42
- ----------------------------------------------------------------------------------------------------
Total mortgage banking risk management 10,823 77
Student lending activities
Forward contracts 427 NM NM
Credit-related activities
Credit default swaps 4,325 (3) NM NM
- ----------------------------------------------------------------------------------------------------
Total financial derivatives $27,679 $(8)
================================================================================================================================
(1) The floating rate portion of interest rate contracts is based on
money-market indices. As a percent of notional value, 24% were based on
1-month LIBOR, 72% on 3-month LIBOR and the remainder on other short-term
indices.
(2) Interest rate caps with notional values of $117 million, $120 million and
$183 million require the counterparty to pay the Corporation the excess, if
any, of 3-month LIBOR over a weighted-average strike of 6.14%, 1-month LIBOR
over a weighted-average strike of 5.71% and Prime over a weighted-average
strike of 8.76%, respectively. At March 31, 2000, 3-month LIBOR was 6.29%,
1-month LIBOR was 6.13% and Prime was 9.00%.
(3) Interest rate floors with notional values of $3.0 billion, $3.8 billion and
$3.2 billion require the counterparty to pay the Corporation the excess, if
any, of the weighted-average strike of 4.63% over 3-month LIBOR, the
weighted-average strike of 5.08% over 10-year CMT and the weighted-average
strike of 4.99% over 10-year CMS, respectively. At March 31, 2000, 3-month
LIBOR was 6.29%, 10-year CMT was 6.03% and 10-year CMS was 7.28%.
NM - Not meaningful
THE PNC FINANCIAL SERVICES GROUP, INC.
----
21
23
OTHER DERIVATIVES To accommodate customer needs, PNC enters into
customer-related financial derivative transactions primarily consisting of
interest rate swaps, caps, floors and foreign exchange contracts. Risk exposure
from customer positions is managed through transactions with other dealers.
Additionally, the Corporation enters into other derivative transactions for risk
management purposes. These positions are recorded at estimated fair value and
changes in value are included in results of operations.
OTHER DERIVATIVES
At March 31, 2000
---------------------------------------------
Positive Negative Average
Notional Fair Fair Net Asset Fair
In millions Value Value Value (Liability) Value*
- -----------------------------------------------------------------------------------
Customer-related
Interest rate
Swaps $12,770 $127 $(133) $(6) $(7)
Caps/floors
Sold 4,080 (26) (26) (27)
Purchased 3,926 25 25 25
Foreign exchange 4,242 51 (45) 6 6
Other 1,912 10 (11) (1) 2
- -----------------------------------------------------------------------------------
Total customer-related 26,930 213 (215) (2) (1)
Other 1,421 6 (1) 5 5
===================================================================================
Total other derivatives $28,351 $219 $(216) $3 $4
===================================================================================
* For the three months ended March 31, 2000
THE PNC FINANCIAL SERVICES GROUP, INC.
----
22
24
CONSOLIDATED STATEMENT OF INCOME
Three months ended March 31 - in millions, except per share data 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Loans and fees on loans $991 $1,112
Securities available for sale 117 106
Loans held for sale 107 56
Other 22 16
- ------------------------------------------------------------------------------------------------------------------------------
Total interest income 1,237 1,290
- ------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Deposits 369 351
Borrowed funds 308 281
- ------------------------------------------------------------------------------------------------------------------------------
Total interest expense 677 632
- ------------------------------------------------------------------------------------------------------------------------------
Net interest income 560 658
Provision for credit losses 31 78
- ------------------------------------------------------------------------------------------------------------------------------
Net interest income less provision for credit losses 529 580
- ------------------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Asset management 186 161
Fund servicing 155 52
Service charges on deposits 50 50
Brokerage 71 56
Consumer services 51 74
Corporate services 82 (63)
Net residential mortgage banking 54 60
Equity management 87 9
Net securities losses (3)
Other 56 332
- ------------------------------------------------------------------------------------------------------------------------------
Total noninterest income 789 731
- ------------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Staff expense 444 412
Net occupancy 57 87
Equipment 60 88
Amortization 28 28
Marketing 15 15
Distributions on capital securities 16 16
Other 227 177
- ------------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 847 823
- ------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 471 488
Income taxes 163 163
- ------------------------------------------------------------------------------------------------------------------------------
Net income $308 $325
- ------------------------------------------------------------------------------------------------------------------------------
Net income applicable to diluted earnings $303 $321
EARNINGS PER COMMON SHARE
Basic $1.04 $1.06
Diluted 1.03 1.05
CASH DIVIDENDS DECLARED PER COMMON SHARE .45 .41
AVERAGE COMMON SHARES OUTSTANDING
Basic 291.9 302.3
Diluted 294.1 305.5
==============================================================================================================================
See accompanying Notes to Consolidated Financial Statements.
THE PNC FINANCIAL SERVICES GROUP, INC.
----
23
25
CONSOLIDATED BALANCE SHEET
March 31 December 31
In millions, except par value 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $2,190 $3,097
Short-term investments 1,032 1,148
Loans held for sale 4,648 5,798
Securities available for sale 7,666 7,611
Loans, net of unearned income of $724 50,653 50,046
Allowance for credit losses (674) (674)
- ------------------------------------------------------------------------------------------------------------------------------
Net loans 49,979 49,372
Goodwill and other amortizable assets 4,155 4,123
Other 4,637 4,264
- ------------------------------------------------------------------------------------------------------------------------------
Total assets $74,307 $75,413
==============================================================================================================================
LIABILITIES
Deposits
Noninterest-bearing $8,292 $8,441
Interest-bearing 38,409 38,227
- ------------------------------------------------------------------------------------------------------------------------------
Total deposits 46,701 46,668
Borrowed funds
Federal funds purchased 909 1,281
Repurchase agreements 770 1,122
Bank notes and senior debt 7,001 6,975
Federal Home Loan Bank borrowings 6,156 6,656
Subordinated debt 2,425 2,327
Other borrowed funds 833 986
- ------------------------------------------------------------------------------------------------------------------------------
Total borrowed funds 18,094 19,347
Other 2,625 2,604
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities 67,420 68,619
- ------------------------------------------------------------------------------------------------------------------------------
Mandatorily redeemable capital securities of subsidiary trusts 848 848
SHAREHOLDERS' EQUITY
Preferred stock 7 7
Common stock - $5 par value
Authorized 450 shares
Issued 353 shares 1,764 1,764
Capital surplus 1,285 1,276
Retained earnings 6,178 6,006
Deferred benefit expense (18) (17)
Accumulated other comprehensive loss (264) (267)
Common stock held in treasury at cost: 62 and 60 shares (2,913) (2,823)
- ------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 6,039 5,946
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities, capital securities and shareholders' equity $74,307 $75,413
==============================================================================================================================
See accompanying Notes to Consolidated Financial Statements.
THE PNC FINANCIAL SERVICES GROUP, INC.
----
24
26
CONSOLIDATED STATEMENT OF CASH FLOWS
Three months ended March 31 - in millions 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $308 $325
Adjustments to reconcile net income to net cash provided by operating activities
Provision for credit losses 31 78
Depreciation, amortization and accretion 131 130
Deferred income taxes 119 43
Net securities losses 3 17
Gain on sale of businesses (290)
Valuation adjustments 17 142
Change in
Loans held for sale 1,133 521
Other (442) (165)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,300 801
- -----------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Net change in loans (652) 218
Repayment of securities available for sale 187 403
Sales
Securities available for sale 1,427 1,659
Loans 38
Foreclosed assets 8 10
Purchases
Securities available for sale (1,690) (3,504)
Net cash received for divestitures 3,261
Other (70) 17
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash (used) provided by investing activities (790) 2,102
- -----------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net change in
Noninterest-bearing deposits (149) (873)
Interest-bearing deposits 182 (824)
Federal funds purchased (372) (145)
Sale/issuance
Repurchase agreements 35,099 33,667
Bank notes and senior debt 1,050 820
Federal Home Loan Bank borrowings 1,500 250
Subordinated debt 99 254
Other borrowed funds 10,399 7,786
Common stock 31 16
Repayment/maturity
Repurchase agreements (35,451) (33,020)
Bank notes and senior debt (1,025) (1,305)
Federal Home Loan Bank borrowings (2,000) (1,450)
Subordinated debt (5)
Other borrowed funds (10,528) (7,860)
Acquisition of treasury stock (116) (297)
Cash dividends paid (136) (129)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash used by financing activities (1,417) (3,115)
- -----------------------------------------------------------------------------------------------------------------------------------
DECREASE IN CASH AND DUE FROM BANKS (907) (212)
Cash and due from banks at beginning of year 3,097 2,534
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and due from banks at end of period $2,190 $2,322
===================================================================================================================================
CASH PAID FOR
Interest $705 $667
Income taxes 90 8
NONCASH ITEMS
Transfer from loans to loans held for sale 1,018
Transfer from loans to other assets 9 11
===================================================================================================================================
See accompanying Notes to Consolidated Financial Statements.
THE PNC FINANCIAL SERVICES GROUP, INC.
----
25
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BUSINESS The PNC Financial Services Group, Inc. ("Corporation" or "PNC") is one
of the largest diversified financial services companies in the United States
operating regional banking, corporate banking, secured finance, asset management
and mortgage banking businesses that provide products and services nationally
and in PNC's primary geographic markets in Pennsylvania, New Jersey, Delaware,
Ohio and Kentucky. The Corporation is subject to intense competition from other
financial services companies and is subject to the regulations of certain
federal and state agencies and undergoes periodic examinations by those
authorities.
ACCOUNTING POLICIES
BASIS OF FINANCIAL STATEMENT PRESENTATION The unaudited consolidated interim
financial statements include the accounts of The PNC Financial Services Group,
Inc. and its subsidiaries, most of which are wholly owned. Such statements have
been prepared in accordance with generally accepted accounting principles. All
significant intercompany accounts and transactions have been eliminated.
In the opinion of management, the financial statements reflect all adjustments
of a normal recurring nature necessary for a fair statement of results for the
interim periods presented. Certain prior-period amounts have been reclassified
to conform to reporting classifications utilized for the current reporting
period. These classifications did not impact the Corporation's financial
condition or results of operations.
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the amounts reported. Actual results
will differ from such estimates and the differences may be material to the
consolidated financial statements.
The notes included herein should be read in conjunction with the audited
consolidated financial statements included in The PNC Financial Services Group,
Inc.'s 1999 Annual Report.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards ("SFAS") No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133" (an amendment of SFAS No. 133), issued in June 1999,
defers the effective date of SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," until fiscal years beginning after June 15,
2000. The Corporation expects to adopt SFAS No. 133, as amended by SFAS No. 137,
effective January 1, 2001, the statement's effective date.
The impact of adopting the provisions of this statement on PNC's financial
position and results of operations is currently not estimable and will depend on
the financial position of the Corporation and the nature and purpose of the
derivative instruments in place as of the effective date.
SFAS No. 133 was originally required to be adopted in years beginning after June
15, 1999, although early adoption is permitted. This statement requires the
Corporation to recognize all financial derivatives on the balance sheet at fair
value. Derivatives that do not qualify as hedges must be adjusted to fair value
through results of operations. If the derivative is a hedge as defined by the
statement, changes in the fair value of derivatives will be either offset
against the change in fair value of the hedged assets, liabilities, or firm
commitments through results of operations or recognized in other comprehensive
income until the hedged item is recognized in results of operations based on the
nature of the hedge. The ineffective portion of a derivative's change in fair
value will be immediately recognized in earnings.
CASH FLOWS
The Corporation did not have any acquisition or divestiture activity that
affected cash flows during the first three months of 2000. During the first
three months of 1999, divestiture activity that affected cash flow consisted of
$3.1 billion of divested assets and cash receipts of $3.3 billion in cash and
due from banks.
TRADING ACTIVITIES
PNC engages in trading activities as part of the Corporation's risk management
strategies and for "market making" in equity securities. Additionally, PNC
participates in derivatives and foreign exchange trading as an accommodation to
customers.
Net trading income for the first three months of 2000 totaled $35 million
compared with a net trading loss of $14 million for the prior-year period that
were included in noninterest income as follows:
Three months ended March 31 - in millions 2000 1999
- ----------------------------------------------------------------
Net residential mortgage banking
Risk management $15 $(28)
Other income
Securities trading 12 8
Derivatives trading 3 2
Foreign exchange 5 4
- ----------------------------------------------------------------
Net trading income (loss) $35 $(14)
================================================================
THE PNC FINANCIAL SERVICES GROUP, INC.
----
26
28
SECURITIES AVAILABLE FOR SALE
Unrealized
Amortized --------------------------------- Fair
In millions Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------------------------
MARCH 31, 2000
PORTFOLIO SECURITIES
Debt securities
U.S. Treasury and government agencies $159 $(6) $153
Mortgage-backed 3,777 $1 (165) 3,613
Asset-backed 1,320 (34) 1,286
State and municipal 135 2 (5) 132
Other debt 39 (1) 38
- ---------------------------------------------------------------------------------------------------------------------------------
Total debt securities 5,430 3 (211) 5,222
Corporate stocks and other 673 12 (1) 684
- ---------------------------------------------------------------------------------------------------------------------------------
Total 6,103 15 (212) 5,906
- ---------------------------------------------------------------------------------------------------------------------------------
MORTGAGE BANKING RISK MANAGEMENT
Debt securities
U.S. Treasury and government agencies 1,885 (187) 1,698
Mortgage-backed 66 (4) 62
- ---------------------------------------------------------------------------------------------------------------------------------
Total 1,951 (191) 1,760
- ---------------------------------------------------------------------------------------------------------------------------------
Total securities available for sale $8,054 $15 $(403) $7,666
=================================================================================================================================
DECEMBER 31, 1999
PORTFOLIO SECURITIES
Debt securities
U.S. Treasury and government agencies $411 $(11) $400
Mortgage-backed 3,918 $2 (151) 3,769
Asset-backed 1,051 (24) 1,027
State and municipal 134 2 (5) 131
Other debt 40 (1) 39
- ---------------------------------------------------------------------------------------------------------------------------------
Total debt securities 5,554 4 (192) 5,366
Corporate stocks and other 590 9 (5) 594
- ---------------------------------------------------------------------------------------------------------------------------------
Total 6,144 13 (197) 5,960
- ---------------------------------------------------------------------------------------------------------------------------------
MORTGAGE BANKING RISK MANAGEMENT
Debt securities
U.S. Treasury and government agencies 1,791 (204) 1,587
Mortgage-backed 68 (4) 64
- ---------------------------------------------------------------------------------------------------------------------------------
Total 1,859 (208) 1,651
- ---------------------------------------------------------------------------------------------------------------------------------
Total securities available for sale $8,003 $13 $(405) $7,611
=================================================================================================================================
The fair value of the securities available for sale portfolio increased $55
million from December 31, 1999 to $7.7 billion at March 31, 2000. Total
securities used to hedge residential mortgage servicing rights were $1.8 billion
at March 31, 2000. Portfolio securities represented 8% of total assets at March
31, 2000. The expected weighted-average life of the portfolio securities
decreased to 4 years and 3 months at March 31, 2000 compared with 4 years and 7
months at year-end 1999. The expected weighted-average life of total securities
available for sale decreased to 5 years and 4 months at March 31, 2000 compared
with 5 years and 7 months at year-end 1999.
Net securities losses were $3 million for the first three months of 2000. In
comparison, net securities losses for the first three months of 1999 were $17
million and were reported in net residential mortgage hedging activities. During
the first three months of 2000, no securities held for mortgage banking risk
management purposes were sold.
THE PNC FINANCIAL SERVICES GROUP, INC.
----
27
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NONPERFORMING ASSETS
Nonperforming assets were as follows:
March 31 December 31
In millions 2000 1999
- ------------------------------------------------------------------
Nonaccrual loans $307 $299
Foreclosed and other assets 48 39
- ------------------------------------------------------------------
Total nonperforming assets $355 $338
==================================================================
The above table excludes $18 million and $13 million of equity management assets
at March 31, 2000 and December 31, 1999, respectively, carried at fair value.
ALLOWANCE FOR CREDIT LOSSES
Changes in the allowance for credit losses were as follows:
In millions 2000 1999
- ------------------------------------------------------------------
Allowance at January 1 $674 $753
Charge-offs
Consumer (12) (18)
Credit card (60)
Residential mortgage (2) (4)
Commercial (29) (12)
Commercial real estate (1)
Lease financing (2) (2)
- ------------------------------------------------------------------
Total charge-offs (45) (97)
Recoveries
Consumer 6 7
Credit card 2
Residential mortgage 1
Commercial 7 7
Commercial real estate 1
Lease financing 1 1
- ------------------------------------------------------------------
Total recoveries 14 19
- ------------------------------------------------------------------
Net charge-offs
Consumer (6) (11)
Credit card (58)
Residential mortgage (2) (3)
Commercial (22) (5)
Lease financing (1) (1)
- ------------------------------------------------------------------
Total net charge-offs (31) (78)
Provision for credit losses 31 78
Divestitures (81)
- ------------------------------------------------------------------
Allowance at March 31 $674 $672
==================================================================
FINANCIAL DERIVATIVES
FAIR VALUE OF FINANCIAL DERIVATIVES The notional and fair values of financial
derivatives used for risk management were as follows:
Positive Negative
Notional Fair Notional Fair
In millions Value Value Value Value
- ------------------------------------------------------------------
MARCH 31, 2000
Interest rate
Swaps $2,939 $20 $5,452 $(113)
Caps 422 12
Floors 3,000 291 (1)
- ------------------------------------------------------------------
Total interest rate
risk management 6,361 32 5,743 (114)
Mortgage banking risk
management 8,578 86 2,245 (9)
Forward contract 427
Credit default swaps 70 4,255 (3)
- ------------------------------------------------------------------
Total $15,436 $118 $12,243 $(126)
==================================================================
DECEMBER 31, 1999
Interest rate
Swaps $3,666 $46 $5,402 $(108)
Caps 474 12
Floors 3,000 1 311 (1)
- ------------------------------------------------------------------
Total interest rate
risk management 7,140 59 5,713 (109)
Mortgage banking risk
management 8,747 80 1,165 (1)
Forward contract 681
Credit default swaps 60 4,255 (4)
- ------------------------------------------------------------------
Total $16,628 $139 $11,133 $(114)
==================================================================
THE PNC FINANCIAL SERVICES GROUP, INC.
----
28
30
OTHER DERIVATIVES The following schedule sets forth information relating to
positions associated with customer-related and other derivatives.
At March 31
----------------------------------------
Positive Negative Average
Notional Fair Fair Net Asset Fair
In millions Value Value Value (Liability) Value*
- ----------------------------------------------------------------------
2000
Customer-related
Interest rate
Swaps $12,770 $127 $(133) $(6) $(7)
Caps/floors
Sold 4,080 (26) (26) (27)
Purchased 3,926 25 25 25
Foreign exchange 4,242 51 (45) 6 6
Other 1,912 10 (11) (1) 2
- ----------------------------------------------------------------------
Total
customer-related 26,930 213 (215) (2) (1)
Other 1,421 6 (1) 5 5
- ----------------------------------------------------------------------
Total other
derivatives $28,351 $219 $(216) $3 $4
======================================================================
At December 31
---------------------------------------- 1999
Positive Negative Average
Notional Fair Fair Net Asset Fair
In millions Value Value Value (Liability) Value
- ----------------------------------------------------------------------
1999
Customer-related
Interest rate
Swaps $17,103 $110 $(116) $(6) $(13)
Caps/floors
Sold 3,440 (25) (25) (20)
Purchased 3,337 22 22 18
Foreign exchange 3,310 47 (36) 11 7
Other 2,161 22 (9) 13 3
- ----------------------------------------------------------------------
Total customer-related 29,351 201 (186) 15 (5)
Other 1,238 6 6 4
- ----------------------------------------------------------------------
Total other
derivatives $30,589 $207 $(186) $21 $(1)
======================================================================
* For the three months ended March 31, 2000
LITIGATION
The Corporation and persons to whom the Corporation may have indemnification
obligations, in the normal course of business, are subject to various pending
and threatened lawsuits in which claims for monetary damages are asserted.
Management, after consultation with legal counsel, does not at the present time
anticipate the ultimate aggregate liability, if any, arising out of such
lawsuits will have a material adverse effect on the Corporation's financial
position. At the present time, management is not in a position to determine
whether any such pending or threatened litigation will have a material adverse
effect on the Corporation's results of operations in any future reporting
period.
COMPREHENSIVE INCOME
Total comprehensive income was $311 million and $279 million for the first three
months of 2000 and 1999, respectively.
THE PNC FINANCIAL SERVICES GROUP, INC.
----
29
31
EARNINGS PER SHARE
The following table sets forth basic and diluted earnings per share
calculations.
Three months ended March 31 - in millions, except share and per share data 2000 1999
- ---------------------------------------------------------------------------------------------------------------------
CALCULATION OF BASIC EARNINGS PER COMMON SHARE
Net income $308 $325
Less: Preferred dividends declared 5 5
- ---------------------------------------------------------------------------------------------------------------------
Net income applicable to basic earnings per common share $303 $320
- ---------------------------------------------------------------------------------------------------------------------
Basic weighted-average common shares outstanding (in thousands) 291,891 302,303
- ---------------------------------------------------------------------------------------------------------------------
Basic Earnings Per Common Share $1.04 $1.06
=====================================================================================================================
CALCULATION OF DILUTED EARNINGS PER COMMON SHARE
Net income $308 $325
Less: Dividends declared on nonconvertible preferred stock Series F 5 4
- ---------------------------------------------------------------------------------------------------------------------
Net income applicable to diluted earnings per common share $303 $321
- ---------------------------------------------------------------------------------------------------------------------
Basic weighted-average common shares outstanding (in thousands) 291,891 302,303
Weighted-average common shares to be issued using average market price and assuming:
Conversion of preferred stock Series A and B 122 138
Conversion of preferred stock Series C and D 1,028 1,099
Conversion of debentures 22 25
Exercise of stock options 699 1,558
Incentive share awards 368 373
- ---------------------------------------------------------------------------------------------------------------------
Diluted weighted-average common shares outstanding (in thousands) 294,130 305,496
- ---------------------------------------------------------------------------------------------------------------------
Diluted Earnings Per Common Share $1.03 $1.05
=====================================================================================================================
THE PNC FINANCIAL SERVICES GROUP, INC.
----
30
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEGMENT REPORTING
PNC operates eight major businesses engaged in regional banking, corporate
banking, secured finance, asset management and mortgage banking activities:
Regional Banking, Corporate Banking, PNC Real Estate Finance, PNC Business
Credit, PNC Advisors, BlackRock, PFPC and PNC Mortgage.
Business results are based on PNC's management accounting practices and the
Corporation's current management structure. There is no comprehensive,
authoritative body of guidance for management accounting equivalent to generally
accepted accounting principles; therefore, PNC's business results are not
necessarily comparable with similar information for any other financial services
institution. Financial results are presented as if each business operated on a
stand-alone basis.
The presentation of business results was changed during the first quarter of
2000 to reflect the Corporation's current operating strategy and recent
management changes. Middle market and equipment leasing activities (previously
included in Regional Banking) are reported in Corporate Banking. In addition,
PNC Real Estate Finance and PNC Business Credit are reported separately within
PNC Secured Finance. Regional real estate lending activities (previously
included in Regional Banking) are reported in PNC Real Estate Finance. Business
financial results for the first quarter of 2000 and 1999 are presented
consistent with this structure.
The management accounting process uses various balance sheet and income
statement assignments and transfers to measure performance of the businesses.
Methodologies change from time to time as management accounting practices are
enhanced and businesses change. Securities or borrowings and related net
interest income are assigned based on the net asset or liability position of
each business. Capital is assigned based on management's assessment of inherent
risks and equity levels at independent companies providing similar products and
services. The allowance for credit losses is allocated to the businesses based
on risk inherent in the loan portfolios. Support areas not directly aligned with
the businesses are allocated primarily based on the utilization of services.
Total business financial results differ from consolidated financial results
primarily due to differences between management accounting practices and
generally accepted accounting principles, divested and exited businesses, equity
management activities, minority interests, eliminations and unassigned items,
the impact of which is reflected in Other.
BUSINESS SEGMENT PRODUCTS AND SERVICES
Regional Banking provides credit, deposit, branch-based brokerage and electronic
banking products and services to retail customers as well as credit, treasury
management and capital markets products and services to small businesses
primarily within PNC's geographic footprint.
Corporate Banking provides specialized credit, equipment leasing, treasury
management and capital markets products and services to large and mid-sized
corporations, institutions and government entities primarily within PNC's
geographic region.
PNC Real Estate Finance provides credit, capital markets, treasury management
and loan servicing products and services to private developers, real estate
investment trusts, pension funds and the affordable housing market nationally.
PNC Business Credit provides asset-based lending, capital markets and treasury
management products and services to middle market customers on a national basis.
PNC Advisors offers customized investment management, high-end brokerage,
personal trust, estate planning and traditional banking services to affluent and
wealthy individuals, and investment management, trust and administrative
services to pension funds, 401(k) plans and charitable organizations.
BlackRock manages assets for institutions and individuals through a variety of
fixed income, liquidity, equity and alternative investment products, including
BlackRock's flagship fund families.
PFPC, the Corporation's investment servicing subsidiary, provides a wide range
of processing services to the investment management community. PFPC provides
customized services to clients in the United States and to the global funds
marketplace through its Dublin, Ireland operation.
PNC Mortgage originates, purchases and services residential mortgages and
related products. PNC Mortgage also acquires and securitizes residential
mortgages as private-label, mortgage-backed securities and performs the master
servicing of those securities for investors.
THE PNC FINANCIAL SERVICES GROUP, INC.
----
31
33
RESULTS OF BUSINESSES
PNC PNC
Three months ended March 31 Regional Corporate Real Estate Business PNC Total
In millions Banking Banking Finance Credit Advisors BlackRock PFPC Mortgage Other PNC
- ------------------------------------------------------------------------------------------------------------------------------
2000
INCOME STATEMENT
Net interest income* $344 $134 $27 $24 $35 $1 $(10) $5 $5 $565
Noninterest income 133 80 19 4 169 108 155 71 50 789
- ------------------------------------------------------------------------------------------------------------------------------
Total revenue 477 214 46 28 204 109 145 76 55 1,354
Provision for credit losses 12 15 3 1 31
Depreciation and amortization 21 3 5 1 4 5 13 2 14 68
Other noninterest expense 243 98 30 6 131 71 122 63 15 779
- ------------------------------------------------------------------------------------------------------------------------------
Pretax earnings 201 98 11 21 66 33 10 11 25 476
Income taxes 72 34 (2) 8 25 14 4 5 8 168
- ------------------------------------------------------------------------------------------------------------------------------
Earnings $129 $64 $13 $13 $41 $19 $6 $6 $17 $308
==============================================================================================================================
Inter-segment revenue $(4) $2 $2 $2 $21 $9 $(32)
==============================================================================================================================
Average assets $37,866 $15,950 $5,382 $2,084 $3,598 $388 $1,603 $6,333 $1,473 $74,677
==============================================================================================================================
1999
INCOME STATEMENT
Net interest income * $352 $114 $30 $16 $33 $(3) $3 $25 $94 $664
Noninterest income 121 58 18 2 146 88 51 76 171 731
- ------------------------------------------------------------------------------------------------------------------------------
Total revenue 473 172 48 18 179 85 54 101 265 1,395
Provision for credit losses 18 3 1 56 78
Depreciation and amortization 23 3 5 1 3 5 2 3 88 133
Other noninterest expense 248 81 24 5 117 59 34 80 42 690
- ------------------------------------------------------------------------------------------------------------------------------
Pretax earnings 184 85 19 12 58 21 18 18 79 494
Income taxes 68 31 4 4 22 9 7 7 17 169
- ------------------------------------------------------------------------------------------------------------------------------
Earnings $116 $54 $15 $8 $36 $12 $11 $11 $62 $325
==============================================================================================================================
Inter-segment revenue $1 $(1) $1 $2 $19 $9 $(31)
==============================================================================================================================
Average assets $37,525 $15,679 $5,634 $1,597 $3,249 $400 $268 $7,084 $5,522 $76,958
==============================================================================================================================
* Taxable-equivalent basis
THE PNC FINANCIAL SERVICES GROUP, INC.
----
32
34
Statistical Information
CONSOLIDATED AVERAGE BALANCE SHEET AND NET INTEREST ANALYSIS
-----------------------------------------------------------------------------
First Quarter 2000 Fourth Quarter 1999
-----------------------------------------------------------------------------
Dollars in millions Average Average Average Average
Taxable-equivalent basis Balances Interest Yields/Rates Balances Interest Yields/Rates
- ----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Interest-earning assets
Loans held for sale $5,434 $107 7.86% $4,427 $86 7.79%
Securities available for sale
U.S. Treasury and government agencies and
corporations 3,819 50 5.24 3,844 51 5.28
Other debt 3,578 58 6.45 3,676 59 6.44
Other 614 10 6.92 691 11 6.45
- ---------------------------------------------------------------------------------- -------------------------
Total securities available for sale 8,011 118 5.91 8,211 121 5.90
Loans, net of unearned income
Consumer 9,261 192 8.33 9,421 197 8.28
Credit card
Residential mortgage 12,947 229 7.07 12,667 222 7.00
Commercial 21,793 447 8.12 22,318 448 7.85
Commercial real estate 2,698 59 8.60 3,265 66 7.98
Lease financing 2,958 54 7.33 2,786 50 7.17
Other 688 14 8.09 613 13 7.80
- ---------------------------------------------------------------------------------- -------------------------
Total loans, net of unearned income 50,345 995 7.87 51,070 996 7.69
Other 1,173 22 7.60 1,132 18 6.41
- ---------------------------------------------------------------------------------- -------------------------
Total interest-earning assets/interest income 64,963 1,242 7.62 64,840 1,221 7.45
Noninterest-earning assets
Allowance for credit losses (683) (681)
Cash and due from banks 2,324 2,347
Other assets 8,073 7,042
- ----------------------------------------------------------------- ------------
Total assets $74,677 $73,548
- ----------------------------------------------------------------- ------------
LIABILITIES, CAPITAL SECURITIES
AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities
Interest-bearing deposits
Demand and money market $18,355 138 3.03 $18,226 136 2.95
Savings 2,138 9 1.64 2,212 9 1.63
Retail certificates of deposit 14,591 191 5.25 14,007 177 5.03
Other time 637 10 6.36 621 10 6.47
Deposits in foreign offices 1,489 21 5.63 976 13 5.11
- ---------------------------------------------------------------------------------- -------------------------
Total interest-bearing deposits 37,210 369 3.98 36,042 345 3.80
Borrowed funds
Bank notes and senior debt 6,976 107 6.10 7,253 108 5.83
Federal funds purchased 2,279 33 5.67 1,922 26 5.26
Repurchase agreements 1,272 16 5.04 1,207 14 4.54
Federal Home Loan Bank borrowings 6,417 96 5.89 6,724 96 5.61
Other borrowed funds 775 12 6.31 668 10 5.83
Subordinated debt 2,377 44 7.43 2,255 42 7.48
- ---------------------------------------------------------------------------------- -------------------------
Total borrowed funds 20,096 308 6.08 20,029 296 5.81
- ---------------------------------------------------------------------------------- -------------------------
Total interest-bearing
liabilities/interest expense 57,306 677 4.72 56,071 641 4.52
Noninterest-bearing liabilities and
shareholders' equity
Demand and other noninterest-bearing deposits 8,004 8,413
Accrued expenses and other liabilities 2,592 2,312
Mandatorily redeemable capital securities
of subsidiary trusts 848 848
Shareholders' equity 5,927 5,904
- ----------------------------------------------------------------- ------------
Total liabilities, capital securities and
shareholders' equity $74,677 $73,548
- ----------------------------------------------------------------------------------------------------------------------------------
Interest rate spread 2.90 2.93
Impact of noninterest-bearing sources .56 .61
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest income/margin $565 3.46% $580 3.54%
- ----------------------------------------------------------------------------------------------------------------------------------
Nonaccrual loans are included in loans, net of unearned income. The impact of
financial derivatives used in interest rate risk management is included in the
interest income/expense and average yields/rates of the related assets and
liabilities. Average balances of securities available for sale are based on
amortized historical cost (excluding SFAS No. 115 adjustments to fair value).
Loan fees for each of the three months ended March 31, 2000, December 31, 1999,
September 30, 1999, June 30, 1999 and March 31, 1999 were $29 million, $29
million, $30 million, $30 million, and $30 million, respectively.
THE PNC FINANCIAL SERVICES GROUP, INC.
----
33
35
- --------------------------------------------------------------------------------------------------------------------------------
Third Quarter 1999 Second Quarter 1999 First Quarter 1999
- --------------------------------------------------------------------------------------------------------------------------------
Average Average Average Average Average Average
Balances Interest Yields/Rates Balances Interest Yields/Rates Balances Interest Yields/Rates
- ---------------------------------------------------------------------------------------------------------------------------------
$4,385 $82 7.51% $3,727 $67 7.07% $3,383 $56 6.68%
4,484 58 5.20 5,187 66 5.12 4,248 54 5.10
3,705 59 6.33 3,521 55 6.19 2,848 43 6.11
614 11 6.89 729 10 5.70 659 10 5.98
- --------------------------- -------------------------- -------------------------
8,803 128 5.79 9,437 131 5.56 7,755 107 5.55
10,171 207 8.08 10,729 218 8.16 10,955 222 8.21
2,724 100 14.91
12,451 216 6.94 12,496 218 6.97 12,184 216 7.09
22,631 444 7.68 22,846 438 7.58 24,574 462 7.52
3,389 67 7.67 3,396 66 7.66 3,398 65 7.70
2,543 44 7.02 2,478 43 6.98 2,443 44 7.17
561 11 7.57 534 9 6.99 417 8 7.69
- --------------------------- -------------------------- -------------------------
51,746 989 7.55 52,479 992 7.53 56,695 1,117 7.91
1,102 18 6.26 1,236 19 6.37 1,005 16 6.19
- --------------------------- -------------------------- -------------------------
66,036 1,217 7.29 66,879 1,209 7.20 68,838 1,296 7.56
(677) (678) (744)
1,959 2,038 2,066
6,445 6,821 6,798
- ------------- ------------ ------------
$73,763 $75,060 $76,958
- ------------- ------------ ------------
$18,034 127 2.80 $17,686 118 2.66 $16,825 113 2.73
2,345 10 1.59 2,472 10 1.60 2,535 10 1.63
14,114 174 4.89 14,114 172 4.91 14,652 184 5.08
1,022 15 5.99 1,832 25 5.47 2,610 35 5.35
1,066 14 5.16 682 8 4.83 759 9 4.78
- --------------------------- -------------------------- -------------------------
36,581 340 3.69 36,786 333 3.63 37,381 351 3.80
7,823 103 5.28 9,214 117 5.03 9,814 125 5.10
1,828 24 5.07 1,230 15 4.77 1,663 20 4.81
1,892 20 4.17 2,629 25 3.62 1,841 16 3.57
5,876 78 5.21 4,727 59 4.92 5,810 73 5.05
792 12 5.66 714 10 5.92 570 11 7.13
2,031 41 7.48 2,030 38 7.50 1,886 36 7.58
- --------------------------- -------------------------- -------------------------
20,242 278 5.40 20,544 264 5.08 21,584 281 5.21
- --------------------------- -------------------------- -------------------------
56,823 618 4.30 57,330 597 4.15 58,965 632 4.31
8,318 8,684 9,035
2,042 2,325 2,135
848 848 848
5,732 5,873 5,975
- ------------- ------------ ------------
$73,763 $75,060 $76,958
- ---------------------------------------------------------------------------------------------------------------------------------
2.99 3.05 3.25
.60 .59 .61
- ---------------------------------------------------------------------------------------------------------------------------------
$599 3.59% $612 3.64% $664 3.86%
- ---------------------------------------------------------------------------------------------------------------------------------
THE PNC FINANCIAL SERVICES GROUP, INC.
----
34
36
Quarterly Report on Form 10-Q
Securities and Exchange Commission
Washington, D.C. 20549
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the quarterly period ended March 31, 2000.
Commission File Number 1-9718
THE PNC FINANCIAL SERVICES GROUP, INC.
Incorporated in the Commonwealth of Pennsylvania
IRS Employer Identification No. 25-1435979
Address: One PNC Plaza
249 Fifth Avenue
Pittsburgh, Pennsylvania 15222-2707
Telephone: (412) 762-2000
As of April 28, 2000, The PNC Financial Services Group, Inc. had 290,402,857
shares of common stock ($5 par value) outstanding.
The PNC Financial Services Group, Inc. (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months and (2) has been subject to such filing requirements for the
past 90 days.
The following sections of the Financial Review set forth in the cross-reference
index are incorporated in the Quarterly Report on Form 10-Q.
Cross-Reference Page(s)
-----------------------------------------------------
PART I FINANCIAL INFORMATION
Item 1 Consolidated Statement of Income for the
three months ended March 31, 2000 and
1999 23
Consolidated Balance Sheet as of March
31, 2000 and December 31, 1999 24
Consolidated Statement of Cash Flows for
the three months ended March 31, 2000
and 1999 25
Notes to Consolidated Financial
Statements 26 - 32
Consolidated Average Balance Sheet and
Net Interest Analysis 33 - 34
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of
Operations 2 - 22
Item 3 Quantitative and Qualitative Disclosures
About Market Risk 18 - 19
- ----------------------------------------------------------------
PART II OTHER FINANCIAL INFORMATION
Item 4. Submission of Matters for a Vote of Security Holders
An annual meeting of shareholders of the Corporation was held on April 25, 2000
for the purpose of electing 17 directors.
All 17 nominees were elected and the votes cast for and against/withheld were as
follows:
Aggregate Votes
-------------------------------
Nominee For Against/Withheld
- ----------------------------------------------------------------
Paul W. Chellgren 253,246,931 2,448,330
Robert N. Clay 253,217,580 2,477,681
Thomas A. Corcoran 252,741,135 2,954,127
George A. Davidson, Jr. 253,274,134 2,421,129
David F. Girard-diCarlo 250,936,628 4,758,635
Walter E. Gregg, Jr. 253,172,069 2,523,192
William R. Johnson 252,886,173 2,809,089
Bruce C. Lindsay 253,237,435 2,457,826
W. Craig McClelland 253,167,366 2,527,895
Thomas H. O'Brien 252,970,736 2,724,526
Jane G. Pepper 252,767,909 2,927,354
Jackson H. Randolph 253,176,721 2,518,541
James E. Rohr 253,071,352 2,623,909
Roderic H. Ross 253,161,697 2,533,565
Thomas J. Usher 253,216,014 2,479,247
Milton A. Washington 253,170,453 2,524,808
Helge H. Wehmeier 253,246,008 2,449,253
===============================================================
THE PNC FINANCIAL SERVICES GROUP, INC.
----
35
37
With respect to the preceding matter, holders of the Corporation's common and
preferred stock voted together as a single class. The following table sets forth
as of the February 28, 2000 record date the number of shares of each class or
series of stock that were issued and outstanding and entitled to vote, the
voting power per share and the aggregate voting power of each class or series:
Number of
Voting Shares
Rights Entitled Aggregate
Title of Class or Series Per Share to Vote Voting Power
- ----------------------------------------------------------------------------
Common Stock 1 292,548,003 292,548,003
$1.80 Cumulative
Convertible
Preferred Stock -
Series A 8 11,901 95,208
$1.80 Cumulative
Convertible
Preferred Stock -
Series B 8 3,348 26,784
$1.60 Cumulative
Convertible
Preferred Stock -
Series C 4/2.4 252,206 420,343*
$1.80 Cumulative
Convertible
Preferred Stock -
Series D 4/2.4 363,467 605,778*
-------------
Total possible votes 293,696,116*
============================================================================
* Represents greatest number of votes possible. Actual aggregate voting power
was less since each holder of such preferred stock was entitled to a number of
votes equal to the number of full shares of common stock into which such
holder's preferred stock was convertible.
Holders of the Corporation's 6,000,000 issued and outstanding shares of
Fixed/Adjustable Rate Noncumulative Preferred Stock-Series F were not entitled
to vote with respect to the matters presented at the meeting.
ITEM 5. OTHER INFORMATION
The Board of Directors adopted a shareholder rights plan effective as of May 15,
2000 providing for the distribution of one right for each share of common stock
outstanding on May 25, 2000. The rights become exercisable only in the event,
with certain exceptions, that an acquiring party accumulates 10% or more of the
Corporation's voting stock or a party announces an offer to acquire 10% or more
of the voting stock. The rights have an exercise price of $180 per right and
expire on May 25, 2010. Upon the occurrence of certain events, holders of the
rights will be entitled to purchase either PNC common or common equivalent
preferred shares or shares in an acquiring entity at half of market value. The
Corporation is entitled to redeem the rights at a value of $0.01 per right at
any time until the acquisition of a 10% position in its voting stock. A copy of
the Rights Agreement providing for the issuance of the rights is filed as an
exhibit to this Quarterly Report on Form 10-Q. This description should be read
together with the Rights Agreement and is qualified in its entirety by reference
to that agreement.
Item 6. Exhibits and Reports on Form 8-K
The following exhibit index lists Exhibits filed with this Quarterly Report on
Form 10-Q:
3.1 Articles of Incorporation of the Corporation, as
amended and restated as of May 15, 2000
3.2 By-laws of The PNC Financial Services Group, Inc., as amended
4.7 Terms of Series G Junior Participating Preferred Stock
(included as part of exhibit 3.1)
4.8 Rights Agreement between the Corporation and The Chase
Manhattan Bank dated May 15, 2000
10.5 The PNC Financial Services Group, Inc. 1997 Long-Term
Incentive Award Plan, as amended
12.1 Computation of Ratio of Earnings to Fixed Charges
12.2 Computation of Ratio of Earnings to Fixed Charges and
Preferred Stock Dividends
27 Financial Data Schedule
==================================================================
Copies of these Exhibits may be obtained electronically at the Securities and
Exchange Commission's home page at www.sec.gov. Copies may also be obtained
without charge by writing to Lynn Fox Evans, Director of Financial Reporting, at
corporate headquarters, by calling (412) 762-1553 or via e-mail at
financial.reporting@pncbank.com.
The following Reports on Form 8-K were filed by the Corporation during the
quarter ended March 31, 2000:
Form 8-K dated January 13, 2000, filing an earnings release reporting the
Corporation's consolidated financial results for the three months and year ended
December 31, 1999, and financial information on the Corporation's businesses for
the years ended December 31, 1999 and 1998.
Form 8-K dated February 15, 2000, reporting on entering into an underwriting
agreement with respect to the public offering of $100,000,000 of 7.50%
Subordinated Notes due 2009, and on the form of the Notes and related guarantee.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on May 15, 2000, on its
behalf by the undersigned thereunto duly authorized.
The PNC Financial Services Group, Inc.
Robert L. Haunschild
Senior Vice President and
Chief Financial Officer
THE PNC FINANCIAL SERVICES GROUP, INC.
----
36
38
CORPORATE INFORMATION
CORPORATE HEADQUARTERS
The PNC Financial Services Group, Inc.
One PNC Plaza
249 Fifth Avenue
Pittsburgh, Pennsylvania 15222-2707
(412) 762-2000
STOCK LISTING
The PNC Financial Services Group, Inc. common stock is listed on the New York
Stock Exchange under the symbol PNC.
INTERNET INFORMATION
Information about The PNC Financial Services Group, Inc.'s financial results and
its products and services is available on the Internet at www.pnc.com.
FINANCIAL INFORMATION
The Annual Report on Form 10-K is filed with the Securities and Exchange
Commission ("SEC"). Copies of this document and other filings, including
Exhibits thereto, may be obtained electronically at the SEC's home page at
www.sec.gov. Copies may also be obtained without charge by writing to Lynn Fox
Evans, Director of Financial Reporting, at corporate headquarters, by calling
(412) 762-1553 or via e-mail at financial.reporting@pncbank.com.
INQUIRIES
For financial services call 1-888-PNC-2265. Individual shareholders should
contact Shareholder Relations at (800) 982-7652.
Analysts and institutional investors should contact William H. Callihan, Vice
President, Investor Relations, at (412) 762-8257 or via e-mail at
investor.relations@pncbank.com.
News media representatives and others seeking general information should contact
R. Jeep Bryant, Director of Corporate Communications, at (412) 762-8221 or via
e-mail at corporate.communications@pncbank.com.
COMMON STOCK PRICES/DIVIDENDS DECLARED
The table below sets forth by quarter the range of high and low sale and
quarter-end closing prices for The PNC Financial Services Group, Inc. common
stock and the cash dividends declared per common share.
Cash
Dividends
High Low Close Declared
=====================================================================
2000 QUARTER
- ---------------------------------------------------------------------
First $48.500 $36.000 $45.063 $.45
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1999 QUARTER
- ---------------------------------------------------------------------
First $59.750 $47.000 $55.563 $.41
Second 60.125 54.375 57.625 .41
Third 58.063 49.688 52.688 .41
Fourth 62.000 43.000 44.500 .45
- ---------------------------------------------------------------------
Total $1.68
=====================================================================
DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN
The PNC Financial Services Group, Inc. Dividend Reinvestment and Stock Purchase
Plan enables holders of common and preferred stock to purchase additional shares
of common stock conveniently and without paying brokerage commissions or service
charges. A prospectus and enrollment card may be obtained by writing to
Shareholder Relations at corporate headquarters.
REGISTRAR AND TRANSFER AGENT
The Chase Manhattan Bank
P.O. Box 590
Ridgefield Park, New Jersey 07660
(800) 982-7652
THE PNC FINANCIAL SERVICES GROUP, INC.
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