THE PNC FINANCIAL SERVICES GROUP, INC.
Quarterly Report on Form 10-Q
For the quarterly period ended March 31, 2002
Page 1 represents a portion of the first quarter 2002 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 47.
FINANCIAL HIGHLIGHTS
THE PNC FINANCIAL SERVICES GROUP, INC.
For the three months ended - dollars in millions, except per
share data March 31 March 31
Unaudited 2002 2001
- ----------------------------------------------------------------------------------------------------------------
FINANCIAL PERFORMANCE
Revenue
Net interest income (taxable-equivalent basis) $593 $559
Noninterest income 774 715
---------------------------------------
Total revenue $1,367 $1,274
=======================================
Income from continuing operations $317 $265
Discontinued operations 5
---------------------------------------
Income before cumulative effect of accounting change 317 270
Cumulative effect of accounting change (5)
---------------------------------------
Net income $317 $265
=======================================
Per common share
Diluted earnings
Continuing operations $1.11 $.89
Discontinued operations .02
---------------------------------------
Before cumulative effect of accounting change 1.11 .91
Cumulative effect of accounting change (.02)
---------------------------------------
Net income $1.11 $.89
=======================================
Cash dividends declared $.48 $.48
- ----------------------------------------------------------------------------------------------------------------
SELECTED RATIOS
FROM CONTINUING OPERATIONS
Return on
Average common shareholders' equity 21.83 % 16.59 %
Average assets 1.89 1.49
Net interest margin 4.12 3.62
Noninterest income to total revenue 56.62 56.12
Efficiency (a) 57.54 58.37
FROM NET INCOME
Return on
Average common shareholders' equity 21.83 % 16.59 %
Average assets 1.89 1.43
Net interest margin 4.12 3.53
Noninterest income to total revenue 56.62 56.40
Efficiency (a) 57.54 58.19
================================================================================================================
(a) The efficiency ratio is the sum of noninterest expense and minority
interest in income of consolidated entities divided by the sum of
taxable-equivalent net interest income and noninterest income.
Amortization, distributions on capital securities and residential
mortgage banking risk management activities are excluded for purposes
of computing this ratio.
1
March 31 December 31 March 31
Dollars in millions, except per share data 2002 2001 2001
- ---------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
Assets $66,564 $69,568 $70,966
Earning assets 55,856 57,875 60,548
Loans, net of unearned income 38,539 37,974 45,626
Securities 11,092 13,908 11,976
Loans held for sale 3,648 4,189 1,765
Deposits 44,910 47,304 47,189
Borrowed funds 10,988 12,090 12,279
Shareholders' equity 5,979 5,823 6,781
Common shareholders' equity 5,969 5,813 6,470
Book value per common share 21.02 20.54 22.39
Loans to deposits 86 % 80 % 97 %
CAPITAL RATIOS
Leverage 6.9 % 6.8 % 7.8 %
Common shareholders' equity to total assets 8.97 8.36 9.12
ASSET QUALITY RATIOS
Nonperforming assets to total loans,
loans held for sale and foreclosed assets 1.04 % .93 % .81 %
Allowance for credit losses to total loans 1.85 1.66 1.48
Allowance for credit losses to nonaccrual loans 284 299 201
Net charge-offs to average loans (For the three months
ended) .43 7.30 .65
================================================================================================================
2
FINANCIAL REVIEW
THE PNC FINANCIAL SERVICES GROUP, INC.
This Financial Review should be read in conjunction with The PNC Financial
Services Group, Inc. and subsidiaries ("Corporation" or "PNC") unaudited
Consolidated Financial Statements and Statistical Information included herein
and the Financial Review, audited Consolidated Financial Statements and
Statistical Information included in the Corporation's 2001 Annual Report to
Shareholders. Certain prior-period amounts have been reclassified to conform
with the current year presentation. For information regarding certain business
risks, see the Risk Factors and Risk Management sections in this Financial
Review. Also, see the Forward-Looking Statements section in this Financial
Review for certain other factors that could cause actual results to differ
materially from forward-looking statements or historical performance.
OVERVIEW
THE PNC FINANCIAL SERVICES GROUP, INC.
The Corporation is one of the largest diversified financial services companies
in the United States, operating businesses engaged in regional community
banking, corporate banking, real estate finance, asset-based lending, wealth
management, asset management and global fund services. The Corporation provides
certain products and services nationally and others in PNC's primary geographic
markets in Pennsylvania, New Jersey, Delaware, Ohio and Kentucky. The
Corporation also provides certain banking, asset management and global fund
services internationally.
PNC continues to pursue strategies to build a diverse and valuable business mix
designed to create shareholder value over time. PNC's focus is on increasing the
contribution from more highly-valued businesses such as asset management and
processing while reducing lending leverage and improving the risk/return
characteristics of traditional banking businesses. PNC also seeks to derive a
greater proportion of its revenue from less volatile, fee-based products and
services.
The first quarter of 2002 was characterized by a continued weak economy and only
moderate capital markets recovery. The Corporation made progress in addressing a
number of key challenges during the first quarter:
- - Institutional repositioning loans held for sale decreased 23%;
- - Overall asset quality was negatively impacted by the continued weakness
in the economy and the resulting impact on PNC Business Credit;
- - The ratio of PNC's loans to deposits was 86% at March 31, 2002, one of
the lowest in PNC's peer group;
- - PNC continued to invest in fee-based businesses such as asset
management and processing to support continued growth in the customer
base of these businesses;
- - Aggregate earnings from PNC Advisors, BlackRock and PFPC represented
26% of total business earnings for the first quarter of 2002 and PNC's
noninterest income was 57% of total revenue for the first quarter of
2002;
- - Regional Community Banking earnings grew 11% during the first quarter
of 2002 and improved its efficiency ratio to 48%, and
- - The Corporation completed its acquisition of a portion of the U.S.
asset-based lending business of the National Bank of Canada, referred
to in this discussion as the NBOC acquisition (see PNC Business Credit
discussion within this Financial Review).
Management expects the remainder of 2002 will continue to be a challenging
operating environment. The Corporation's success during the remainder of the
year will depend on, among other factors, its ability to address its key
operating challenges. See 2002 Operating Environment in the Financial Review
section of the 2001 Annual Report on Form 10-K for additional information. Also,
see the Risk Factors, Risk Management and Forward-Looking Statements sections
of this Financial Review.
SUMMARY FINANCIAL RESULTS
Consolidated net income for the first three months of 2002 was $317 million or
$1.11 per diluted share compared with $265 million or $.89 per diluted share for
the first quarter of 2001. Results for the first quarter of 2002 reflected the
required adoption of Statement of Financial Accounting Standards ("SFAS") No.
142, "Goodwill and Other Intangible Assets," under which goodwill is no longer
amortized to expense. Excluding goodwill amortization expense from first quarter
2001 results, earnings would have been $288 million or $.97 per diluted share.
Reported earnings in 2001 included income from discontinued operations of $.02
per diluted share and an after-tax loss of $.02 per diluted share related to the
cumulative effect of the accounting change for the adoption of SFAS No. 133,
"Accounting For Derivative Instruments and Hedging Activities," as amended by
SFAS No. 137 and 138.
3
Return on average common shareholders' equity was 21.83% and return on average
assets was 1.89% for the first quarter of 2002 compared with 16.59% and 1.43%,
respectively, for the first quarter of 2001. Comparable prior year returns
excluding goodwill amortization expense were 18.05% and 1.62%, respectively.
The residential mortgage banking business, which was sold in January 2001, is
reflected in discontinued operations throughout the Corporation's consolidated
financial statements. Accordingly, the results of operations for the residential
mortgage banking business are shown separately on one line in the income
statement for all periods presented. The remainder of the presentation in this
Financial Review reflects continuing operations, unless otherwise noted.
Taxable-equivalent net interest income was $593 million and the net interest
margin was 4.12% for the first quarter of 2002 compared with $559 million and
3.62%, respectively, for the first quarter of 2001. The increases were primarily
due to the impact of changes in balance sheet composition and a lower interest
rate environment in 2002, combined with a steep yield curve. The provision for
credit losses was $82 million for the first three months of 2002 compared with
$80 million for the first three months of 2001. Net charge-offs were $41 million
or .43% of average loans for the first quarter of 2002, compared with $80
million or .65%, respectively, for the first quarter of 2001. The provision for
credit losses in the first quarter of 2002 reflected additional reserves related
to the Corporate Banking business and the PNC Business Credit portfolio. The
first quarter of 2001 included $41 million of provision related to loans
designated for exit in that period.
As a result of the above activity and the recognition of $41 million of
allowance acquired in connection with the NBOC acquisition, the allowance for
credit losses was $712 million at March 31, 2002, compared with $630 million at
December 31, 2001 and $675 million at March 31, 2001.
Noninterest income was $774 million for the first quarter of 2002 compared with
$715 million for the first quarter of 2001, an increase of $59 million or 8%.
Excluding equity management losses and net securities gains in both periods,
total noninterest income increased $47 million for the first three months of
2002 compared with the prior year period. Corporate services revenue increased
$42 million for the first quarter of 2002 compared with the first quarter of
2001 primarily due to $23 million of net gains in excess of valuation
adjustments related to institutional loans held for sale and higher treasury
management fees.
Total noninterest expense was $791 million for the first quarter of 2002
compared with $781 million for the first quarter of 2001 and the efficiency
ratio remained flat at 58% for both periods.
Total assets were $66.6 billion at March 31, 2002 compared with $69.6 billion at
December 31, 2001. At March 31, 2002, loans were $38.5 billion and loans held
for sale were $3.6 billion, including $2.0 billion of institutional loans held
for sale. At December 31, 2001, loans were $38.0 billion and loans held for sale
were $4.2 billion, including $2.6 billion of institutional loans held for sale.
The term "loans" in this Financial Review excludes loans held for sale and
securities that represent interests in pools of loans.
Average interest-earning assets were $57.6 billion for the first quarter of 2002
compared with $61.5 billion for the first quarter of 2001. The decline primarily
reflected the impact of the institutional lending repositioning.
Shareholders' equity totaled $6.0 billion at March 31, 2002 compared with $5.8
billion at December 31, 2001. The regulatory capital ratios were 6.9% for
leverage, 7.7% for Tier I risk-based and 11.7% for total risk-based capital at
March 31, 2002 compared with 6.8% for leverage, 7.8% for Tier 1 risk-based and
11.8% for total risk-based capital at December 31, 2001. Common shares
outstanding at March 31, 2002 were 283.4 million.
Nonperforming assets were $438 million at March 31, 2002 compared with $391
million and $386 million at December 31, 2001 and March 31, 2001, respectively.
The ratio of nonperforming assets to total loans, loans held for sale and
foreclosed assets was 1.04% at March 31, 2002 compared with .93% at December 31,
2001 and .81% at March 31, 2001. The increase in nonperforming assets was
primarily attributable to PNC Business Credit.
The allowance for credit losses was $712 million and represented 1.85% of
period-end loans and 284% of nonperforming loans at March 31, 2002. The
comparable amounts were $630 million, 1.66% and 299%, respectively, at December
31, 2001 and $675 million, 1.48% and 201%, respectively, at March 31, 2001.
Subsequent to the end of first quarter 2002, the Corporation learned of an
apparent fraud related to a seller of receivables to Market Street Funding
Corporation ("Market Street"), an asset-backed commercial paper conduit that is
independently owned and managed. PNC provides administrative services, a portion
of the program-level credit enhancement and participates with other banks in
providing liquidity facilities to Market Street. In April 2002, PNC funded
approximately $50 million to Market Street under a liquidity facility
agreement. Reserves were specifically allocated to cover substantially all of
this exposure at March 31, 2002. PNC is evaluating possible sources of recovery
for its loss.
STRATEGIC REPOSITIONING
As previously reported, PNC took several actions in 2001 to accelerate the
strategic repositioning of its lending businesses that began in 1998. A total of
$12.0 billion of credit exposure (comprised of loans outstanding, unfunded
commitments and letters of credit) including $6.2 billion of outstandings were
designated for exit or transferred to held for sale during 2001, of which $10.1
billion and $4.3 billion,
4
respectively, related to the institutional lending portfolio. The remaining $1.9
billion of credit exposure and outstandings related to PNC's vehicle leasing
business that is being discontinued. At March 31, 2002, PNC's vehicle leasing
business had $1.8 billion in assets that have been designated for exit and are
expected to mature over a period of approximately five years.
Details of the credit exposure and outstandings by business in the institutional
lending held for sale and exit portfolios are as follows:
INSTITUTIONAL LENDING HELD FOR SALE AND EXIT PORTFOLIOS
March 31, 2002 - in millions Credit Exposure Outstandings
- ---------------------------------------------------------------
LOANS HELD FOR SALE
Corporate Banking $3,519 $1,714
PNC Real Estate Finance 320 234
PNC Business Credit 35 27
- ---------------------------------------------------------------
Total loans held for sale 3,874 1,975
- ---------------------------------------------------------------
EXIT
Corporate Banking 1,945 113
PNC Real Estate Finance 25
- ---------------------------------------------------------------
Total exit 1,970 113
- ---------------------------------------------------------------
Total $5,844 $2,088
===============================================================
December 31, 2001 - in millions Credit Exposure Outstandings
- ----------------------------------------------------------------
LOANS HELD FOR SALE
Corporate Banking $4,594 $2,294
PNC Real Estate Finance 324 244
PNC Business Credit 40 30
- ----------------------------------------------------------------
Total loans held for sale 4,958 2,568
- ----------------------------------------------------------------
EXIT
Corporate Banking 2,662 192
PNC Real Estate Finance 30 5
- ----------------------------------------------------------------
Total exit 2,692 197
- ----------------------------------------------------------------
Total $7,650 $2,765
================================================================
ROLLFORWARD OF INSTITUTIONAL LENDING HELD FOR SALE PORTFOLIO
In millions Credit Exposure Outstandings
- ------------------------------------------------------------
January 1, 2002 $4,958 $2,568
Additions 26 150
Sales (560) (425)
Other reductions, including
payments (461) (237)
Valuation adjustments, net (89) (81)
- ------------------------------------------------------------
March 31, 2002 $3,874 $1,975
============================================================
During the first quarter of 2002, the liquidation of institutional loans held
for sale resulted in net gains in excess of valuation adjustments of $23
million. Details by business follow:
INSTITUTIONAL LENDING HELD FOR SALE ACTIVITY
Three months ended March 31, Net gains
2002 on Valuation
In millions liquidation Adjustments Total
- -----------------------------------------------------------------
Corporate Banking $110 $(81) $29
PNC Real Estate Finance 1 (7) (6)
PNC Business Credit 1 (1)
- -----------------------------------------------------------------
Total $112 $(89) $23
=================================================================
In addition to the actions taken regarding the institutional lending held for
sale and exit portfolios, the Corporation also recorded charges in 2001 totaling
$208 million in connection with other actions and additions to reserves.
Reserves related to these actions totaled $159 million at March 31, 2002. The
following table summarizes the first quarter 2002 changes to these reserves:
ROLLFORWARD OF OTHER RESERVES RELATED TO FOURTH QUARTER 2001 ACTIONS
First At
Quarter Mar.
2001 Utilized 2002 31,
In millions Charge in 2001 Activity 2002
- ----------------------------------------------------------------
Vehicle leasing $135 $(11) $(3) $121
Asset impairment
and severance costs 37 (24) (10) 3
Facilities consolidation
and other charges 36 (1) 35
- ---------------------------------------------------------------
Total $208 $(35) $(14) $159
===============================================================
The fourth quarter 2001 charge of $135 million in connection with the vehicle
leasing business included exit costs and additions to reserves related to
insured residual value exposures. At March 31, 2002, the related liability had
been reduced to $121 million as a result of goodwill impairment of $11 million
recorded in the fourth quarter of 2001 and a net $3 million reduction related to
severance and contractual payments recorded in the first quarter of 2002 in
connection with PNC's exit of this business. The liability for asset impairment
and severance costs had been reduced to $3 million at March 31, 2002 as a result
of asset write-downs of $24 million in the fourth quarter of 2001 and $10
million of severance benefits in the first three months of 2002.
In the fourth quarter of 2001, PFPC incurred $36 million of pretax charges
primarily related to a plan to consolidate certain facilities following an
acquisition. The charges primarily reflected termination costs related to
exiting certain lease agreements and the abandonment of related leasehold
improvements. The Corporation is continuing to pursue these initiatives.
See Strategic Repositioning in the Risk Factors section of this Financial Review
for additional information regarding certain risks associated with executing the
repositioning strategies.
5
REVIEW OF BUSINESSES
PNC operates seven major businesses engaged in regional community banking,
corporate banking, real estate finance, asset-based lending, wealth management,
asset management and global fund services.
Results of individual businesses are presented based on PNC's management
accounting practices and the Corporation's management structure. There is no
comprehensive, authoritative body of guidance for management accounting
equivalent to generally accepted accounting principles; therefore, the financial
results of individual businesses are not necessarily comparable with similar
information for any other company. Financial results are presented, to the
extent practicable, as if each business operated on a stand-alone basis. Also,
certain amounts for 2001 have been reclassified to conform with the 2002
presentation.
The management accounting process uses various balance sheet and income
statement assignments and transfers to measure performance of the businesses.
Methodologies change from time to time as management accounting practices are
enhanced and businesses change. Securities available for sale or borrowings and
related net interest income are assigned based on the net asset or liability
position of each business. Capital is assigned based on management's assessment
of inherent risks and equity levels at independent companies providing similar
products and services. The allowance for credit losses is allocated based on
management's assessment of risk inherent in the loan portfolios. Support areas
not directly aligned with the businesses are allocated primarily based on the
utilization of services.
Total business financial results differ from consolidated results from
continuing operations primarily due to differences between management accounting
practices and generally accepted accounting principles, equity management
activities, minority interest in income of consolidated entities, residual asset
and liability management activities, unallocated reserves, eliminations and
unassigned items, the impact of which is reflected in the "Other" category. The
operating results and financial impact of the disposition of the residential
mortgage banking business, previously PNC Mortgage, are included in discontinued
operations.
The impact of the institutional lending repositioning and other strategic
actions that occurred during 2001 is reflected in the business results presented
in the table below. The charges are separately identified in the business income
statements. Performance ratios in the results of individual businesses reflect
the impact of the charges.
RESULTS OF BUSINESSES
Return on
Earnings Revenue (a) Assigned Capital Average Assets
--------------- -------------- ----------------- ----------------
Three months ended March 31 - dollars in 2002 2001 2002 2001 2002 2001 2002 2001
millions
- -----------------------------------------------------------------------------------------------------------------------------
Banking Businesses
Regional Community Banking $177 $160 $551 $542 27% 24% $38,749 $40,617
Corporate Banking 33 20 194 191 12 6 15,217 17,686
PNC Real Estate Finance 22 14 51 53 22 14 5,174 5,453
PNC Business Credit 2 16 45 38 3 41 3,817 2,377
- ----------------------------------------------------------------------------------- -------------------
Total banking businesses 234 210 841 824 22 18 62,957 66,133
- ----------------------------------------------------------------------------------- -------------------
Asset Management and Processing
PNC Advisors 33 44 183 199 25 32 3,042 3,505
BlackRock 31 25 146 134 25 26 667 500
PFPC 17 17 197 197 33 33 1,848 1,735
- ----------------------------------------------------------------------------------- -------------------
Total asset management and
processing 81 86 526 530 26 30 5,557 5,740
- ----------------------------------------------------------------------------------- -------------------
Total business results 315 296 1,367 1,354 23 21 68,514 71,873
Other 2 (31) (80) (355) (88)
- ----------------------------------------------------------------------------------- -------------------
Results from continuing operations 317 265 1,367 1,274 22 17 68,159 71,785
Discontinued operations 5 207
Cumulative effect of accounting change (5)
- -----------------------------------------------------------------------------------------------------------------------------
Total consolidated $317 $265 $1,367 $1,274 22 17 $68,159 $71,992
=============================================================================================================================
(a) Business revenues are presented on a taxable-equivalent basis except
for BlackRock and PFPC.
6
REGIONAL COMMUNITY BANKING
Three months ended March 31
Taxable-equivalent basis
Dollars in millions 2002 2001
- ----------------------------------------------------------------
INCOME STATEMENT
Net interest income $384 $354
Other noninterest income 164 161
Net securities gains 3 27
- ----------------------------------------------------------------
Total revenue 551 542
Provision for credit losses 12 10
Noninterest expense 266 270
Goodwill amortization 9
Severance costs 3
- ----------------------------------------------------------------
Pretax earnings 273 250
Income taxes 96 90
- ----------------------------------------------------------------
Earnings $177 $160
================================================================
AVERAGE BALANCE SHEET
Loans
Consumer
Home equity $6,733 $6,148
Indirect 633 943
Other consumer 697 836
- ----------------------------------------------------------------
Total consumer 8,063 7,927
Residential mortgage 5,096 11,701
Commercial 3,511 3,611
Vehicle leasing 1,895 1,703
Other 122 140
- ----------------------------------------------------------------
Total loans 18,687 25,082
Securities 12,206 7,551
Loans held for sale 1,488 1,324
Assigned assets and other assets 6,368 6,660
- ----------------------------------------------------------------
Total assets $38,749 $40,617
================================================================
Deposits
Noninterest-bearing demand $4,879 $4,476
Interest-bearing demand 6,053 5,506
Money market 12,292 11,769
- ----------------------------------------------------------------
Total transaction deposits 23,224 21,751
Savings 1,924 1,860
Certificates 10,310 13,256
- ----------------------------------------------------------------
Total deposits 35,458 36,867
Other liabilities 675 1,010
Assigned capital 2,616 2,740
- ----------------------------------------------------------------
Total funds $38,749 $40,617
================================================================
PERFORMANCE RATIOS
Return on assigned capital 27% 24%
Noninterest income to total revenue 30 35
Efficiency 48 50
================================================================
Regional Community Banking provides deposit, branch-based brokerage, electronic
banking and credit products and services to retail customers as well as deposit,
credit, treasury management and capital markets products and services to small
businesses primarily within PNC's geographic region.
Regional Community Banking's strategic focus is on driving sustainable revenue
growth, aggressively managing the revenue/expense relationship and improving the
risk/return dynamic of this business. As previously reported, the Corporation
made the decision to discontinue its vehicle leasing business in the fourth
quarter of 2001. This portfolio is expected to mature over a period of
approximately five years. See Strategic Repositioning in the Overview and Risk
Factors sections of this Financial Review for additional information. Regional
Community Banking utilizes knowledge-based marketing capabilities to analyze
customer demographic information, transaction patterns and delivery preferences
to develop customized banking packages focused on improving customer
satisfaction and profitability.
Regional Community Banking has also invested heavily in building a sales culture
and infrastructure while improving efficiency. Capital investments have been
strategically directed towards the expansion of multi-channel distribution,
consistent with customer preferences, as well as the delivery of relevant
customer information to all distribution channels.
Regional Community Banking contributed $177 million or 56% of total business
earnings for the first quarter of 2002 compared with $160 million or 54% for the
first quarter of 2001. An increase in revenue combined with lower expenses
resulted in an 11% increase in earnings in the comparison. Excluding net
securities gains in both periods and goodwill amortization expense in the first
quarter of 2001, earnings for the first quarter of 2002 increased 16% compared
with the prior-year quarter. This increase was primarily due to growth in net
interest income driven by a 7% increase in average transaction deposits.
Total revenue increased 2% to $551 million for the first quarter of 2002
compared with the first quarter of 2001. Excluding net securities gains from
both periods, revenue increased 6% in the period-to-period comparison. This was
primarily due to the improvement in net interest income resulting from increases
in average transaction deposits and savings accounts as spreads widened given
the impact of a steep yield curve.
The provision for credit losses for the first quarter of 2002 was $12 million
compared with $10 million for the same period in 2001.
Total loans decreased 25% on average in the first quarter of 2002 compared with
the prior year quarter due to the reduction of residential mortgage loans due to
sales and securitization and the continued downsizing of the indirect automobile
lending and other consumer loan portfolios. Securities increased on average in
the quarter-to-quarter comparison due to purchases for balance sheet and
interest rate risk management activities as well as the retention of interests
from the residential mortgage loan securitization. See "Securitizations" in this
Financial Review for further information.
Total deposits declined 4% for the first quarter of 2002 compared with the same
period in 2001 as increases in transaction deposits and savings accounts were
more than offset by a decline in retail certificates of deposit. Demand and
money market deposits increased due to ongoing strategic marketing efforts while
higher cost retail certificates of deposit were not emphasized.
7
CORPORATE BANKING
Three months ended March 31
Taxable-equivalent basis
Dollars in millions 2002 2001
- -----------------------------------------------------------------
INCOME STATEMENT
Credit-related revenue $109 $103
Noncredit revenue 85 88
- -----------------------------------------------------------------
Total revenue 194 191
Provision for credit losses 46 16
Noninterest expense 97 101
Institutional lending repositioning 41
Goodwill amortization 1
Severance costs 3
- -----------------------------------------------------------------
Pretax earnings 51 29
Income tax expense 18 9
- -----------------------------------------------------------------
Earnings $33 $20
=================================================================
AVERAGE BALANCE SHEET
Loans
Middle market $4,555 $6,461
Large corporate 2,161 3,105
Energy, metals and mining 436 1,490
Communications 66 1,301
Leasing 2,429 2,185
Other 283 326
- -----------------------------------------------------------------
Total loans 9,930 14,868
Loans held for sale 2,519 320
Other assets 2,768 2,498
- -----------------------------------------------------------------
Total assets $15,217 $17,686
=================================================================
Deposits $4,475 $4,901
Assigned funds and other liabilities 9,601 11,459
Assigned capital 1,141 1,326
- -----------------------------------------------------------------
Total funds $15,217 $17,686
=================================================================
PERFORMANCE RATIOS
Return on assigned capital 12% 6%
Noncredit revenue to total revenue 44 46
Efficiency 50 54
=================================================================
Corporate Banking provides credit, equipment leasing, treasury management and
capital markets products and services primarily to mid-sized corporations and
government entities within PNC's geographic region. The strategic focus for
Corporate Banking is to adapt its institutional expertise to the middle market
with an emphasis on higher-margin noncredit products and services, especially
treasury management and capital markets, and to improve the risk/return
characteristics of its institutional lending business.
As previously reported, during 2001 Corporate Banking took actions to accelerate
the repositioning of its institutional lending business. A total of $9.7 billion
of credit exposure including $4.0 billion of outstandings were designated for
exit or transferred to held for sale. At March 31, 2002, the exit and held for
sale portfolios had remaining total credit exposure of $5.5 billion including
outstandings of $1.8 billion. Of these amounts, $3.5 billion and $1.7 billion,
respectively, were classified as held for sale. The Corporation is continuing to
pursue liquidation of the institutional held for sale portfolio. Gains and
losses may result from the liquidation of loans held for sale to the extent
actual performance differs from estimates inherent in the recorded amounts or if
valuations change. See Strategic Repositioning in the Risk Factors section of
this Financial Review for additional information.
Corporate Banking contributed $33 million or 10% of total business earnings for
the first three months of 2002 compared with $20 million or 7% for the first
three months of 2001. Overall results for this business were negatively impacted
in both quarters by decreased activity as a result of general economic
conditions and PNC's institutional lending repositioning efforts.
Total revenue of $194 million for the first quarter of 2002 increased $3 million
from the year-ago period. Credit-related revenue increased $6 million or 6%
primarily due to $29 million of net gains in excess of valuation adjustments on
loans held for sale, partially offset by the impact of the decline in interest
rates and the reduction in loans outstanding resulting from the ongoing
institutional lending repositioning. Noncredit revenue includes noninterest
income and the benefit of compensating balances received in lieu of fees.
Noncredit revenue was $85 million for the first three months of 2002 compared
with $88 million for the same period in 2001.
Total credit costs were $46 million for the first three months of 2002 compared
with $57 million for the first three months of 2001, which included $16 million
reflected in the provision for credit losses and $41 million of institutional
lending repositioning charges. The provision for credit losses for the first
quarter of 2002 reflects the impact of, among others, reserve allocations for
the apparent fraud related to Market Street. See Credit Risk in the Risk
Management section of this Financial Review for additional information regarding
credit risk.
Treasury management and capital markets products offered through Corporate
Banking are sold by several businesses across the Corporation and related
profitability is included in the results of those businesses. Consolidated
revenue from treasury management decreased to $84 million for the first quarter
of 2002 compared with $88 million in the first three months of 2001 as lower
income earned on customers' deposit balances reflecting the lower interest rate
environment offset higher fee revenue. Consolidated revenue from capital markets
was $30 million for the first three months of 2002, an increase of $7 million
compared with the first three months of 2001 primarily due to increased volume
of transactions for various capital markets products in 2002 combined with the
comparative impact of write-downs of other assets in 2001.
8
PNC REAL ESTATE FINANCE
Three months ended March 31
Taxable-equivalent basis
Dollars in millions 2002 2001
- -----------------------------------------------------------------
INCOME STATEMENT
Net interest income $30 $29
Noninterest income
Commercial mortgage banking 18 17
Other 3 7
- -----------------------------------------------------------------
Total noninterest income 21 24
- -----------------------------------------------------------------
Total revenue 51 53
Provision for credit losses (5) 9
Noninterest expense 36 32
Goodwill amortization 5
- -----------------------------------------------------------------
Pretax earnings 20 7
Income tax (benefit) expense (2) (7)
- -----------------------------------------------------------------
Earnings $22 $14
=================================================================
AVERAGE BALANCE SHEET
Loans
Commercial real estate $2,228 $2,326
Commercial - real estate related 1,555 1,884
- -----------------------------------------------------------------
Total loans 3,783 4,210
Commercial mortgages held for sale 529 284
Other assets 862 959
- -----------------------------------------------------------------
Total assets $5,174 $5,453
=================================================================
Deposits $617 $340
Assigned funds and other
liabilities 4,158 4,714
Assigned capital 399 399
- -----------------------------------------------------------------
Total funds $5,174 $5,453
=================================================================
PERFORMANCE RATIOS
Return on assigned capital 22% 14%
Noninterest income to total revenue 41 45
Efficiency 63 56
=================================================================
PNC Real Estate Finance provides credit, capital markets, treasury management,
commercial mortgage loan servicing and other financial products and services to
developers, owners and investors in commercial real estate. PNC's commercial
real estate financial services platform provides processing services through
Midland Loan Services, Inc., a leading third-party provider of loan servicing
and technology to the commercial real estate finance industry, and national
syndication of affordable housing equity through Columbia Housing Partners, LP
("Columbia").
PNC Real Estate Finance seeks to have a more balanced and valuable revenue
stream by focusing on real estate processing businesses and increasing the value
of its lending business by seeking to sell more fee-based products.
During 2001, PNC Real Estate Finance took actions to accelerate the downsizing
of its institutional lending business. A total of $354 million of credit
exposure including $249 million of outstandings were designated for exit or
transferred to held for sale. Credit exposure of $345 million including $234
million of outstandings classified as held for sale or exit remained at March
31, 2002.
PNC Real Estate Finance contributed $22 million of total business earnings for
the first three months of 2002 compared with $14 million for the first three
months of 2001. Earnings increased in the period-to-period comparison primarily
due to the impact of a loan recovery in the exited mortgage warehouse lending
business. Excluding the recovery, the provision for credit losses for the first
quarter of 2002 was $1 million. Average loans decreased 10% reflecting
management's ongoing strategy to reduce balance sheet leverage.
Total revenue was $51 million for the first quarter of 2002 compared with $53
million for the prior year quarter. The decline in other noninterest income was
primarily due to $6 million of net valuation adjustments related to
institutional loans held for sale.
The commercial mortgage servicing portfolio increased 19% from March 31, 2001 to
$69 billion at March 31, 2002 as shown below.
COMMERCIAL MORTGAGE SERVICING PORTFOLIO
In billions 2002 2001
- -----------------------------------------------------------------
January 1 $68 $54
Acquisitions/additions 4 6
Repayments/transfers (3) (2)
- -----------------------------------------------------------------
March 31 $69 $58
=================================================================
9
PNC BUSINESS CREDIT
Three months ended March 31
Taxable-equivalent basis
Dollars in millions 2002 2001
- ---------------------------------------------------------------
INCOME STATEMENT
Net interest income $33 $24
Noninterest income 12 14
- ---------------------------------------------------------------
Total revenue 45 38
Provision for credit losses 28 5
Noninterest expense 14 7
Goodwill amortization 1
- ---------------------------------------------------------------
Pretax earnings 3 25
Income taxes 1 9
- ---------------------------------------------------------------
Earnings $2 $16
===============================================================
AVERAGE BALANCE SHEET
Loans $3,484 $2,255
Loans held for sale 92 61
Other assets 241 61
- ---------------------------------------------------------------
Total assets $3,817 $2,377
===============================================================
Deposits $68 $77
Assigned funds and other liabilities 3,500 2,142
Assigned capital 249 158
- ---------------------------------------------------------------
Total funds $3,817 $2,377
===============================================================
PERFORMANCE RATIOS
Return on assigned capital 3% 41%
Noninterest income total revenue 27 37
Efficiency 31 18
===============================================================
PNC Business Credit provides asset-based lending, capital markets and treasury
management products and services to middle market customers nationally. PNC
Business Credit's lending services include loans secured by accounts receivable,
inventory, machinery and equipment, and other collateral, and its customers
include manufacturing, wholesale, distribution, retailing and service industry
companies.
In January 2002, PNC Business Credit acquired a portion of National Bank of
Canada's ("NBOC") U.S. asset-based lending business in a purchase business
combination. With this acquisition, PNC Business Credit established six new
marketing offices and enhanced its presence as one of the premier asset-based
lenders for the middle market customer segment. The transaction was designed to
allow PNC to acquire the higher-quality portion of the portfolio, and provide
NBOC a means for the orderly liquidation and exit of the remaining portfolio.
PNC acquired 245 lending customer relationships representing approximately $2.6
billion of credit exposure including $1.5 billion of loan outstandings with the
balance representing unfunded loan commitments. PNC also acquired certain other
assets and assumed liabilities resulting in a total acquisition cost of
approximately $1.8 billion that was paid primarily in cash. Goodwill recorded
was approximately $277 million, of which approximately $101 million is
non-deductible for federal income tax purposes. The results of the acquired
business have been included in results of operations for PNC Business Credit
since the acquisition date.
NBOC retained a portfolio ("Serviced Portfolio") totaling approximately $670
million of credit exposure including $463 million of outstandings, which will be
serviced by PNC for an 18-month term unless a different date is mutually agreed
upon. The Serviced Portfolio retained by NBOC primarily represents the portion
of NBOC's U.S. asset-based loan portfolio with the highest risk. The loans are
either to borrowers with deteriorating trends or with identified weaknesses
which if not corrected could jeopardize full satisfaction of the loans or in
industries to which PNC Business Credit wants to limit its exposure.
Approximately $138 million of the Serviced Portfolio outstandings were
nonperforming on the acquisition date. At the end of the servicing term, NBOC
has the right to transfer the then remaining Serviced Portfolio to PNC ("Put
Option"). NBOC's and PNC's strategy is to aggressively liquidate the Serviced
Portfolio during the servicing term. PNC intends to sell or otherwise liquidate
any remaining loans in the event NBOC puts them to PNC at the end of the
servicing term.
NBOC retains significant risks and rewards of owning the Serviced Portfolio,
including realized credit losses, during the servicing term as described below.
NBOC assigned $24 million of specific reserves to certain of the loans in the
Serviced Portfolio. Additionally, NBOC absorbs realized credit losses on the
Serviced Portfolio in addition to the specific reserves on individual identified
loans. If during the servicing term the realized credit losses in the Serviced
Portfolio exceed $50 million plus the specific reserves, then PNC Business
Credit will advance cash to NBOC for these excess losses ("Excess Loss
Payments"). PNC is to be reimbursed by NBOC for any Excess Loss Payments if the
Put Option is not exercised. If the Put Option is exercised, the Put Option
purchase price will be reduced by the amount of any Excess Loss Payments.
As part of the allocation of the purchase price for the business acquired, PNC
Business Credit established a liability of $112 million to reflect its
obligation under the Put Option. An independent third party valuation firm
valued the Put Option by estimating the difference between the anticipated fair
value of loans from the Serviced Portfolio expected to be outstanding at the put
date and the anticipated Put Option purchase price. The Put Option liability
will be revalued on a quarterly basis by the independent valuation firm with
changes in the value included in earnings. At March 31, 2002 the Put Option
liability was approximately $107 million. The $5 million reduction from the
acquisition date amount was recognized in earnings for the first quarter as
other noninterest income.
If the Put Option is exercised, then PNC would record the loans acquired as
loans held for sale at the purchase price less the balance of the Put Option
liability at that date, which should approximate fair value. The Put Option
purchase price will be NBOC's outstanding principal balance for the loans
remaining in the Serviced Portfolio adjusted for the realized credit losses
during the servicing term and Excess Loss Payments, if applicable. If realized
credit losses are less than $50 million, the difference between $50 million and
the actual realized credit losses will be deducted from NBOC's outstanding
principal
10
balance to establish the Put Option purchase price. If realized credit losses
were to exceed $50 million plus the specific reserves used, the Excess Loss
Payments made by PNC Business Credit to NBOC will be deducted from NBOC's
outstanding principal balance in determining the Put Option purchase price.
At March 31, 2002, the valuation firm estimated that loans outstanding in the
Serviced Portfolio at the put date would be $332.5 million and that estimated
credit losses on liquidating the Serviced Portfolio would be $56.5 million
including $12.1 million during the servicing term. Using these and other
assumptions, if the Put were exercised at the end of the servicing term, PNC
would record the acquired loans at $165 million. Actual results may differ
materially from these assumptions.
Prior to closing of the acquisition, PNC Business Credit transferred $49 million
of nonperforming loans to NBOC in a transaction accounted for as a financing.
Those loans are subject to the terms of the servicing agreement and are included
in the Serviced Portfolio amounts set forth above. The loans were transferred to
loans held for sale on PNC's balance sheet at a loss of $9.9 million, which was
recognized as a charge-off in the first quarter of 2002. The carrying amount of
those loans held for sale was $33.2 million at March 31, 2002 and is included in
PNC's nonperforming assets. Excluding these loans, the Serviced Portfolio in
January 2002 was $620 million of credit exposure including $413 million of
outstandings of which $88 million was nonperforming. At March 31, 2002,
comparable amounts were $532 million, $385 million, and $110 million,
respectively.
During 2001, as part of the overall lending repositioning, a total of $88
million of credit exposure including $78 million of outstandings was transferred
to held for sale. Credit exposure of $35 million including $27 million of
outstandings classified as held for sale remained at March 31, 2002.
PNC Business Credit contributed $2 million of total business earnings for the
first three months of 2002 compared with $16 million for the first three months
of 2001. Higher revenues in 2002 were more than offset by a $23 million increase
in the provision for credit losses.
Revenue was $45 million for the first three months of 2002, a $7 million or 18%
increase compared with the first three months of 2001 as higher net interest
income more than offset a decline in noninterest income. Noninterest income in
the first quarter of 2002 included a $5 million benefit resulting from the
reduction in the Put Option liability related to the NBOC acquisition.
Noninterest income for the first quarter of 2001 included $6 million of gains on
equity interests received as compensation in conjunction with lending
relationships. The increase in net interest income for the first quarter of 2002
reflects an increase of $1.2 billion or 55% in total average loans for the
period resulting primarily from the NBOC acquisition.
The provision for credit losses for the first three months of 2002 was $28
million compared with $5 million for the first three months of 2001. PNC
Business Credit loans, including those acquired in the NBOC acquisition, are
secured loans to borrowers, many with a weaker credit risk rating. As a result,
these loans typically exhibit a higher risk of default. PNC Business Credit
attempts to manage this risk through direct control of cash flows and collateral
requirements. Compensation for this higher risk of default is obtained by way of
higher interest rates charged. The impact of these loans on the provision for
credit losses and the level of nonperforming assets may be even more pronounced
during periods of economic downturn consistent with PNC Business Credit's recent
experience. The first quarter 2002 provision includes an $11 million addition to
reserves reflecting current economic conditions and the growth of the loan
portfolio. See Credit Risk in the Risk Management section of this Financial
Review for additional information.
Total noninterest expense increased $6 million to $14 million during the first
quarter of 2002 compared with the prior year quarter, while the efficiency ratio
was 31% for the first three months of 2002 compared with 18% for the first three
months of 2001. Costs incurred in connection with the NBOC acquisition were the
primary cause of the increased expenses in 2002.
11
PNC ADVISORS
Three months ended March 31
Taxable-equivalent basis
Dollars in millions 2002 2001
- -----------------------------------------------------------------
INCOME STATEMENT
Net interest income $26 $32
Noninterest income
Investment management and trust 92 111
Brokerage 39 36
Other 26 20
- -----------------------------------------------------------------
Total noninterest income 157 167
- -----------------------------------------------------------------
Total revenue 183 199
Noninterest expense 130 126
Goodwill amortization 2
- -----------------------------------------------------------------
Pretax earnings 53 71
Income taxes 20 27
- -----------------------------------------------------------------
Earnings $33 $44
=================================================================
AVERAGE BALANCE SHEET
Loans
Consumer $1,170 $1,106
Residential mortgage 613 930
Commercial 475 564
Other 349 422
- -----------------------------------------------------------------
Total loans 2,607 3,022
Other assets 435 483
- -----------------------------------------------------------------
Total assets $3,042 $3,505
=================================================================
Deposits $2,058 $1,981
Assigned funds and other liabilities 455 968
Assigned capital 529 556
- -----------------------------------------------------------------
Total funds $3,042 $3,505
=================================================================
PERFORMANCE RATIOS
Return on assigned capital 25% 32%
Noninterest income to total revenue 86 84
Efficiency 71 63
=================================================================
PNC Advisors provides a full range of tailored investment products and services
to affluent individuals and families, including full-service brokerage through
J.J.B. Hilliard, W.L. Lyons, Inc. ("Hilliard Lyons") and investment advisory
services to the ultra-affluent through Hawthorn. PNC Advisors also serves as
investment manager and trustee for employee benefit plans and charitable and
endowment assets. PNC Advisors is focused on selectively expanding Hilliard
Lyons and Hawthorn, increasing market share in PNC's primary geographic region
and leveraging its distribution platform. PNC Advisors expects to continue to
focus on acquiring new customers and growing and expanding existing customer
relationships while aggressively managing its expenses.
PNC Advisors contributed $33 million or 11% of total business earnings for the
first three months of 2002 compared with $44 million or 15% for the first three
months of 2001.
Revenue decreased $16 million in the first quarter of 2002 compared with the
first quarter of 2001. The decrease was due primarily to the impact of weaker
equity markets in 2002, lower interest rates and loan volume and the recognition
of revenue accrual adjustments of $14 million in the first quarter of 2001 for
investment management and trust fees. Other noninterest income increased $6
million in various fee categories. PNC Advisors' noninterest income is closely
tied to the performance of the equity markets. Management expects that revenue
will continue to be challenged at least until market conditions improve.
Total noninterest expense increased $2 million or 2% in the first quarter of
2002 compared with the prior year quarter primarily due to higher
production-based compensation costs.
ASSETS UNDER MANAGEMENT (a)
March 31 - in billions 2002 2001
- -----------------------------------------------------------------
Personal investment management and trust $48 $47
Institutional trust 12 14
- -----------------------------------------------------------------
Total $60 $61
=================================================================
(a) Excludes brokerage assets administered.
Assets under management decreased $1 billion as new asset inflows from new and
existing customers during the twelve months ended March 31, 2002 were offset by
a decline in the value of the equity component of customers' portfolios. See
Business and Economic Conditions and Asset Management Performance in the Risk
Factors section of this Financial Review for additional information regarding
matters that could impact PNC Advisors' revenue.
Brokerage assets administered by PNC Advisors were $29 billion at March 31, 2002
compared with $27 billion at March 31, 2001 and were also impacted by weak
equity market conditions.
12
BLACKROCK
Three months ended March 31
Dollars in millions 2002 2001
- -----------------------------------------------------------------
INCOME STATEMENT
Investment advisory and
administrative fees $132 $125
Other income 14 9
- -----------------------------------------------------------------
Total revenue 146 134
Operating expense 83 72
Fund administration
and servicing costs - affiliates 13 17
Amortization of intangible assets 3
- -----------------------------------------------------------------
Total expense 96 92
- -----------------------------------------------------------------
Operating income 50 42
Nonoperating income 3 2
- -----------------------------------------------------------------
Pretax earnings 53 44
Income taxes 22 19
- -----------------------------------------------------------------
Earnings $31 $25
=================================================================
PERIOD-END BALANCE SHEET
Intangible assets $181 $190
Other assets 486 310
- -----------------------------------------------------------------
Total assets $667 $500
=================================================================
Liabilities $144 $98
Stockholders' equity 523 402
- -----------------------------------------------------------------
Total liabilities and $667 $500
stockholders' equity
=================================================================
PERFORMANCE DATA
Return on equity 25% 26%
Operating margin (a) 38 36
Diluted earnings per share $.48 $.39
=================================================================
(a) Excludes the impact of fund administration and servicing costs - affiliates.
BlackRock is one of the largest publicly traded investment management firms in
the United States with approximately $238 billion of assets under management at
March 31, 2002. BlackRock manages assets on behalf of institutions and
individuals worldwide through a variety of fixed income, liquidity and equity
mutual funds, separate accounts and alternative investment products. Mutual
funds include the flagship fund families, BlackRock Funds and BlackRock
Provident Institutional Funds. In addition, BlackRock provides risk management
and investment system services to institutional investors under the BlackRock
Solutions name.
BlackRock continues to focus on delivering superior investment performance to
clients while pursuing strategies to build on core strengths and to selectively
expand the firm's expertise and breadth of distribution.
BlackRock contributed $31 million or 10% of total business earnings for the
first three months of 2002 compared with $25 million or 8% for the first three
months of 2001. Earnings increased 23% in the period-to-period comparison
resulting primarily from an 18% increase in assets under management and
increased sales of BlackRock Solutions products and services. Total revenue for
the first three months of 2002 increased $12 million or 9% compared with the
first three months of 2001 primarily due to new business and strong fixed income
asset growth. The increase in operating expense for the first quarter of 2002
compared with the prior year quarter supported revenue growth and business
expansion. Expense growth was mitigated by goodwill amortization in the first
quarter of 2001 that did not recur in 2002 under SFAS No. 142.
See Business and Economic Conditions and Asset Management Performance in the
Risk Factors section of this Financial Review for additional information
regarding matters that could impact asset management revenue.
ASSETS UNDER MANAGEMENT
March 31 - in billions 2002 2001
- -----------------------------------------------------------------
Separate accounts
Fixed income $124 $107
Liquidity 5 6
Liquidity - securities lending 10 8
Equity 9 8
Alternative investment products 6 4
- -----------------------------------------------------------------
Total separate accounts 154 133
- -----------------------------------------------------------------
Mutual funds (a)
Fixed income 16 14
Liquidity 60 44
Equity 8 11
- -----------------------------------------------------------------
Total mutual funds 84 69
- -----------------------------------------------------------------
Total assets under management $238 $202
=================================================================
(a)Includes BlackRock Funds, BlackRock Provident Institutional Funds, BlackRock
Closed End Funds, Short Term Investment Funds and BlackRock Global Series
Funds.
BlackRock, Inc. is approximately 69% owned by PNC and is listed on the New York
Stock Exchange under the symbol BLK. Additional information about BlackRock is
available in its filings with the Securities and Exchange Commission ("SEC") and
may be obtained electronically at the SEC's home page at www.sec.gov.
13
PFPC
Three months ended March 31
Dollars in millions 2002 2001
- -----------------------------------------------------------------
INCOME STATEMENT
Fund servicing revenue $197 $197
Operating expense 154 145
Amortization (accretion) (5) 6
- -----------------------------------------------------------------
Operating income 48 46
Nonoperating income (a) 4 5
Debt financing 23 24
- -----------------------------------------------------------------
Pretax earnings 29 27
Income taxes 12 10
- -----------------------------------------------------------------
Earnings $17 $17
=================================================================
AVERAGE BALANCE SHEET
Intangible assets $1,036 $1,086
Other assets 812 649
- -----------------------------------------------------------------
Total assets $1,848 $1,735
=================================================================
Assigned funds and other liabilities $1,640 $1,527
Assigned capital 208 208
- -----------------------------------------------------------------
Total funds $1,848 $1,735
=================================================================
PERFORMANCE RATIOS
Return on assigned capital 33% 33%
Operating margin 24 23
==================================================================
(a) Net of nonoperating expense
PFPC is the largest full-service mutual fund transfer agent and second largest
provider of mutual fund accounting and administration services in the United
States, providing a wide range of fund services to the investment management
industry. PFPC also provides processing solutions to the international
marketplace through its Ireland and Luxembourg operations.
To meet the growing needs of the European marketplace, PFPC continues its
pursuit of offshore expansion. PFPC is also focusing technological resources on
targeted Web-based initiatives and exploring strategic alliances.
PFPC contributed $17 million of total business earnings for both the first three
months of 2002 and 2001. Excluding goodwill amortization in 2001, earnings
decreased $5 million or 24% primarily due to an increase in expenses. The cost
of technology and infrastructure enhancements, combined with a shift in both
product and client mix, continued to exert pressure on operating margins.
Revenue of $197 million for the first quarter of 2002 was consistent with the
prior year quarter. The benefit of growth in accounting/administration assets
and shareholder accounts offset the impact on revenue of lower custody assets
serviced, changes in both product and client mix and the divestiture in June
2001 of the traditional retail retirement services business. Revenue growth
rates in this business may be pressured by lower equity valuations, pricing and
other competitive factors. See Fund Servicing in the Risk Factors section of
this Financial Review for additional information regarding matters that could
impact fund servicing revenue.
Operating expense increased $9 million or 6% in the first three months of 2002
compared with the first quarter of 2001 primarily due to increased staff levels
for new product support combined with additional expenses related to technology.
Amortization decreased $11 million compared with the first three months of 2001
as a result of the adoption of the new goodwill accounting standard that no
longer requires the amortization of goodwill. The benefit of $5 million for the
first three months of 2002 is driven by accretion of a discounted contract
liability. Excluding goodwill amortization, the comparable amount for the first
three months of 2001 was a benefit of $4 million.
SERVICING STATISTICS
March 31 2002 2001
- ---------------------------------------------------------------
Accounting/administration assets ($ in
billions)
Domestic $520 $461
Foreign 23 11
- ---------------------------------------------------------------
Total $543 $472
Custody assets ($ in billions) 339 435
Shareholder accounts (in millions) 49 44
===============================================================
14
CONSOLIDATED STATEMENT OF INCOME REVIEW
NET INTEREST INCOME
Changes in net interest income and margin result from the interaction between
the volume and composition of earning assets, related yields and associated
funding costs. Accordingly, portfolio size, composition and yields earned and
funding costs can have a significant impact on net interest income and margin.
Taxable-equivalent net interest income of $593 million for the first three
months of 2002 increased 6% compared with the first three months of 2001. The
increase was primarily due to the impact of transaction deposit growth and a
lower rate environment that was partially offset by the impact of continued
downsizing of the loan portfolio. The net interest margin widened 50 basis
points to 4.12% for the first three months of 2002 compared with 3.62% for the
first three months of 2001. The increase was primarily due to the impact of
changes in balance sheet composition and a lower interest rate environment in
2002, combined with a steep yield curve. See Interest Rate Risk in the Risk
Management section of this Financial Review for additional information regarding
interest rate risk.
Loans represented 67% of average interest-earning assets for the first three
months of 2002 compared with 81% for the first three months of 2001. The
decrease was primarily due to the continued downsizing of certain institutional
lending portfolios and the securitization of residential mortgage loans during
2001.
Securities represented 23% of average interest-earning assets for the first
three months of 2002 compared with 13% for the first three months of 2001. The
increase was primarily due to the retention of interests from the securitization
of residential mortgage loans, net securities purchases upon redeployment of
funds resulting from loan downsizing and interest rate risk management
activities.
NET INTEREST INCOME ANALYSIS
Average Balances Interest Income/Expense Average Yields/Rates
----------------------------- --------------------------- -------------------------------
Taxable-equivalent basis
Three months ended March 31
Dollars in millions 2002 2001 Change 2002 2001 Change 2002 2001 Change
- -------------------------------------------------------------------- --------------------------- -------------------------------
Interest-earning assets
Loans held for sale $ 4,276 $ 2,005 $ 2,271 $ 52 $ 37 $15 4.85% 7.31% (246)bp
Securities 13,011 8,061 4,950 178 122 56 5.47 6.08 (61)
Loans, net of unearned income
Commercial 16,264 20,882 (4,618) 240 422 (182) 5.90 8.09 (219)
Commercial real estate 2,452 2,580 (128) 33 55 (22) 5.36 8.44 (308)
Consumer 9,278 9,085 193 156 194 (38) 6.82 8.70 (188)
Residential mortgage 5,756 12,673 (6,917) 98 232 (134) 6.85 7.32 (47)
Lease financing 4,327 3,897 430 70 71 (1) 6.52 7.32 (80)
Other 394 520 (126) 4 11 (7) 4.16 7.98 (382)
- -------------------------------------------------------------------- ---------------------------
Total loans, net of unearned
income 38,471 49,637 (11,166) 601 985 (384) 6.28 7.96 (168)
Other 1,867 1,831 36 30 33 (3) 6.38 7.20 (82)
- -------------------------------------------------------------------- ---------------------------
Total interest-earning assets/
interest income 57,625 61,534 (3,909) 861 1,177 (316) 5.99 7.67 (168)
Noninterest-earning assets 10,534 10,251 283
Investment in discontinued
operations 207 (207)
- --------------------------------------------------------------------
Total assets $68,159 $71,992 $(3,833)
====================================================================
Interest-bearing liabilities
Deposits
Demand and money market $21,802 $20,468 $1,334 60 162 (102) 1.11 3.20 (209)
Savings 1,994 1,919 75 2 6 (4) .48 1.31 (83)
Retail certificates of deposit 10,608 13,724 (3,116) 101 199 (98) 3.86 5.90 (204)
Other time 827 565 262 9 10 (1) 4.40 6.67 (227)
Deposits in foreign offices 867 1,402 (535) 4 20 (16) 1.65 5.75 (410)
- -------------------------------------------------------------------- ---------------------------
Total interest-bearing deposits 36,098 38,078 (1,980) 176 397 (221) 1.97 4.22 (225)
Borrowed funds 13,172 14,375 (1,203) 92 221 (129) 2.80 6.15 (335)
- -------------------------------------------------------------------- ---------------------------
Total interest-bearing liabilities/
interest expense 49,270 52,453 (3,183) 268 618 (350) 2.19 4.75 (256)
--------------------------- ------------------------------
Noninterest-bearing liabilities,
minority interest, capital
securities and shareholders' equity 18,889 19,539 (650)
- --------------------------------------------------------------------
Total liabilities, minority
interest, capital securities and
shareholders' equity $68,159 $71,992 $(3,833)
====================================================================
Interest rate spread 3.80 2.92 88
Impact of noninterest-bearing
sources .32 .70 (38)
------------------------------
Net interest income/margin $593 $559 $34 4.12% 3.62% 50bp
===================================================================================================================================
15
Funding cost is affected by the volume and composition of funding sources as
well as related rates paid thereon. Average deposits comprised 65% and 64% of
total sources of funds for the first three months of 2002 and 2001,
respectively, with the remainder primarily comprised of wholesale funding
obtained at prevailing market rates.
Average interest-bearing demand and money market deposits increased $1.3 billion
or 7% compared with the first three months of 2001, primarily reflecting the
impact of ongoing strategic marketing efforts to grow more valuable transaction
accounts, while higher cost, less valuable retail certificates of deposit were
not emphasized. Average borrowed funds for the first quarter of 2002 declined
$1.2 billion compared with the first quarter of 2001.
PROVISION FOR CREDIT LOSSES
The provision for credit losses was $82 million for the first three months of
2002 compared with $80 million for the first three months of 2001. Net
charge-offs were $41 million or .43% of average loans for the first quarter of
2002, compared with $80 million or .65%, respectively, for the first quarter of
2001. The provision for credit losses in the first quarter of 2002 exceeded net
charge-offs due to additional reserves related to Corporate Banking and PNC
Business Credit. Corporate Banking's additional reserves are in connection with
the apparent fraud related to a seller of receivables to Market Street. The
additional reserves of PNC Business Credit reflect current economic conditions
and the growth of the loan portfolio. The first quarter of 2001 included $41
million of additional provision related to loans designated for exit in that
period.
As a result of net charge-offs, additional reserves and $41 million of allowance
recorded in connection with the NBOC acquisition, the allowance for credit
losses was $712 million at March 31, 2002 compared with $630 million at December
31, 2001 and $675 million at March 31, 2001. See Credit Risk in the Risk
Management section in the Risk Factors section of this Financial Review for
additional information regarding credit risk.
NONINTEREST INCOME
Noninterest income was $774 million for the first three months of 2002 compared
with $715 million for the first three months of 2001, an increase of $59 million
or 8%.
Asset management fees of $221 million for the first quarter of 2002 declined
slightly compared with the first quarter of 2001 as increases in separate
account assets and sales of alternative products in 2002 were mitigated in the
year-to-year comparison by the inclusion of $14 million of investment management
and trust revenue accrual adjustments in the first quarter of 2001. Consolidated
assets under management were $285 billion at March 31, 2002 compared with $248
billion at March 31, 2001. Fund servicing fees of $196 million for the first
quarter of 2002 increased $1 million compared with the first quarter of 2001 as
the benefit of growth in accounting/administration assets and shareholder
accounts more than offset the impact on revenue of lower custody assets
serviced.
Service charges on deposits increased 8% to $54 million for the first quarter of
2002 primarily due to an increase in transaction deposit accounts. Brokerage
fees were $55 million for the first quarter of 2002 compared with $54 million
for the first quarter of 2001. Consumer services revenue was $55 million for the
first three months of both 2002 and 2001.
Corporate services revenue was $118 million for the first quarter of 2002, an
increase of $42 million compared with the first quarter of 2001. The increase
was primarily due to $23 million of net gains in excess of valuation adjustments
related to institutional loans held for sale and higher treasury management fees
in 2002.
Equity management (venture capital activities) net losses were $2 million for
the first quarter of 2002 compared with $39 million for the first quarter of
2001. At March 31, 2002, equity management investments held by PNC and
consolidated subsidiaries totaled approximately $578 million. Approximately 54%
of that amount is invested directly in a variety of companies and approximately
46% is invested in various limited partnerships. The valuation of equity
management assets is subject to the performance of the underlying companies as
well as market conditions and may be volatile. The Corporation continues to make
equity management investments; however, its focus is on attracting funding from
investors to generate a greater proportion of revenues from fees earned by
managing investments for others. See Business and Economic Conditions in the
Risk Factors section of this Financial Review for additional information
regarding equity management assets.
Net securities gains were $4 million for the first three months of 2002 compared
with $29 million for the first three months of 2001.
Other noninterest income was $73 million for the first three months of 2002
compared with $72 million for the first three months of 2001. The benefit of a
$5 million reduction in the Put Option liability related to the NBOC acquisition
combined with the comparative impact of writedowns on other assets and
e-commerce investments a year ago offset a decrease in net trading income. Net
trading income included in other noninterest income was $24 million for the
first three months of 2002 compared with $37 million for the first three months
of 2001. See Note 7 Trading Activities in the Notes to Consolidated Financial
Statements.
16
NONINTEREST EXPENSE
Noninterest expense was $791 million and the efficiency ratio was 58% in the
first quarter of 2002 compared with $781 million and 58%, respectively, in the
first quarter of 2001. A reduction in amortization expense related to goodwill
was more than offset by increases in employee benefit and legal expenses, costs
added with the NBOC acquisition and expense growth at BlackRock and PFPC.
Average full-time equivalent employees totaled approximately 24,100 and 24,800
for the first three months of 2002 and 2001, respectively. The decrease was
mainly in Regional Community Banking and Corporate Banking.
CONSOLIDATED BALANCE SHEET REVIEW
LOANS
Loans were $38.5 billion at March 31, 2002, an increase of $.6 billion from
December 31, 2001 primarily due to the NBOC acquisition, which more than offset
the impact of residential mortgage securitizations and runoff, transfers to held
for sale and the managed reduction of institutional loans.
DETAILS OF LOANS
March 31 December 31
In millions 2002 2001
- ----------------------------------------------------------------
Commercial
Manufacturing $4,066 $3,352
Retail/wholesale 4,368 3,856
Service providers 2,131 2,136
Real estate related 1,664 1,720
Financial services 1,289 1,362
Communications 111 139
Health care 487 517
Other 2,362 2,123
- ----------------------------------------------------------------
Total commercial 16,478 15,205
- ----------------------------------------------------------------
Commercial real estate
Mortgage 561 592
Real estate project 1,891 1,780
- ----------------------------------------------------------------
Total commercial real estate 2,452 2,372
----------------------------------------------------------------
Consumer
Home equity 7,358 7,016
Automobile 683 773
Other 1,346 1,375
- ----------------------------------------------------------------
Total consumer 9,387 9,164
- ----------------------------------------------------------------
Residential mortgage 5,420 6,395
Lease financing 5,471 5,557
Other 467 445
Unearned income (1,136) (1,164)
- ----------------------------------------------------------------
Total, net of unearned income $38,539 $37,974
================================================================
Loan portfolio composition continued to be geographically diversified among
numerous industries and types of businesses.
At March 31, 2002, loans of $38.5 billion included $1.8 billion of vehicle
leases and $113 million of commercial loans that have been designated for exit.
NET UNFUNDED COMMITMENTS
March 31 December 31
In millions 2002 2001
- ----------------------------------------------------------------
Commercial $21,341 $20,233
Commercial real estate 858 711
Consumer 5,164 4,977
Lease financing 130 146
Other 120 139
Designated for exit or held for sale 3,720 4,837
- ----------------------------------------------------------------
Total $31,333 $31,043
=================================================================
Commitments to extend credit represent arrangements to lend funds subject to
specified contractual conditions. Commercial commitments are reported net of
participations, assignments and syndications, primarily to financial
institutions, totaling $7.0 billion at March 31, 2002 and $7.1 billion at
December 31, 2001.
Net outstanding letters of credit totaled $4.0 billion at both March 31, 2002
and December 31, 2001 and consisted primarily of standby letters of credit that
commit the Corporation to make payments on behalf of customers if certain
specified future events occur.
LOANS HELD FOR SALE
Loans held for sale were $3.6 billion at March 31, 2002 compared with $4.2
billion at December 31, 2001. See Strategic Repositioning in this Financial
Review for further information regarding details of the institutional lending
held for sale portfolio. Approximately $254 million of loans held at March 31,
2002 by subsidiaries of a third-party financial institution are classified in
the consolidated financial statements as loans held for sale. See Note 3 to the
Consolidated Financial Statements included in the Corporation's 2001 Annual
Report on Form 10-K for further information. Substantially all student loans are
classified as loans held for sale.
DETAILS OF LOANS HELD FOR SALE
March 31 December 31
In millions 2002 2001
- -------------------------------------------------------------------
Institutional lending repositioning
Commercial
Manufacturing $610 $810
Communications 581 690
Service providers 166 333
Retail/wholesale 115 114
Financial services 36 40
Health care 32 73
Real estate related 24 30
Other 175 223
- ----------------------------------------------------------------
Total commercial 1,739 2,313
- ----------------------------------------------------------------
Commercial real estate 233 248
Lease financing 3 7
- ----------------------------------------------------------------
Total institutional lending
repositioning 1,975 2,568
Student loans 1,532 1,340
Other 141 281
- ----------------------------------------------------------------
Total loans held for sale $3,648 $4,189
================================================================
17
SECURITIES
Total securities at March 31, 2002 were $11.1 billion compared with $13.9
billion at December 31, 2001. Total securities represented 17% of total assets
at March 31, 2002 compared with 20% at December 31, 2001. The decrease was
primarily due to the sale of mortgage-backed securities.
At March 31, 2002, the securities available for sale balance included a net
unrealized loss of $158 million, which represented the difference between fair
value and amortized cost. The comparable amount at December 31, 2001 was a net
unrealized loss of $132 million. Net unrealized gains and losses in the
securities available for sale portfolio are included in accumulated other
comprehensive income or loss, net of tax or, for the portion attributable to a
hedged risk as part of a fair value hedge strategy, in net income. The expected
weighted-average life of securities available for sale was 4 years and 4 months
at March 31, 2002 compared with 4 years at December 31, 2001.
Securities designated as held to maturity are carried at amortized cost and are
assets of subsidiaries of a third party financial institution that are
consolidated in PNC's financial statements as described in Note 3 to the
Consolidated Financial Statements included in the Corporation's 2001 Annual
Report on Form 10-K. The expected weighted-average life of securities held to
maturity was 18 years and 9 months at March 31, 2002 compared with 18 years and
11 months at December 31, 2001.
DETAILS OF SECURITIES
Amortized Fair
In millions Cost Value
- -----------------------------------------------------------------
MARCH 31, 2002
SECURITIES AVAILABLE FOR SALE
Debt securities
U.S. Treasury and government agencies $760 $754
Mortgage-backed 6,836 6,735
Asset-backed 2,706 2,668
State and municipal 62 64
Other debt 73 73
Corporate stocks and other 446 431
- -----------------------------------------------------------------
Total securities available for sale $10,883 $10,725
- -----------------------------------------------------------------
SECURITIES HELD TO MATURITY
Debt securities
U.S. Treasury and government agencies $264 $244
Asset-backed 8 8
Other debt 95 95
- -----------------------------------------------------------------
Total securities held to maturity $367 $347
=================================================================
December 31, 2001
SECURITIES AVAILABLE FOR SALE
Debt securities
U.S. Treasury and government agencies $808 $807
Mortgage-backed 9,669 9,578
Asset-backed 2,799 2,776
State and municipal 62 64
Other debt 75 75
Corporate stocks and other 264 245
- -----------------------------------------------------------------
Total securities available for sale $13,677 $13,545
- -----------------------------------------------------------------
SECURITIES HELD TO MATURITY
Debt securities
U.S. Treasury and government agencies $260 $257
Asset-backed 8 8
Other debt 95 95
- -----------------------------------------------------------------
Total securities held to maturity $363 $360
=================================================================
FUNDING SOURCES
Total funding sources were $55.9 billion at March 31, 2002 and $59.4 billion at
December 31, 2001, a decrease of $3.5 billion corresponding to a decrease of
$3.0 billion in total assets and modest increases in other liabilities and total
shareholders' equity. Total deposits decreased $2.4 billion from December 31,
2001 primarily due to a $2.0 billion decrease in demand and money market
deposits reflecting seasonal increases in customer account balances at year end
2001. The change in the composition of other time deposits, deposits in foreign
offices and borrowed funds reflected a shift within categories to manage overall
funding costs. See Liquidity Risk under Risk Management in the Financial Review
section for additional information.
DETAILS OF FUNDING SOURCES
March 31 December 31
In millions 2002 2001
- ------------------------------------------ ---------- -----------
Deposits
Demand and money market $30,638 $32,589
Savings 2,055 1,942
Retail certificates of deposit 10,500 10,727
Other time 1,212 472
Deposits in foreign offices 505 1,574
- ------------------------------------------ ---------- -----------
Total deposits 44,910 47,304
- ------------------------------------------ ---------- -----------
Borrowed funds
Federal funds purchased 34 167
Repurchase agreements 827 954
Bank notes and senior debt 5,480 6,362
Federal Home Loan Bank borrowings 1,787 2,047
Subordinated debt 2,275 2,298
Other borrowed funds 585 262
- ------------------------------------------ ---------- -----------
Total borrowed funds 10,988 12,090
- ------------------------------------------ ---------- -----------
Total $55,898 $59,394
========================================== ========== ===========
CAPITAL
The access to and cost of funding new business initiatives including
acquisitions, the ability to engage in expanded business activities, the ability
to pay dividends, the ability to repurchase stock, the level of deposit
insurance costs, and the level and nature of regulatory oversight depend, in
part, on a financial institution's capital strength. At March 31, 2002, the
Corporation and each bank subsidiary were considered "well-capitalized" based on
regulatory capital ratio requirements. See Supervision and Regulation in the
Risk Factors section of this Financial Review for additional information.
18
RISK-BASED CAPITAL
March 31 December 31
Dollars in millions 2002 2001
- ------------------------------------------------------------------
Capital components
Shareholders' equity
Common $5,969 $5,813
Preferred 10 10
Trust preferred capital securities 848 848
Minority interest 147 134
Goodwill and other intangibles (2,461) (2,174)
Net unrealized securities losses 103 86
Net unrealized gains on cash flow
hedge derivatives (79) (98)
Other, net (17) (20)
- ------------------------------------------------------------------
Tier I risk-based capital 4,520 4,599
Subordinated debt 1,579 1,616
Minority interest 36 36
Eligible allowance for credit losses 735 707
- ------------------------------------------------------------------
Total risk-based capital $6,870 $6,958
==================================================================
Assets
Risk-weighted assets and
off-balance-sheet instruments, and
market risk equivalent assets $58,830 $58,958
Average tangible assets 65,720 67,604
==================================================================
Capital ratios
Tier I risk-based 7.7% 7.8%
Total risk-based 11.7 11.8
Leverage 6.9 6.8
==================================================================
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.
On January 3, 2002, the Board of Directors authorized the Corporation to
purchase up to 35 million shares of its common stock through February 29, 2004.
These shares may be purchased in the open market or privately negotiated
transactions. This authorization terminated any prior authorization. During the
first quarter of 2002, PNC repurchased 320,000 shares of its common stock. The
extent and timing of any further share repurchases will depend on a number of
factors including, among others, progress in disposing of loans held for sale,
regulatory capital considerations, alternative uses of capital and receipt of
regulatory approvals if then required.
RISK FACTORS
The Corporation is subject to a number of risks including, among others, those
described below and in the Risk Management and Forward-Looking Statements
sections of this Financial Review. These factors and others could impact the
Corporation's business, financial condition and results of operations.
BUSINESS AND ECONOMIC CONDITIONS
The Corporation's business and results of operations are sensitive to general
business and economic conditions in the United States. These conditions include
the level and movement of interest rates, inflation, monetary supply,
fluctuations in both debt and equity capital markets, and the strength of the
U.S. economy, in general, and the regional economies in which the Corporation
conducts business. A sustained weakness or further weakening of the economy
could decrease the value of loans held for sale, decrease the demand for loans
and other products and services offered by the Corporation, increase usage of
unfunded commitments or increase the number of customers and counterparties who
become delinquent, file for protection under bankruptcy laws or default on their
loans or other obligations to the Corporation. An increase in the number of
delinquencies, bankruptcies or defaults could result in a higher level of
nonperforming assets, net charge-offs, provision for credit losses, and
valuation adjustments on loans held for sale. Changes in interest rates could
affect the value of certain on-balance-sheet and off-balance-sheet financial
instruments of the Corporation. Higher interest rates would also increase the
Corporation's cost to borrow funds and may increase the rate paid on deposits.
Changes in interest rates could also affect the value of assets under
management. In a period of rapidly rising interest rates, certain assets under
management would likely be negatively impacted by reduced asset values and
increased redemptions. Also, changes in equity markets could affect the value of
equity investments and the value of net assets under management and
administration. A decline in the equity markets adversely affected results in
2001 and early 2002 and could continue to negatively affect noninterest revenues
in future periods.
STRATEGIC REPOSITIONING
The Corporation took several actions in 2001 to accelerate the strategic
repositioning of its lending business that began in 1998. These actions entail a
degree of risk pending completion.
At March 31, 2002, $3.9 billion of institutional lending credit exposure
including $2.0 billion of outstandings were classified as held for sale. A total
of $175 million of these loans was included in nonperforming assets at that
date. The loans are carried at the lower of cost or estimated fair market value.
The estimation of fair market values involves a number of judgments, and is
inherently uncertain. In addition, the value of loan assets is affected by a
variety of company, industry, economic and other factors, and can be volatile.
If the value of loans held for sale deteriorates prior to disposition, valuation
adjustments will be made through charges to earnings. Moreover, deterioration in
the condition of the borrowers could lead to additional loans being placed on
nonperforming status.
During the fourth quarter of 2001, the Corporation decided to discontinue its
vehicle leasing business and recorded charges of $135 million related to exit
costs and additions to reserves related to insured residual value exposures. At
March 31, 2002, approximately $1.8 billion of vehicle leases remained on the
Corporation's balance sheet. These leases are expected to mature over a period
of approximately five years. During this period, the Corporation will continue
to be subject to risks inherent in the vehicle leasing business, including
credit
19
risk and the risk that vehicles returned during or at the conclusion of the
lease term cannot be disposed of at a price at least as great as the
Corporation's remaining investment in the vehicles after application of any
available residual value insurance or related reserves.
In January 2001, PNC sold its residential mortgage banking business. Certain
closing date purchase price adjustments aggregating approximately $300 million
pretax are currently in dispute between the parties. The Corporation has
established a receivable of approximately $140 million to reflect additional
purchase price it believes is due from the buyer. The buyer has taken the
position that the purchase price it has already paid should be reduced by
approximately $160 million. The Corporation has established specific reserves
related to a portion of its recorded receivable. The purchase agreement requires
that an independent public accounting firm determine the final adjustments. The
buyer also has filed a lawsuit against the Corporation seeking compensatory
damages with respect to certain of the disputed matters that the Corporation
believes are covered by the process provided in the purchase agreement,
unquantified punitive damages and declaratory and other relief. Management
intends to assert the Corporation's positions vigorously. Management believes
that, net of available reserves, an adverse outcome, which would be recorded in
discontinued operations, could be material to net income in the period in which
recorded, but that the final disposition of this matter will not be material to
the Corporation's financial position.
CRITICAL ACCOUNTING POLICIES AND JUDGMENTS
The Corporation's consolidated financial statements are prepared based on the
application of certain accounting policies, the most significant of which are
described in Note 1 Accounting Policies. Certain of these policies require
numerous estimates and strategic or economic assumptions that may prove
inaccurate or subject to variations and may significantly affect PNC's reported
results and financial position for the period or in future periods. Changes in
underlying factors, assumptions, or estimates in any of these areas could have a
material impact on PNC's future financial condition and results of operations.
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses is calculated with the objective of maintaining
a reserve level believed by management to be sufficient to absorb estimated
probable credit losses. Management's determination of the adequacy of the
allowance is based on periodic evaluations of the credit portfolio and other
relevant factors. However, this evaluation is inherently subjective as it
requires material estimates, including, among others, expected default
probabilities, loss given default, expected commitment usage, the amounts and
timing of expected future cash flows on impaired loans, value of collateral,
estimated losses on consumer loans and residential mortgages, and general
amounts for historical loss experience. The process also considers economic
conditions, uncertainties in estimating losses and inherent risks in the various
credit portfolios. All of these factors may be susceptible to significant
change. Also, the allocation of the allowance to specific loan pools is based on
historical loss trends and management's judgment concerning those trends.
Commercial loans are the largest category of credits and are the most sensitive
to changes in assumptions and judgments underlying the determination of the
allowance. As such, approximately $569 million or 80% of the total allowance at
March 31, 2002 has been allocated to the commercial loan category. This
allocation also considers other relevant factors such as actual versus estimated
losses, regional and national economic conditions, business segment and
portfolio concentrations, industry competition and consolidation, the impact of
government regulations, and risk of potential estimation or judgmental errors.
To the extent actual outcomes differ from management estimates, additional
provision for credit losses may be required that would adversely impact earnings
in future periods.
LOANS HELD FOR SALE
Loans are classified as held for sale based on management's intent to sell them.
At the initial transfer date of a loan from portfolio to held for sale, any
lower of cost or market ("LOCOM") adjustment is recorded as a charge-off. This
results in a new cost basis. Any subsequent adjustment as a result of the LOCOM
analysis is recognized as a valuation adjustment with changes included in
noninterest income. Although the market value for certain held for sale assets
may be readily obtainable, other assets require significant judgments by
management as to the value that could be realized at the balance sheet date.
These assumptions include but are not limited to the cash flows generated from
the asset, the timing of a sale, the value of any collateral, the market
conditions for the particular credit, overall investor demand for these assets
and the determination of a proper discount rate. Changes in market conditions
and actual liquidation experience may result in additional valuation adjustments
that could adversely impact earnings in future periods.
EQUITY MANAGEMENT ASSET VALUATION
Equity management assets are valued at each balance sheet date based primarily
on either, in the case of limited partnership investments, the financial
statements received from the limited partnership or, with respect to direct
investments, the estimated fair value. Changes in the market value of these
investments are reflected in the Corporation's results of operations as equity
management income. The value of limited partnership investments is based on the
financial statements received from the general partners. Due to the nature of
the direct investments, management must make assumptions as to future
performance, financial condition, liquidity, availability of capital, and market
conditions, among others, to determine the estimated fair value of the
investments. Market conditions and actual performance of the companies invested
in could differ from these assumptions resulting in lower valuations that could
adversely impact earnings in future periods.
20
LEASE RESIDUALS
Leases are carried at the aggregate of lease payments and the estimated residual
value of the leased property, less unearned income. The Corporation provides
financing for various types of equipment, aircraft, energy and power systems and
rolling stock through a variety of lease arrangements. A significant portion of
the residual value is guaranteed by governmental entities or covered by residual
value insurance. Residual values are subject to judgments as to the value of the
underlying equipment that can be affected by changes in economic and market
conditions and the financial viability of the residual guarantors and insurers.
To the extent not guaranteed or assumed by a third party, or otherwise insured
against, the Corporation bears the risk of ownership of the leased assets
including the risk that the actual value of the leased assets at the end of the
lease term will be less than the residual value which could result in a charge
and adversely impact earnings in future periods.
GOODWILL AND OTHER INTANGIBLE ASSETS
See Note 5 Goodwill And Other Intangible Assets in the Notes To Consolidated
Financial Statements for further information on PNC's adoption of SFAS No. 142
effective January 1, 2002.
Goodwill arising from business acquisitions represents the value attributable to
unidentifiable intangible elements in the business acquired. The majority of the
Corporation's goodwill relates to value inherent in fund servicing and banking
businesses. The value of this goodwill is dependent upon the Corporation's
ability to provide quality, cost effective services in the face of competition
from other market leaders on a national and global basis. This ability in turn
relies upon continuing investments in processing systems, the development of
value-added service features, and the ease of use of the Corporation's services.
As such, goodwill value is supported ultimately by revenue which is driven by
the volume of business transacted and the market value of the assets under
administration. A decline in earnings as a result of a lack of growth or the
Corporation's inability to deliver cost effective services over sustained
periods can lead to impairment of goodwill which could result in a charge and
adversely impact earnings in future periods.
Total goodwill was $2.3 billion and other intangible assets totaled $.3 billion
at March 31, 2002.
SUPERVISION AND REGULATION
The Corporation operates in highly regulated industries. Applicable laws and
regulations, for example, restrict permissible activities and investments and
require compliance with consumer-related protections for loan, deposit,
fiduciary, mutual fund and other customers. The consequences of noncompliance
can include substantial monetary and nonmonetary sanctions. In addition, failure
of PNC's subsidiary banks to satisfy certain managerial and capitalization
criteria could affect the ability of the Corporation and the financial
subsidiaries of PNC Bank, N.A. to engage in certain nonbanking activities. The
Corporation and certain of its subsidiaries are subject to comprehensive
examination and supervision by, among other regulatory bodies, the Federal
Reserve Board and the Office of the Comptroller of the Currency. These
regulatory agencies generally have broad discretion to impose restrictions and
limitations on the operations of a regulated entity where the agencies
determine, among others, that such operations are unsafe or unsound, fail to
comply with applicable law or are otherwise inconsistent with laws and
regulations or with the supervisory policies of these agencies. The examination
process and the regulators' associated supervisory tools could materially impact
the conduct, growth and profitability of the Corporation's operations.
Early in 2002, the Corporation announced two restatements affecting previously
reported financial results. The Corporation is a defendant in several lawsuits
filed after announcement of the restatement related to consolidation of
subsidiaries of a third party financial institution as discussed in Note 10
Legal Proceedings in the Notes To Consolidated Financial Statements. The staffs
of the Securities and Exchange Commission and the Federal Reserve Board have
informed the Corporation that they are conducting inquiries into the
transactions that are the subject of such restatement. The Corporation is
cooperating with these inquiries. In addition, the reputational risk created by
the restatements may have consequences to the Corporation in such areas as
business generation and retention, funding and liquidity that cannot be
predicted at this time.
Additional information is included in Item 1 of the Corporation's 2001 Annual
Report on Form 10-K.
MONETARY AND OTHER POLICIES
The financial services industry is subject to various monetary and other
policies and regulations of the United States government and its agencies, which
include the Federal Reserve Board, the Office of the Comptroller of Currency and
the Federal Deposit Insurance Corporation as well as state regulators. The
Corporation is particularly affected by the policies of the Federal Reserve
Board, which regulates the supply of money and credit in the United States. The
Federal Reserve Board's policies influence the rates of interest that PNC
charges on loans and pays on interest-bearing deposits and can also affect the
value of on-balance-sheet and off-balance-sheet financial instruments. Those
policies also influence, to a significant extent, the cost of funding for the
Corporation.
COMPETITION
PNC operates in a highly competitive environment, both in terms of the products
and services offered and the geographic markets in which PNC conducts business.
This environment could become even more competitive in the future. The
Corporation competes with local, regional and national banks, thrifts, credit
unions and non-bank financial institutions, such as investment banking firms,
investment
21
advisory firms, brokerage firms, investment companies, venture capital firms,
mutual fund complexes and insurance companies, as well as other entities that
offer financial and processing services, and through alternative delivery
channels such as the World Wide Web. Technological advances and legislation,
among other changes, have lowered barriers to entry, have made it possible for
non-bank institutions to offer products and services that traditionally have
been provided by banks, and have increased the level of competition faced by the
Corporation. Many of the Corporation's competitors benefit from fewer regulatory
constraints and lower cost structures, allowing for more competitive pricing of
products and services.
DISINTERMEDIATION
Disintermediation is the process of eliminating the role of the intermediary in
completing a transaction. For the financial services industry, this means
eliminating or significantly reducing the role of banks and other depository
institutions in completing transactions that have traditionally involved banks.
Disintermediation could result in, among other things, the loss of customer
deposits and decreases in transactions that generate fee income.
ASSET MANAGEMENT PERFORMANCE
Asset management revenue is primarily based on a percentage of the value of
assets under management and performance fees expressed as a percentage of the
returns realized on assets under management. A decline in the value of debt and
equity instruments, among other things, could cause asset management revenue to
decline. Weak equity markets over a sustained period have negatively impacted
investment performance and asset management revenues. These conditions are
expected to continue at least until equity markets improve for a sustained
period.
Investment performance is an important factor for the level of assets under
management. Poor investment performance could impair revenue and growth in
managed assets as existing clients might withdraw funds in favor of better
performing products. Also, performance fees could be lower or nonexistent.
Additionally, the ability to attract funds from existing and new clients might
diminish.
FUND SERVICING
Fund servicing fees are primarily based on the market value of the assets and
the number of shareholder accounts administered by the Corporation for its
clients. A rise in interest rates or a sustained weakness or further weakening
or volatility in the debt and equity markets could influence an investor's
decision to invest or maintain an investment in a mutual fund. As a result,
fluctuations may occur in the level or value of assets that the Corporation has
under administration. A significant investor migration from mutual fund
investments could have a negative impact on the Corporation's revenues by
reducing the assets and the number of shareholder accounts it administers. There
has been and continues to be merger, acquisition and consolidation activity in
the financial services industry. Mergers or consolidations of financial
institutions in the future could reduce the number of existing or potential fund
servicing clients. In addition, the fund servicing business has been
characterized recently by intense competition, pricing pressure and changes in
product mix that have negatively impacted operating margins. These conditions
are expected to continue at least until equity markets improve for a sustained
period.
ACQUISITIONS
The Corporation expands its business from time to time by acquiring other
financial services companies. Factors pertaining to acquisitions that could
adversely affect the Corporation's business and earnings include, among others,
anticipated cost savings or potential revenue enhancements that may not be fully
realized or realized within the expected time frame; key employee, customer or
revenue loss following an acquisition that may be greater than expected; and
costs or difficulties related to the integration of businesses that may be
greater than expected. See PNC Business Credit discussion within this Financial
Review for further information on risks associated with the NBOC acquisition.
TERRORIST ACTIVITIES
The impact of the September 11th terrorist attacks or any future terrorist
activities and responses to such activities cannot be predicted at this time
with respect to severity or duration. The impact could adversely affect the
Corporation in a number of ways including, among others, an increase in
delinquencies, bankruptcies or defaults that could result in a higher level of
nonperforming assets, net charge-offs and provision for credit losses.
RISK MANAGEMENT
In the normal course of business, the Corporation assumes various types of risk,
which include, among others, credit risk, interest rate risk, liquidity risk,
operational risk and risk associated with trading activities, financial
derivatives and "off-balance-sheet" activities. PNC has risk management
processes designed to provide for risk identification, measurement and
monitoring.
CREDIT RISK
Credit risk represents the possibility that a borrower, counterparty or insurer
may not perform in accordance with contractual terms. Credit risk is inherent in
the financial services business and results from extending credit to customers,
purchasing securities and entering into financial derivative transactions. The
Corporation seeks to manage credit risk through, among others, diversification,
limiting credit exposure to any single industry or customer, requiring
collateral, selling participations to third parties, and purchasing
credit-related derivatives.
NONPERFORMING, PAST DUE AND POTENTIAL PROBLEM ASSETS
Nonperforming assets include nonaccrual loans, troubled debt restructurings,
nonaccrual loans held for sale and foreclosed assets. In addition, certain
performing assets have
22
interest payments that are past due or have the potential for future repayment
problems.
NONPERFORMING ASSETS BY TYPE
March 31 December 31
Dollars in millions 2002 2001
- -----------------------------------------------------------------
Nonaccrual loans
Commercial $225 $188
Commercial real estate 5 4
Consumer 2 3
Residential mortgage 6 5
Lease financing 13 11
- -----------------------------------------------------------------
Total nonaccrual loans 251 211
Nonperforming loans held for sale (a) 175 169
Foreclosed assets
Commercial real estate 1 1
Residential mortgage 3 3
Other 8 7
- -----------------------------------------------------------------
Total foreclosed assets 12 11
- -----------------------------------------------------------------
Total nonperforming assets $438 $391
=================================================================
Nonaccrual loans to total loans .65% .56%
Nonperforming assets to total loans,
loans held for sale and foreclosed
assets 1.04 .93
Nonperforming assets to total assets .66 .56
===================================================================
(a) Includes $6 million of a troubled debt restructured loan held for sale at
December 31, 2001.
Of the total nonaccrual loans at March 31, 2002, 51% are related to PNC Business
Credit. These loans are to borrowers, many of which have weaker credit risk
ratings. Increases in nonperforming assets in this business are to be expected
at this point in the economic cycle. Such loans are secured by accounts
receivable, inventory, machinery and equipment, and other collateral. The
estimated value of collateral typically exceeds the amount of credit extended to
provide protection in the event that some collateral assets may not be
collectable or their full value may not be realizable. This secured position is
intended to help mitigate risk of loss on these loans by reducing the reliance
on cash flows for repayment. The above table excludes nonperforming equity
management assets carried at estimated fair value of $18 million at both March
31, 2002 and December 31, 2001, and included in other assets on the Consolidated
Balance Sheet.
The amount of nonaccrual loans that were current as to principal and interest
was $133 million at March 31, 2002 and $93 million at December 31, 2001. The
amount of nonperforming loans held for sale that were current as to principal
and interest was $45 million at March 31, 2002 and $8 million at December 31,
2001.
NONPERFORMING ASSETS BY BUSINESS
March 31 December 31
In millions 2002 2001
- ------------------------------------------------------------------
Regional Community Banking $59 $52
Corporate Banking 191 220
PNC Real Estate Finance 12 6
PNC Business Credit 172 109
PNC Advisors 4 4
- ------------------------------------------------------------------
Total nonperforming assets $438 $391
==================================================================
At March 31, 2002, Corporate Banking, PNC Real Estate Finance and PNC Business
Credit had nonperforming loans held for sale of $127 million, $6 million and $42
million, respectively, which are included in the table above.
CHANGE IN NONPERFORMING ASSETS
In millions 2002 2001
- ------------------------------------------------------------------
January 1 $391 $372
Transferred from accrual 232 171
Returned to performing (18) (13)
Principal reductions (63) (38)
Asset sales (69) (17)
Charge-offs and other (35) (89)
- ------------------------------------------------------------------
March 31 $438 $386
===================================================================
A sustained weakness or further weakening of the economy, or other factors that
affect asset quality, could result in an increase in the number of
delinquencies, bankruptcies or defaults, and a higher level of nonperforming
assets, net charge-offs and provision for credit losses in future periods. See
the Forward-Looking Statements section of this Financial Review for additional
factors that could cause actual results to differ materially from
forward-looking statements or historical performance.
ACCRUING LOANS AND LOANS HELD FOR SALE PAST DUE 90 DAYS OR MORE
Percent of Total
Amount Outstandings
-------------------------------------------
March 31 Dec. 31 March 31 Dec. 31
Dollars in millions 2002 2001 2002 2001
- ----------------------------------------------------------------
Commercial $34 $54 .21% .36%
Commercial real
estate 4 11 .16 .46
Consumer 41 36 .44 .39
Residential mortgage 55 56 1.01 .88
Lease financing 2 2 .05 .05
- -----------------------------------------
Total loans 136 159 .35 .42
Loans held for sale 35 33 .96 .79
- -----------------------------------------
Total loans and
loans held for
sale $171 $192 .41 .46
================================================================
Loans and loans held for sale not included in nonperforming or past due
categories, but where information about possible credit problems causes
management to be uncertain about the borrower's ability to comply with existing
repayment terms over the next six months, totaled $246 million and $106 million,
respectively, at March 31, 2002. Approximately two-thirds of these loans are in
the PNC Business Credit portfolio and all of the loans held for sale relate to
the institutional lending repositioning.
ALLOWANCE FOR CREDIT LOSSES
The Corporation maintains an allowance for credit losses to absorb losses
inherent in the loan portfolio. The allowance is determined based on quarterly
assessments of the probable estimated losses inherent in the loan portfolio and
is in compliance with applicable regulatory standards and generally accepted
accounting principles. The methodology
23
for measuring the appropriate level of the allowance consists of several
elements, including specific allocations to impaired loans, allocations to pools
of non-impaired loans and unallocated reserves. While allocations are made to
specific loans and pools of loans, the total reserve is available for all credit
losses.
Specific allowances are established for all loans considered impaired by a
method prescribed by SFAS No. 114, "Accounting by Creditors for Impairment of a
Loan." Specific allowances are determined by PNC's Special Asset Committee based
on an analysis of the present value of the loan's expected future cash flows
discounted at the loan's effective interest rate, the loan's observable market
price or the fair value of the loan's collateral.
Allocations to non-impaired commercial loans (pool reserve allocations) are
assigned to pools of loans as defined by PNC's internal risk rating categories.
The pool reserve methodology's key elements include expected default
probabilities ("EDP"), loss given default ("LGD") and expected commitment usage.
EDPs are derived from historical default analyses and are a function of the
borrower's risk rating grade and loan tenor. LGDs are derived from historical
loss data and are a function of the loan's collateral value and other structural
factors that may affect the ultimate ability to collect the loan. The final
non-impaired loan reserve allocations are based on this methodology and
management's judgment of other relevant factors which may include, among others,
regional and national economic conditions, business segment and portfolio
concentrations, historical versus estimated future losses and the volatility of
PNC's historic loss trends.
This methodology is sensitive to changes in key risk parameters such as EDPs and
LGDs. In general, a given change in any of the major risk parameters will have a
commensurate change in the pool reserve allocations to non-impaired commercial
loans. Additionally, other factors such as the rate of migration in the severity
of problem loans or changes in the distribution of loan tenor will contribute to
the final pool reserve allocations.
Consumer and residential mortgage loan allocations are made at a total portfolio
level by consumer product line based on historical loss experience adjusted for
volatility, current economic conditions and other relevant factors.
While PNC's specific and pool reserve methodologies strive to reflect all risk
factors, there continues to be certain elements of risk associated with, but not
limited to, potential estimation and judgmental errors. Furthermore, events may
have occurred as of the reserve evaluation date that are not yet reflected in
the risk measures or characteristics of the portfolio due to inherent lags in
information. Unallocated reserves are established to provide coverage for such
risks.
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.
ALLOCATION OF ALLOWANCE FOR CREDIT LOSSES
March 31, 2002 December 31, 2001
--------------------- -----------------------
Loans to Loans to
Dollars in millions Allowance Total Loans Allowance Total Loans
- ------------------------------------------------------------------
Commercial $569 42.7% $467 40.0%
Commercial
real estate 67 6.4 67 6.3
Consumer 43 24.3 49 24.1
Residential
mortgage 11 14.1 8 16.8
Other 22 12.5 39 12.8
- -----------------------------------------------------------------
Total $712 100% $630 100%
=================================================================
For purposes of this presentation, the unallocated portion of the allowance for
credit losses of $143 million at March 31, 2002 and December 31, 2001 has been
assigned to loan categories based on the relative specific and pool allocation
amounts. The unallocated portion of the allowance for credit losses represented
20% of the total allowance and .37% of total loans at March 31, 2002, compared
with 23% and .38%, respectively, at December 31, 2001.
The provision for credit losses for the first three months of 2002 and the
evaluation of the allowance for credit losses as of March 31, 2002 reflected
changes in loan portfolio composition, the net impact of downsizing credit
exposure and changes in asset quality.
ROLLFORWARD OF ALLOWANCE FOR CREDIT LOSSES
In millions 2002 2001
- -----------------------------------------------------------------
January 1 $630 $675
Charge-offs (57) (91)
Recoveries 16 11
- -----------------------------------------------------------------
Net charge-offs (41) (80)
Provision for credit losses 82 80
Acquired allowance (NBOC acquisition) 41
- -----------------------------------------------------------------
March 31 $712 $675
=================================================================
The allowance as a percent of nonaccrual loans and total loans was 284% and
1.85%, respectively, at March 31, 2002 compared with 299% and 1.66%,
respectively, at December 31, 2001. Excluding the portion of the reserve
specifically allocated for the apparent fraud related to Market Street, these
ratios were 265% and 1.73%, respectively, at the end of the first quarter of
2002. See additional discussion elsewhere in this Financial Review for further
information regarding Market Street.
24
CHARGE-OFFS AND RECOVERIES
Percent of
Three months ended March 31 Net Average
Dollars in millions Charge-offs Recoveries Charge-offs Loans
- ---------------------------------------------------------------------
2002
Commercial $39 $10 $29 .72%
Commercial real
estate 2 2 .33
Consumer 10 4 6 .26
Residential mortgage 1 1
Lease financing 5 1 4 .37
- ------------------------------------------------------
Total $57 $16 $41 .43
====================================================================
2001
Commercial $78 $6 $72 1.40%
Consumer 10 5 5 .22
Lease financing 3 3 .31
- ------------------------------------------------------
Total $91 $11 $80 .65
====================================================================
CREDIT DEFAULT SWAPS
Credit default swaps provide, for a fee, an assumption of a portion of the
credit risk associated with the underlying financial instruments. The
Corporation primarily uses such contracts to mitigate credit risk associated
with commercial lending activities. At March 31, 2002, credit default swaps of
$169 million in notional value were used by the Corporation to hedge credit risk
associated with commercial lending activities.
INTEREST RATE RISK
Interest rate risk arises primarily through the Corporation's traditional
business activities of extending loans and accepting deposits. Many factors,
including economic and financial conditions, movements in interest rates and
consumer preferences affect the spread between interest earned on assets and
interest paid on liabilities. In managing interest rate risk, the Corporation
seeks to minimize its reliance on a particular interest rate scenario as a
source of earnings while maximizing net interest income and net interest margin.
To further these objectives, the Corporation uses securities purchases and
sales, short-term and long-term funding, financial derivatives and other capital
markets instruments.
Interest rate risk is centrally managed by Asset and Liability Management. The
Corporation actively measures and monitors components of interest rate risk
including term structure or repricing risk, yield curve risk, basis risk and
options risk. The Corporation measures and manages both the short-term and
long-term effects of changing interest rates. An income simulation model
measures the sensitivity of net interest income to changing interest rates over
the next twenty-four month period. An economic value of equity model measures
the sensitivity of the value of existing on-balance-sheet and off-balance-sheet
positions to changing interest rates.
The income simulation model measures 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 loans
and deposits without maturity dates, 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 on net interest
income of higher or lower interest rates. Actual results will differ from
simulated results due to, among others, 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.
The Corporation models 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. The frequency of modeling these scenarios varies depending upon market
conditions and other factors. Such analyses are used to identify risk and
develop strategies.
An economic value of equity model is used by the Corporation to value all
current on-balance-sheet and off-balance-sheet positions under a range of
instantaneous interest rate changes. The resulting change in the value of equity
is a measure of overall long-term interest rate risk inherent in the
Corporation's existing on-balance-sheet and off-balance-sheet positions. The
Corporation uses the economic value of equity model to complement the net
interest income simulation modeling process.
The Corporation's interest rate risk management policies provide that 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 and that the economic value of equity should not decline by more than
1.5% of the book value of assets for a 200 basis point instantaneous increase or
decrease in interest rates. In the scenario with a 200 basis point decline in
interest rates, rates are reduced to not less than zero. Policy exceptions, if
any, are reported to the Finance Committee of the Board of Directors.
At March 31, 2002, the Corporation was outside of Board-approved policy limits
assuming a gradual, parallel 100 basis point decrease in interest rates over the
next twelve months. In the current low rate environment, the probability of an
additional 100 basis point decline in rates is considered less
25
likely than usual. Therefore, management's actions have focused on attempting to
reduce the effects of significantly higher interest rates on the Corporation's
net interest income and economic value of equity and on the effects of more
modest interest rate declines.
Management has kept the Finance Committee of the Board of Directors apprised of
the Corporation's risk position and continues to model and report the results of
this and other interest rate scenarios.
The following table sets forth the sensitivity results for the quarters ended
March 31, 2002 and 2001.
INTEREST SENSITIVITY ANALYSIS
March 31 March 31
2002 2001
- ----------------------------------------------------------------
NET INTEREST INCOME SENSITIVITY SIMULATION
Effect on net interest income from
gradual interest rate change over
following 12 months of:
100 basis point increase (0.2)% (0.7)%
100 basis point decrease (3.7)% 0.1%
ECONOMIC VALUE OF EQUITY SENSITIVITY MODEL
Effect on value of on- and off-balance-sheet
positions as a percentage of assets from
instantaneous change in interest rates of:
200 basis point increase (1.0)% (1.1)%
200 basis point decrease 0.4% 0.1%
KEY PERIOD-END INTEREST RATES
One month LIBOR 1.88% 5.08%
Three-year swap 4.73% 5.07%
================================================================
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 Executive Asset and Liability Committee and the
Finance Committee of the Board of Directors.
The Corporation's main sources of funds to meet its liquidity requirements are
its core deposit base, access to the capital markets, sale of liquid assets,
secured advances from the Federal Home Loan Bank and the capability to
securitize assets for sale.
Access to capital markets is in part based on the Corporation's credit ratings,
which are influenced by a number of factors including capital ratios, asset
quality and earnings. Additional factors that impact liquidity include the
maturity structure of existing assets, liabilities, and off-balance-sheet
positions, the level of liquid securities and loans available for sale,
regulatory capital classification, and the Corporation's ability to securitize
and sell various types of loans.
Liquid assets consist of short-term investments and securities available for
sale. At March 31, 2002, such assets totaled $12.8 billion, with $7.0 billion
pledged as collateral for borrowings, trust and other commitments. Secured
advances from the Federal Home Loan Bank, of which PNC Bank, N.A. ("PNC Bank"),
PNC's principal bank subsidiary, is a member, are generally secured by
residential mortgages, other real-estate related loans and mortgage-backed
securities. At March 31, 2002, approximately $9.4 billion of residential
mortgages and other real-estate related loans were available as collateral for
borrowings from the Federal Home Loan Bank. Funding can also be obtained through
alternative forms of borrowing, including federal funds purchased, repurchase
agreements and short-term and long-term debt issuance.
Liquidity for the parent company and subsidiaries is generated through the
issuance of securities in public or private markets and lines of credit. At
March 31, 2002, the Corporation had unused capacity under effective shelf
registration statements of approximately $3.3 billion of debt or equity
securities and $400 million of trust preferred capital securities. The
Corporation had an unused line of credit of $460 million at March 31, 2002.
The principal source of parent company revenue and cash flow is the dividends it
receives from PNC Bank. PNC Bank's dividend level may be impacted by its capital
needs, supervisory policies, corporate policies, contractual restrictions and
other factors. Also, there are legal limitations on the ability of national
banks to pay dividends or make other capital distributions. The amount available
for dividend payments to the parent company by all bank subsidiaries was $59
million at March 31, 2002. Management expects PNC Bank's dividend capacity
relative to such legal limitations to increase further by the retention of
earnings during the remainder of 2002.
In addition to dividends from PNC Bank, other sources of parent company
liquidity include cash and short-term investments, as well as dividends and loan
repayments from other subsidiaries. As of March 31, 2002, the parent company had
approximately $700 million in funds available from its cash and short-term
investments or other funds available from unrestricted subsidiaries. Management
believes the parent company has sufficient liquidity available from sources
other than dividends from PNC Bank to meet current obligations to its debt
holders, vendors, and others and to pay dividends at current rates through 2002.
26
OPERATIONAL RISK
The Corporation is exposed to a variety of operational risks that can affect
each of its business activities. Operational risk is defined as the risk of loss
resulting from inadequate or failed internal processes, people or systems or
from external events. The risk of loss also includes the potential legal actions
that could result from operational deficiencies or noncompliance with
regulations governing PNC.
PNC monitors and evaluates operational risk on an ongoing basis via systems of
internal control, formal Corporate-wide policies and procedures, and an internal
audit function. In addition, in April 2002 the Corporation created a new
position, Chief Risk Officer. The Chief Risk Officer will direct credit policy,
balance sheet risk management, operational risk, audit, compliance, and
regulatory affairs, with the aim to help PNC sharpen its strategic focus and
integrated coordination of all risk management activities throughout the
Corporation.
TRADING ACTIVITIES
Most of PNC's trading activities are designed to provide capital markets
services to customers and not to position the Corporation's portfolio for gains
from market movements. Trading activities are confined to financial instruments
and financial derivatives. PNC participates in derivatives and foreign exchange
trading as well as underwriting and "market making" in equity securities as an
accommodation to customers. PNC also engages in trading activities as part of
risk management strategies. Net trading income was $24 million for the first
three months of 2002 compared with $38 million for the first three months of
2001. See Note 7 Trading Activities in the Notes to Consolidated Financial
Statements for additional information.
Risk associated with trading, capital markets and foreign exchange activities is
managed using a value-at-risk approach that combines interest rate risk, foreign
exchange rate risk, spread risk and volatility risk. Using this approach,
exposure is measured as the potential loss due to a two standard deviation,
one-day move in interest rates. The combined period-end value-at-risk of all
trading operations using this measurement was estimated as less than $.6 million
at March 31, 2002.
FINANCIAL DERIVATIVES
The Corporation uses a variety of financial derivatives as part of the overall
asset and liability risk management process to manage interest rate, market and
credit risk inherent in the Corporation's business activities. Substantially all
such instruments are used to manage risk related to changes in interest rates.
Interest rate and total rate of return swaps, purchased interest rate caps and
floors and futures contracts are the primary instruments used by the Corporation
for interest rate risk management.
As required, effective January 1, 2001, the Corporation implemented SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," as amended
by SFAS No. 137 and No. 138. The statement requires the Corporation to recognize
all derivative instruments at fair value as either assets or liabilities.
Financial derivatives are reported at fair value in other assets or other
liabilities. The 2001 cumulative effect of the change in accounting principle
resulting from the adoption of SFAS No. 133 was an after-tax charge of $5
million reported in the consolidated income statement and an after-tax
accumulated other comprehensive loss of $4 million reported in the consolidated
balance sheet.
Interest rate swaps are agreements with a counterparty to exchange periodic
fixed and floating interest payments calculated on a notional amount. The
floating rate is based on a money market index, primarily short-term LIBOR.
Total rate of return swaps are agreements with a counterparty to exchange an
interest rate payment for the total rate of return on a specified reference
index calculated on a notional amount. Purchased interest rate caps and floors
are agreements where, for a fee, the counterparty agrees to pay the Corporation
the amount, if any, by which a specified market interest rate exceeds or is less
than a defined rate applied to a notional amount, respectively. Interest rate
futures contracts are exchange-traded agreements to make or take delivery of a
financial instrument at an agreed upon price and time and are settled in cash
daily.
Financial derivatives involve, to varying degrees, interest rate, market and
credit risk. For interest rate and total rate of return swaps, caps and floors
and futures contracts, only periodic cash payments and, with respect to caps and
floors, premiums, are exchanged. Therefore, cash requirements and exposure to
credit risk are significantly less than the notional value. Not all elements of
interest rate, market and credit risk are addressed through the use of financial
or other derivatives, and such instruments may be ineffective for their intended
purposes due to unanticipated market characteristics among other reasons.
27
The following table sets forth changes, during the first three months of 2002,
in the notional value of financial derivatives used for risk management and
designated as accounting hedges under SFAS No. 133.
FINANCIAL DERIVATIVES ACTIVITY
December 31 March 31 Weighted-Average
Dollars in millions 2001 Additions Maturities Terminations 2002 Maturity
- -----------------------------------------------------------------------------------------------------------------------------------
Interest rate risk management
Interest rate swaps
Receive fixed $6,748 $2,000 $(750) $(2,600) $5,398 3 yrs. 9 mos.
Pay fixed 107 107 3 yrs. 10 mos.
Basis swaps 87 (30) 57 6 yrs. 6 mos.
Interest rate caps 25 25 4 yrs. 2 mos.
Interest rate floors 7 7 3 yrs. 1 mo.
Futures contracts 398 (158) 240 7 mos.
- ----------------------------------------------------------------------------------------------------------------
Total interest rate risk
management 7,372 2,000 (750) (2,788) 5,834
- ----------------------------------------------------------------------------------------------------------------
Commercial mortgage banking risk management
Interest rate swaps 105 281 (218) 168 10 yrs. 9 mos.
Total rate of return swaps 150 75 (75) 150 1 mo.
- ----------------------------------------------------------------------------------------------------------------
Total commercial mortgage
banking risk management 255 356 (75) (218) 318
- ----------------------------------------------------------------------------------------------------------------
Total $7,627 $2,356 $(825) $(3,006) $6,152
===================================================================================================================================
The following table sets forth the notional value and the fair value of
financial derivatives used for risk management and designated as accounting
hedges under SFAS No. 133 at March 31, 2002. Weighted-average interest rates
presented are based on the implied forward yield curve at March 31, 2002.
FINANCIAL DERIVATIVES - 2002
Weighted-Average Interest
Rates
Notional ------------------------------
March 31, 2002 - dollars in millions Value Fair Value Paid Received
- ----------------------------------------------------------------------------------------------------------------------------------
Interest rate risk management
Asset rate conversion
Interest rate swaps (a)
Receive fixed designated to loans $2,985 $20 4.09% 4.61%
Pay fixed designated to loans 107 (5) 5.88 4.95
Basis swaps designated to loans 57 5.74 5.67
Interest rate caps designated to loans (b) 25 NM NM
Interest rate floors designated to loans (c) 7 NM NM
Futures contracts designated to loans 240 NM NM
- ---------------------------------------------------------------------------------------------------
Total asset rate conversion 3,421 15
- ---------------------------------------------------------------------------------------------------
Liability rate conversion
Interest rate swaps (a)
Receive fixed designated to borrowed funds 2,413 94 5.47 5.94
- ---------------------------------------------------------------------------------------------------
Total liability rate conversion 2,413 94
- ---------------------------------------------------------------------------------------------------
Total interest rate risk management 5,834 109
- ---------------------------------------------------------------------------------------------------
Commercial mortgage banking risk management
Pay fixed interest rate swaps designated to loans held for sale
(a) 168 2 5.94 6.19
Pay total rate of return swaps designated to loans held for
sale (a) 150 1 5.80 1.48
- ---------------------------------------------------------------------------------------------------
Total commercial mortgage banking risk management 318 3
- ---------------------------------------------------------------------------------------------------
Total financial derivatives designated for risk management $6,152 $112
===================================================================================================================================
(a) The floating rate portion of interest rate contracts is based on
money-market indices. As a percent of notional value, 57% were based on
1-month LIBOR, 42% on 3-month LIBOR and the remainder on other
short-term indices.
(b) Interest rate caps with notional values of $15 million require the
counterparty to pay the Corporation the excess, if any, of 3-month
LIBOR over a weighted-average strike of 6.40%. In addition, interest
rate caps with notional values of $6 million require the counterparty
to pay the excess, if any, of 1-month LIBOR over a weighted-average
strike of 6.00%. The remainder is based on other short-term indices. At
March 31, 2002, 3-month LIBOR was 2.03% and 1-month LIBOR was 1.88%.
(c) Interest rate floors with notional values of $5 million require the
counterparty to pay the excess, if any, of the weighted-average strike
of 4.50% over 3-month LIBOR. The remainder is based on other short-term
indices. At March 31, 2002, 3-month LIBOR was 2.03%.
NM- Not meaningful
28
The following table sets forth the notional value and the fair value of
financial derivatives used for risk management at December 31, 2001.
Weighted-average interest rates presented are based on the implied forward yield
curve at December 31, 2001.
FINANCIAL DERIVATIVES - 2001
Weighted-Average Interest Rates
Notional ---------------------------------
December 31, 2001 - dollars in millions Value Fair Value Paid Received
- -----------------------------------------------------------------------------------------------------------------------------------
Interest rate risk management
Asset rate conversion
Interest rate swaps (a)
Receive fixed designated to loans $4,335 $132 3.35% 5.23%
Pay fixed designated to loans 107 (5) 5.88 4.66
Basis swaps designated to loans 87 5.49 5.42
Interest rate caps designated to loans (b) 25 NM NM
Interest rate floors designated to loans (c) 7 NM NM
Futures contracts designated to loans 398 NM NM
- ---------------------------------------------------------------------------------------------------
Total asset rate conversion 4,959 127
- ---------------------------------------------------------------------------------------------------
Liability rate conversion
Interest rate swaps (a)
Receive fixed designated to borrowed funds 2,413 135 5.20 5.94
- ---------------------------------------------------------------------------------------------------
Total liability rate conversion 2,413 135
- ---------------------------------------------------------------------------------------------------
Total interest rate risk management 7,372 262
- ---------------------------------------------------------------------------------------------------
Commercial mortgage banking risk management
Pay fixed interest rate swaps designated to loans held for sale (a) 105 1 5.52 5.82
Pay total rate of return swaps designated to loans held for sale (a) 150 5.89 1.39
- ---------------------------------------------------------------------------------------------------
Total commercial mortgage banking risk management 255 1
- ---------------------------------------------------------------------------------------------------
Total financial derivatives designated for risk management $7,627 $263
===================================================================================================================================
(a) The floating rate portion of interest rate contracts is based on
money-market indices. As a percent of notional value, 65% were based on
1-month LIBOR, 34% on 3-month LIBOR and the remainder on other
short-term indices.
(b) Interest rate caps with notional values of $15 million require the
counterparty to pay the Corporation the excess, if any, of 3-month
LIBOR over a weighted-average strike of 6.40%. In addition, interest
rate caps with notional values of $6 million require the counterparty
to pay the excess, if any, of 1-month LIBOR over a weighted-average
strike of 6.00%. The remainder is based on other short-term indices. At
December 31, 2001, 3-month LIBOR was 1.88% and 1-month LIBOR was 1.87%.
(c) Interest rate floors with notional values of $5 million require the
counterparty to pay the excess, if any, of the weighted-average strike
of 4.50% over 3-month LIBOR. The remainder is based on other short-term
indices. At December 31, 2001, 3-month LIBOR was 1.88%.
NM- Not meaningful
OTHER DERIVATIVES
To accommodate customer needs, PNC enters into customer-related financial
derivative transactions primarily consisting of interest rate swaps, caps,
floors and foreign exchange contracts. Risk exposure from customer positions is
primarily managed through offsetting transactions with other dealers.
Additionally, the Corporation enters into other derivative transactions for risk
management purposes that are not designated as accounting hedges, primarily
consisting of interest rate floors and caps and basis swaps. Other noninterest
income for the first three months of 2002 included approximately $1 million of
net gains related to the derivatives held for risk management purposes not
designated as accounting hedges.
29
OTHER DERIVATIVES
At March 31, 2002 2002
---------------------------------------------------------------------------------
Positive Negative Average
Notional Fair Fair Net Asset Fair
In millions Value Value Value (Liability) Value
- --------------------------------------------------------------------------------------------------------------------------------
Customer-related
Interest rate
Swaps $20,951 $255 $(274) $(19) $(10)
Caps/floors
Sold 2,960 (30) (30) (34)
Purchased 2,481 24 24 27
Foreign exchange 4,113 29 (25) 4 3
Other 3,824 68 (56) 12 11
- --------------------------------------------------------------------------------------------------------------------------------
Total customer-related 34,329 376 (385) (9) (3)
================================================================================================================================
Other risk management and proprietary
Interest rate
Basis swaps 2,255 5 5 6
Caps/floors
Sold (22)
Purchased 4,400 22
Other 375 9 (3) 6 6
- --------------------------------------------------------------------------------------------------------------------------------
Total other risk management and proprietary 7,030 14 (3) 11 12
- --------------------------------------------------------------------------------------------------------------------------------
Total other derivatives $41,359 $390 $(388) $2 $9
================================================================================================================================
"OFF-BALANCE-SHEET" ACTIVITIES
PNC has reputation, legal, operational and fiduciary risks in virtually every
area of its business, many of which are not reflected in assets and liabilities
recorded on the balance sheet, and some of which are conducted through limited
purpose entities known as "special purpose entities." These activities are part
of the banking business and would be found in most larger financial institutions
with the size and activities of PNC. Most of these involve financial products
distributed to customers, trust and custody services, and processing and funds
transfer services, and the amounts involved can be quite large in relation to
the Corporation's assets, equity and earnings. The primary accounting for these
activities on PNC's records is to reflect the earned income, operating expenses
and any receivables or liabilities for transaction settlements. For example: PNC
Bank provides credit and liquidity to customers through loan commitments and
letters of credit; BlackRock provides investment advisory and administration
services for others through registered investment companies, separate accounts,
and other legal entities - additional information about BlackRock is available
in its filings with the SEC and may be obtained electronically at the SEC's home
page at www.sec.gov; PFPC processes mutual fund transactions, provides
securities lending services and maintains custody of certain fund assets; PNC
Advisors provides trust services and holds assets for personal and institutional
customers; Hilliard Lyons maintains brokerage assets of customers; and Columbia
Housing administers and manages funds that invest in affordable housing projects
that generate tax credits to investors; among other activities. In addition to
these activities, PNC has other activities or financial interests that involve
credit risk and market risk (including interest rate risk) that are not fully
reflected on the balance sheet. The most significant of these activities include
the following:
- - PNC provides administrative services, a portion of the program-level credit
enhancement, and participates with other banks in providing liquidity
facilities to Market Street.
- - Loan commitments and letters of credit.
- - Financial derivatives -- see Financial Derivatives in the Risk Management
section of this Financial Review.
- - Loan securitization and servicing activities. See Note 3 NBOC acquisition
in the Consolidated Financial Statements for additional information.
Except to the extent inherent in customary activities such as those described
above, PNC does not use off-balance-sheet entities to fund its business
operations. The Corporation does not capitalize any off-balance-sheet entity
with PNC stock and has no commitments to provide financial backing to any such
entity by issuing PNC stock.
The accounting for special purpose entities is currently under review by the
Financial Accounting Standards Board and the conditions for consolidation or
non-consolidation of such entities could change.
30
MARKET STREET FUNDING CORPORATION
Market Street is a multi-seller asset-backed commercial paper conduit that is
independently owned and managed. The activities of Market Street are limited to
the purchase of, or making of, loans secured by interests in pools of
receivables from U.S. corporations unaffiliated with PNC that desire access to
the commercial paper market. Market Street funds the purchases by issuing
commercial paper. Market Street's commercial paper has been rated A1/P1 by
Standard & Poor's and Moody's. Market Street had total assets of $5.2 billion at
March 31, 2002.
PNC Bank provides certain administrative services, a portion of the
program-level credit enhancement and participates with other banks in providing
liquidity facilities to Market Street in exchange for fees negotiated based on
market rates. Credit enhancement is provided in part by PNC Bank in the form of
a revolving credit facility with a five year term expiring December 31, 2004. At
March 31, 2002, approximately $160 million was outstanding on this facility. An
additional $480 million was provided by a major insurer. Also at March 31, 2002,
Market Street had liquidity facilities supporting individual pools of
receivables totaling $7.0 billion, of which $5.8 billion are provided by PNC
Bank. At March 31, 2002, none of the $5.8 billion of liquidity facilities had
been drawn. In April 2002, PNC funded approximately $50 million to Market Street
under a liquidity facility agreement as discussed elsewhere in this Financial
Review.
As Market Street's program administrator, PNC received fees of $3.4 million for
the three months ended March 31, 2002. Commitment fees related to PNC's portion
of the liquidity facilities amounted to $2.3 million for the first quarter of
2002.
SECURITIZATIONS
From time to time the Corporation has sold loans in secondary market
securitization transactions. The Corporation uses securitizations to manage
various balance sheet risks. Also, in such securitization transactions, the
Corporation may retain certain interest-only strips and servicing rights that
were created in the sale of the loans. The Corporation's liquidity is not
dependent on securitizations. As previously reported, in March 2001 PNC
securitized $3.8 billion of residential mortgage loans by selling the loans into
a trust with PNC retaining 99% or $3.7 billion of the certificates. The 1%
interest in the trust was purchased by a publicly-traded entity managed by a
subsidiary of PNC. A substantial portion of the entity's purchase price was
financed by PNC. The reclassification of these loans to securities increased the
liquidity of the assets and was consistent with PNC's on-going balance sheet
restructuring. At the time of the securitization, gains of $25.9 million were
deferred and were recognized when principal payments were received or the
securities sold to third parties. At December 31, 2001, these securities had
been reduced to $1.3 billion through sales and principal payments and the
remaining deferred gains were $7.8 million. In the first quarter of 2002, the
remaining securities were sold. The deferred gain remaining at the time of sale
of $6.0 million was recognized as other noninterest income.
31
FORWARD-LOOKING STATEMENTS
This report contains, and other statements that the Corporation may make may
contain, forward-looking statements within the meaning of the Private Securities
Litigation Reform Act with respect to the outlook or expectations for earnings,
revenues, asset quality, share repurchases, or other future financial or
business performance, strategies and expectations. Forward-looking statements
are typically identified by words or phrases such as "believe," "feel,"
"expect," "anticipate," "intend," "outlook," "estimate," "forecast," "predict,"
"position," "poised," "target," "mission," "assume," "achievable," "potential,"
"strategy," "goal," "objective," "plan," "aspiration," "outcome," "continue,"
"remain," "maintain," "seek," "strive," "trend" and variations of such words and
similar expressions, or future or conditional verbs such as "will," "would,"
"should," "could," "might," "can," "may" or similar expressions.
The Corporation cautions that forward-looking statements are subject to numerous
assumptions, risks and uncertainties, which change over time. Actual results
could differ materially from those anticipated in forward-looking statements and
future results could differ materially from historical performance.
Forward-looking statements speak only as of the date they are made, and the
Corporation assumes no duty to update forward-looking statements. In addition to
factors mentioned elsewhere in this report or previously disclosed in the
Corporation's SEC reports (accessible on the SEC's website at www.sec.gov), the
following factors, among others, could cause actual results to differ materially
from forward-looking statements or historical performance:
(1) The resolution of disputes over certain closing date adjustments related to
the sale of the residential mortgage banking business;
(2) changes in political, economic or industry conditions, the interest rate
environment or financial and capital markets, which could result in: a
deterioration in credit quality and increased credit losses; an adverse
effect on the allowance for credit losses; a reduction in demand for credit
or fee-based products and services, net interest income, value of assets
under management and assets serviced, value of venture capital investments
and of other debt and equity investments, value of loans held for sale or
value of other on-balance-sheet and off-balance-sheet assets; or changes in
the availability and terms of funding necessary to meet PNC's liquidity
needs;
(3) relative investment performance of assets under management;
(4) the introduction, withdrawal, success and timing of business initiatives
and strategies, decisions regarding further reductions in balance sheet
leverage, the timing and pricing of any sales of loans held for sale, and
PNC's inability to realize cost savings or revenue enhancements, implement
integration plans and other consequences of mergers, acquisitions,
restructurings and divestitures;
(5) customer borrowing, repayment, investment and deposit practices and their
acceptance of PNC's products and services;
(6) the impact of increased competition;
(7) the means PNC chooses to redeploy available capital, including the extent
and timing of any share repurchases and investments in PNC businesses;
(8) the inability to manage risks inherent in PNC's business;
(9) the unfavorable resolution of legal proceedings or government inquiries;
(10) the denial of insurance coverage for claims made by PNC;
(11) an increase in the number of customer or counterparty delinquencies,
bankruptcies or defaults that could result in, among other things,
increased credit and asset quality risk, a higher loan loss provision and
reduced profitability;
(12) the impact, extent and timing of technological changes, the adequacy of
intellectual property protection and costs associated with obtaining rights
in intellectual property claimed by others;
(13) actions of the Federal Reserve Board, legislative and regulatory reforms,
and regulatory, supervisory or enforcement actions of government agencies;
and
(14) terrorist activities, including the September 11th terrorist attacks, which
may adversely affect the general economy, financial and capital markets,
specific industries, and PNC. The Corporation cannot predict the severity
or duration of effects stemming from such activities or any actions taken
in connection with them.
Some of the above factors are described in more detail in the Overview and Risk
Factors sections of this Financial Review and factors relating to credit risk,
interest rate risk, liquidity risk, operational risk, trading activities,
financial and other derivatives and "off-balance-sheet" activities are discussed
in the Risk Management section of this Financial Review. Other factors are
described elsewhere in this report.
32
CONSOLIDATED STATEMENT OF INCOME
THE PNC FINANCIAL SERVICES GROUP, INC.
Three months ended March 31 - in millions, except per share data
Unaudited 2002 2001
- ----------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Loans and fees on loans $599 $981
Securities 177 122
Loans held for sale 52 37
Other 30 32
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest income 858 1,172
- ----------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Deposits 176 397
Borrowed funds 92 221
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest expense 268 618
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest income 590 554
Provision for credit losses 82 80
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest income less provision for credit losses 508 474
- ----------------------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Asset management 221 223
Fund servicing 196 195
Service charges on deposits 54 50
Brokerage 55 54
Consumer services 55 55
Corporate services 118 76
Equity management (2) (39)
Net securities gains 4 29
Other 73 72
- ----------------------------------------------------------------------------------------------------------------------------------
Total noninterest income 774 715
- ----------------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Staff expense 430 421
Net occupancy 58 53
Equipment 68 57
Marketing 13 9
Distributions on capital securities 15 17
Other 207 224
- ----------------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 791 781
- ----------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations before minority interest
and income taxes 491 408
Minority interest in income of consolidated entities 10 8
Income taxes 164 135
- ----------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations 317 265
Income from discontinued operations (less applicable income
taxes of $0) 5
- ----------------------------------------------------------------------------------------------------------------------------------
Net income before cumulative effect of accounting change 317 270
Cumulative effect of accounting change (less applicable
income tax benefit of $2) (5)
- ----------------------------------------------------------------------------------------------------------------------------------
Net income $317 $265
===================================================================================================================================
EARNINGS PER COMMON SHARE
Continuing operations and net income
Basic $1.12 $.90
Diluted 1.11 .89
AVERAGE COMMON SHARES OUTSTANDING
Basic 283 289
Diluted 285 293
===================================================================================================================================
See accompanying Notes to Consolidated Financial Statements.
33
CONSOLIDATED BALANCE SHEET
THE PNC FINANCIAL SERVICES GROUP, INC.
In millions, except par value March 31 December 31
Unaudited 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $2,786 $4,327
Short-term investments 2,105 1,335
Loans held for sale 3,648 4,189
Securities 11,092 13,908
Loans, net of unearned income of $1,136 and $1,164 38,539 37,974
Allowance for credit losses (712) (630)
- -----------------------------------------------------------------------------------------------------------------------------------
Net loans 37,827 37,344
Goodwill 2,315 2,036
Other intangible assets 344 337
Other 6,447 6,092
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets $66,564 $69,568
===================================================================================================================================
LIABILITIES
Deposits
Noninterest-bearing $8,686 $10,124
Interest-bearing 36,224 37,180
- -----------------------------------------------------------------------------------------------------------------------------------
Total deposits 44,910 47,304
Borrowed funds
Federal funds purchased 34 167
Repurchase agreements 827 954
Bank notes and senior debt 5,480 6,362
Federal Home Loan Bank borrowings 1,787 2,047
Subordinated debt 2,275 2,298
Other borrowed funds 585 262
- -----------------------------------------------------------------------------------------------------------------------------------
Total borrowed funds 10,988 12,090
Other 3,656 3,333
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 59,554 62,727
- -----------------------------------------------------------------------------------------------------------------------------------
Minority interest 183 170
Mandatorily redeemable capital securities of subsidiary trusts 848 848
SHAREHOLDERS' EQUITY
Preferred stock 1 1
Common stock - $5 par value
Authorized 800 shares
Issued 353 shares 1,764 1,764
Capital surplus 1,090 1,077
Retained earnings 6,730 6,549
Deferred benefit expense (15) (16)
Accumulated other comprehensive (loss) income (30) 5
Common stock held in treasury at cost: 69 and 70 shares (3,561) (3,557)
- -----------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 5,979 5,823
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities, minority interest, capital securities and
shareholders' equity $66,564 $69,568
===================================================================================================================================
See accompanying Notes to Consolidated Financial Statements.
34
CONSOLIDATED STATEMENT OF CASH FLOWS
THE PNC FINANCIAL SERVICES GROUP, INC.
Three months ended March 31 - in millions
Unaudited 2002 2001
- -------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $317 $265
Income from discontinued operations (5)
Cumulative effect of accounting change 5
- -------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations 317 265
Adjustments to reconcile income from continuing operations
to net cash provided by operating activities
Provision for credit losses 82 80
Depreciation, amortization and accretion 10 80
Deferred income taxes 125 114
Securities transactions (4) (28)
Valuation adjustments 37 8
Change in
Loans held for sale 728 (124)
Other (717) (245)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 578 150
- -------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Net change in loans 224 (64)
Repayment of securities 826 265
Sales
Securities 4,500 4,958
Loans 478 1,161
Foreclosed assets 1 5
Purchases
Securities (2,826) (7,357)
Loans (13) (110)
Net cash (paid) received for divestitures/acquisitions (1,676) 503
Other (39) 71
- -------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities 1,475 (568)
- -------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net change in
Noninterest-bearing deposits (1,438) (59)
Interest-bearing deposits (956) (416)
Federal funds purchased (133) (642)
Repurchase agreements (127) 223
Sales/issuances
Federal Home Loan Bank borrowings 2,623
Other borrowed funds 6,812 9,413
Common stock 35 80
Repayments/maturities
Bank notes and senior debt (870) (750)
Federal Home Loan Bank borrowings (260) (500)
Subordinated debt (100)
Other borrowed funds (6,488) (9,783)
Acquisition of treasury stock (33) (191)
Cash dividends paid (136) (144)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash used by financing activities (3,594) (246)
- -------------------------------------------------------------------------------------------------------------------------------
DECREASE IN CASH AND DUE FROM BANKS (1,541) (664)
Cash and due from banks at beginning of year 4,327 3,662
- -------------------------------------------------------------------------------------------------------------------------------
Cash and due from banks at end of period $2,786 $2,998
===============================================================================================================================
CASH PAID FOR
Interest $283 $577
Income taxes 11 29
NON-CASH ITEMS
Transfer of mortgage loans to securities 3,775
Transfer to (from) loans held for sale from (to) loans 160 (6)
Transfer from loans to other assets 4 3
===============================================================================================================================
See accompanying Notes to Consolidated Financial Statements.
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE PNC FINANCIAL SERVICES GROUP, INC.
BUSINESS
The PNC Financial Services Group, Inc. ("Corporation" or "PNC") is one of the
largest diversified financial services companies in the United States, operating
businesses engaged in regional community banking, corporate banking, real estate
finance, asset-based lending, wealth management, asset management and global
fund services. The Corporation provides certain products and services nationally
and others in PNC's primary geographic markets in Pennsylvania, New Jersey,
Delaware, Ohio and Kentucky. The Corporation also provides certain banking,
asset management and global fund services internationally. PNC is subject to
intense competition from other financial services companies and is subject to
regulation by various domestic and international authorities.
NOTE 1 ACCOUNTING POLICIES
The unaudited consolidated interim financial statements include the accounts of
PNC and its subsidiaries, most of which are wholly owned, and other consolidated
entities. Such statements have been prepared in accordance with accounting
principles generally accepted in the United States. All significant intercompany
accounts and transactions have been eliminated. Certain prior-period amounts
have been reclassified to conform with the current period presentation. These
reclassifications did not impact the Corporation's financial condition or
results of operations.
In the opinion of management, the financial statements reflect all adjustments
of a normal recurring nature necessary for a fair statement of results for the
interim periods presented.
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the amounts reported. Actual results
will differ from such estimates and the differences may be material to the
consolidated financial statements.
The consolidated financial statements, notes to consolidated financial
statements and statistical information reflect the residential mortgage banking
business, which was sold on January 31, 2001, in discontinued operations, unless
otherwise noted.
The notes included herein should be read in conjunction with the audited
consolidated financial statements included in PNC's 2001 Annual Report to
Shareholders, excerpts from which are included as Exhibit 13 to PNC's 2001
Annual Report on Form 10-K ("2001 Form 10-K").
NOTE 2 DISCONTINUED OPERATIONS
In the first quarter of 2001, PNC closed the sale of its residential mortgage
banking business. Certain closing date adjustments are currently in dispute
between PNC and the buyer, Washington Mutual Bank, FA. The ultimate financial
impact of the sale will not be determined until the disputed matters are finally
resolved. See Note 10 Legal Proceedings for additional information.
The income of the residential mortgage banking business, which is presented on
one line in the income statement, is as follows:
INCOME FROM DISCONTINUED OPERATIONS
Three months ended March 31 - in millions 2001
- ---------------------------------------------------------------
Income from operations, after tax $15
Net loss on sale of business, after tax (10)
- ---------------------------------------------------------------
Total income from discontinued operations $5
===============================================================
There were no net assets of the residential mortgage banking business remaining
at either March 31, 2002 or December 31, 2001.
NOTE 3 NBOC ACQUISITION
In January 2002, PNC Business Credit acquired a portion of National Bank of
Canada's ("NBOC") U.S. asset-based lending business in a purchase business
combination. With this acquisition, PNC Business Credit established six new
marketing offices and enhanced its presence as one of the premier asset-based
lenders for the middle market customer segment. The transaction was designed to
allow PNC to acquire the higher-quality portion of the portfolio, and provide
NBOC a means for the orderly liquidation and exit of the remaining portfolio.
PNC acquired 245 lending customer relationships representing approximately $2.6
billion of credit exposure including $1.5 billion of loan outstandings with the
balance representing unfunded loan commitments. PNC also acquired certain other
assets and assumed liabilities resulting in a total acquisition cost of
approximately $1.8 billion that was paid primarily in cash. Goodwill recorded
was approximately $277 million, of which approximately $101 million is
non-deductible for federal income tax purposes. The results of the acquired
business have been included in results of operations for PNC Business Credit
since the acquisition date.
NBOC retained a portfolio ("Serviced Portfolio") totaling approximately $670
million of credit exposure including $463 million of outstandings, which will be
serviced by PNC for an 18-month term unless a different date is mutually agreed
upon. The Serviced Portfolio retained by NBOC primarily represents the portion
of NBOC's U.S. asset-based loan portfolio with the highest risk. The loans are
either to borrowers with deteriorating trends or with identified weaknesses
which if not corrected could jeopardize full satisfaction of the loans or in
industries to
36
which PNC Business Credit wants to limit its exposure. Approximately $138
million of the Serviced Portfolio outstandings were nonperforming on the
acquisition date. At the end of the servicing term, NBOC has the right to
transfer the then remaining Serviced Portfolio to PNC ("Put Option"). NBOC's and
PNC's strategy is to aggressively liquidate the Serviced Portfolio during the
servicing term. PNC intends to sell or otherwise liquidate any remaining loans
in the event NBOC puts them to PNC at the end of the servicing term.
NBOC retains significant risks and rewards of owning the Serviced Portfolio,
including realized credit losses, during the servicing term as described below.
NBOC assigned $24 million of specific reserves to certain of the loans in the
Serviced Portfolio. Additionally, NBOC absorbs realized credit losses on the
Serviced Portfolio in addition to the specific reserves on individual identified
loans. If during the servicing term the realized credit losses in the Serviced
Portfolio exceed $50 million plus the specific reserves, then PNC Business
Credit will advance cash to NBOC for these excess losses ("Excess Loss
Payments"). PNC is to be reimbursed by NBOC for any Excess Loss Payments if the
Put Option is not exercised. If the Put Option is exercised, the Put Option
purchase price will be reduced by the amount of any Excess Loss Payments.
As part of the allocation of the purchase price for the business acquired, PNC
Business Credit established a liability of $112 million to reflect its
obligation under the Put Option. An independent third party valuation firm
valued the Put Option by estimating the difference between the anticipated fair
value of loans from the Serviced Portfolio expected to be outstanding at the put
date and the anticipated Put Option purchase price. The Put Option liability
will be revalued on a quarterly basis by the independent valuation firm with
changes in the value included in earnings. At March 31, 2002 the Put Option
liability was approximately $107 million. The $5 million reduction from the
acquisition date amount was recognized in earnings for the first quarter as
other noninterest income.
If the Put Option is exercised, then PNC would record the loans acquired as
loans held for sale at the purchase price less the balance of the Put Option
liability at that date, which should approximate fair value. The Put Option
purchase price will be NBOC's outstanding principal balance for the loans
remaining in the Serviced Portfolio adjusted for the realized credit losses
during the servicing term and Excess Loss Payments, if applicable. If realized
credit losses are less than $50 million, the difference between $50 million and
the actual realized credit losses will be deducted from NBOC's outstanding
principal balance to establish the Put Option purchase price. If realized credit
losses were to exceed $50 million plus the specific reserves used, the Excess
Loss Payments made by PNC Business Credit to NBOC will be deducted from NBOC's
outstanding principal balance in determining the Put Option purchase price.
At March 31, 2002, the valuation firm estimated that loans outstanding in the
Serviced Portfolio at the put date would be $332.5 million and that estimated
credit losses on liquidating the Serviced Portfolio would be $56.5 million
including $12.1 million during the servicing term. Using these and other
assumptions, if the Put were exercised at the end of the servicing term, PNC
would record the acquired loans at $165 million. Actual results may differ
materially from these assumptions.
Prior to closing of the acquisition, PNC Business Credit transferred $49 million
of nonperforming loans to NBOC in a transaction accounted for as a financing.
Those loans are subject to the terms of the servicing agreement and are included
in the Serviced Portfolio amounts set forth above. The loans were transferred to
loans held for sale on PNC's balance sheet at a loss of $9.9 million, which was
recognized as a charge-off in the first quarter of 2002. The carrying amount of
those loans held for sale was $33.2 million at March 31, 2002 and is included in
PNC's nonperforming assets. Excluding these loans, the Serviced Portfolio in
January 2002 was $620 million of credit exposure including $413 million of
outstandings of which $88 million was nonperforming. At March 31, 2002,
comparable amounts were $532 million, $385 million, and $110 million,
respectively.
NOTE 4 RECENT ACCOUNTING PRONOUNCEMENTS
In October 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets," which replaces SFAS No. 121. This statement
primarily defines one accounting model for long-lived assets to be disposed of
by sale, including discontinued operations, and addresses implementation issues
regarding the impairment of long-lived assets. The standard was effective
January 1, 2002 and is not expected to have a material impact on the
Corporation's consolidated financial statements.
37
NOTE 5 GOODWILL AND OTHER INTANGIBLE ASSETS
Effective January 1, 2002, the Corporation implemented SFAS No. 142, "Goodwill
and Other Intangible Assets," which changed the accounting for goodwill from the
amortization of goodwill to an impairment-only approach. The amortization of
goodwill, including goodwill recognized relating to past business combinations,
ceased upon adoption of the new standard. Impairment testing for goodwill at a
reporting unit level will be required on at least an annual basis.
In accordance with SFAS No. 142, the Corporation identified its reporting unit
structure for goodwill impairment testing purposes as of January 1, 2002.
Management performed the first step of the transitional goodwill impairment test
on its reporting units during the first quarter of 2002. The results of this
test indicate no impairment loss as the fair value of the reporting units
exceeds the carrying amount of the net assets (including goodwill) in all cases.
Fair value was determined by using a discounted cash flow methodology.
As a result of adopting this statement, the Corporation reassessed the useful
lives and the classification of identifiable intangible assets and determined
that they continue to be appropriate.
The carrying amount of goodwill and other intangible assets, net of
amortization, consisted of the following:
GOODWILL AND OTHER INTANGIBLES
March 31 December 31
In millions 2002 2001
- ----------------------------------------------------------------
Goodwill $2,315 $2,036
Customer-related intangibles 146 138
Commercial mortgage servicing rights 198 199
- ----------------------------------------------------------------
Total $2,659 $2,373
================================================================
The changes in the carrying amount of goodwill and net other intangible assets
for the three months ended March 31, 2002, are as follows:
CHANGES IN GOODWILL AND OTHER INTANGIBLES
Customer- Servicing
In millions Goodwill Based Rights
- --------------------------------------------------------------
Balance at December 31, 2001 $2,036 $138 $199
Additions during the quarter 279 13 5
Amortization (5) (6)
- --------------------------------------------------------------
Balance at March 31, 2002 $2,315 $146 $198
==============================================================
In conjunction with the NBOC acquisition, PNC Business Credit recorded a
customer-based intangible of $12.4 million that will be amortized over seven
years. Goodwill recorded in connection with the NBOC acquisition was
approximately $277 million, of which approximately $101 million is non-
deductible for federal tax purposes.
Amortization expense on intangible assets during the first quarter of 2002 was
approximately $11 million. Amortization expense on existing intangible assets
for the remainder of 2002 and for 2003, 2004, 2005, 2006 and 2007 is estimated
to be $35 million, $43 million, $40 million, $37 million, $35 million and $33
million, respectively.
The following table sets forth reported and pro forma income from continuing
operations and basic and diluted earnings per share as if the nonamortization
provisions of SFAS No. 142 had been applied in the previous period.
PRO FORMA EFFECTS
Three months ended March 31
In millions, except per share data 2002 2001
- --------------------------------------------------------------
Reported income from continuing
operations $317 $265
Goodwill amortization, net of taxes 23
- --------------------------------------------------------------
Pro forma income from continuing
operations $317 $288
- --------------------------------------------------------------
Basic earnings per share
Reported, from continuing operations $1.12 $.90
Goodwill amortization, net of taxes .08
- --------------------------------------------------------------
Pro forma basic earnings per share $1.12 $.98
- --------------------------------------------------------------
Diluted earnings per share
Reported, from continuing operations $1.11 $.89
Goodwill amortization, net of taxes .08
- --------------------------------------------------------------
Pro forma diluted earnings per share $1.11 $.97
==============================================================
NOTE 6 CASH FLOWS
During the first three months of 2002, acquisition activity that affected cash
flows consisted of $1.736 billion of acquired assets and $60 million of acquired
liabilities, resulting in net cash disbursements of $1.676 billion. The 2002
activity consisted solely of the NBOC acquisition as described in Note 3. During
the first three months of 2001, divestiture activity that affected cash flows
consisted of $383 million of divested net assets and cash receipts of $503
million, both of which were related to the sale of PNC's residential mortgage
banking business.
38
NOTE 7 TRADING ACTIVITIES
Most of PNC's trading activities are designed to provide capital markets
services to customers and not to position the Corporation's portfolio for gains
from market movements. PNC participates in derivatives and foreign exchange
trading as well as underwriting and "market making" in equity securities as an
accommodation to customers. PNC also engages in trading activities as part of
risk management strategies.
Net trading income for the first three months of 2002 totaled $24 million
compared with $38 million for the prior-year period and was included in
noninterest income as follows:
DETAILS OF TRADING ACTIVITIES
Three months ended March 31 - in millions 2002 2001
- --------------------------------------------------------------
Corporate services $1
Other noninterest income
Securities underwriting and trading $17 20
Derivatives trading 1 12
Foreign exchange 6 5
- --------------------------------------------------------------
Net trading income $24 $38
==============================================================
NOTE 8 NONPERFORMING ASSETS
Nonperforming assets were as follows:
March 31 December 31
In millions 2002 2001
- ----------------------------------------------------------------
Nonaccrual loans $251 $211
Nonperforming loans held for sale (a) 175 169
Foreclosed assets 12 11
- ----------------------------------------------------------------
Total nonperforming assets (b) $438 $391
================================================================
(a) Includes a $6 million troubled debt restructured loan held for sale as
of December 31, 2001.
(b) Excludes $18 million of equity management assets carried at estimated
fair value at March 31, 2002 and December 31, 2001.
NOTE 9 ALLOWANCE FOR CREDIT LOSSES
Changes in the allowance for credit losses were as follows:
In millions 2002 2001
- -----------------------------------------------------------------
Allowance at January 1 $630 $675
Charge-offs
Commercial (39) (78)
Commercial real estate (2)
Consumer (10) (10)
Residential mortgage (1)
Lease financing (5) (3)
- -----------------------------------------------------------------
Total charge-offs (57) (91)
Recoveries
Commercial 10 6
Consumer 4 5
Residential mortgage 1
Lease financing 1
- -----------------------------------------------------------------
Total recoveries 16 11
- -----------------------------------------------------------------
Net charge-offs
Commercial (29) (72)
Commercial real estate (2)
Consumer (6) (5)
Lease financing (4) (3)
- -----------------------------------------------------------------
Total net charge-offs (41) (80)
Provision for credit losses 82 80
Acquired allowance (NBOC acquisition) 41
- -----------------------------------------------------------------
Allowance at March 31 $712 $675
=================================================================
NOTE 10 LEGAL PROCEEDINGS
Note 24 to the Consolidated Financial Statements included in the Corporation's
2001 Form 10-K describes putative federal securities law class action litigation
against the Corporation, certain present or former officers and directors, and
its independent auditors for 2001; a dispute over certain closing date purchase
price adjustments related to the January 2001 sale of the Corporation's
residential mortgage banking business; and regulatory inquiries relating to
certain transactions with subsidiaries of a third party financial institution.
There were no material developments in any of these matters or in management's
assessment of them during the quarter ended March 31, 2002.
The Corporation and persons to whom the Corporation may have indemnification
obligations, in the normal course of business, are subject to various other
pending and threatened legal proceedings in which claims for monetary damages
and other relief are asserted. Management does not anticipate that the ultimate
aggregate liability, if any, arising out of such other 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
pending or threatened legal proceedings will have a material adverse effect on
the Corporation's results of operations in any future reporting period.
39
NOTE 11 SECURITIES
Amortized Unrealized Fair
-------------------------------------
In millions Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------------------------
MARCH 31, 2002
SECURITIES AVAILABLE FOR SALE
Debt securities
U.S. Treasury and government agencies $760 $1 $(7) $754
Mortgage-backed 6,836 20 (121) 6,735
Asset-backed 2,706 1 (39) 2,668
State and municipal 62 2 64
Other debt 73 1 (1) 73
- -----------------------------------------------------------------------------------------------------------------------------------
Total debt securities 10,437 25 (168) 10,294
Corporate stocks and other 446 (15) 431
- -----------------------------------------------------------------------------------------------------------------------------------
Total securities available for sale $10,883 $25 $(183) $10,725
===================================================================================================================================
SECURITIES HELD TO MATURITY
Debt securities
U.S. Treasury and government agencies $264 $(20) $244
Asset-backed 8 8
Other debt 95 95
- -----------------------------------------------------------------------------------------------------------------------------------
Total debt securities 367 (20) 347
- -----------------------------------------------------------------------------------------------------------------------------------
Total securities held to maturity $367 $(20) $347
===================================================================================================================================
DECEMBER 31, 2001
SECURITIES AVAILABLE FOR SALE
Debt securities
U.S. Treasury and government agencies $808 $3 $(4) $807
Mortgage-backed 9,669 37 (128) 9,578
Asset-backed 2,799 8 (31) 2,776
State and municipal 62 2 64
Other debt 75 1 (1) 75
- -----------------------------------------------------------------------------------------------------------------------------------
Total debt securities 13,413 51 (164) 13,300
Corporate stocks and other 264 (19) 245
- -----------------------------------------------------------------------------------------------------------------------------------
Total securities available for sale $13,677 $51 $(183) $13,545
- -----------------------------------------------------------------------------------------------------------------------------------
SECURITIES HELD TO MATURITY
Debt securities
U.S. Treasury and government agencies $260 $(3) $257
Asset-backed 8 8
Other debt 95 95
- -----------------------------------------------------------------------------------------------------------------------------------
Total debt securities 363 (3) 360
- -----------------------------------------------------------------------------------------------------------------------------------
Total securities held to maturity $363 $(3) $360
===================================================================================================================================
The fair value of total securities at March 31, 2002 was $11.1 billion compared
with $13.9 billion at December 31, 2001. Securities represented 17% of total
assets at March 31, 2002 compared with 20% at December 31, 2001. The decline in
total securities compared with December 31, 2001 was primarily due to the sale
of mortgage-backed securities during the first quarter of 2002.
The expected weighted-average life of securities available for sale was 4 years
and 4 months at March 31, 2002 compared with 4 years at December 31, 2001.
The securities classified as held to maturity are owned by the subsidiaries of a
third party financial institution that are consolidated in PNC's financial
statements as described in Note 3 to the Consolidated Financial Statements
included in the Corporation's 2001 Form 10-K. The expected weighted-average life
of securities held to maturity was 18 years and 9 months at March 31, 2002 and
18 years and 11 months at December 31, 2001.
At March 31, 2002, the securities available for sale balance included a net
unrealized loss of $158 million, which represented the difference between fair
value and amortized cost. The comparable amount at December 31, 2001 was a net
unrealized loss of $132 million. Net unrealized gains and losses in the
securities available for sale portfolio are included in accumulated other
comprehensive income or loss, net of tax or, for the portion attributable to
changes in a hedged risk as part of a fair value hedge strategy, in net income.
40
Net securities gains were $4 million for the first three months of 2002 and $29
million for the first three months of 2001. Net securities losses of $1 million
for the first three months of 2001 related to commercial mortgage banking
activities were included in corporate services revenue. There was no comparable
amount for the first three months of 2002.
Information relating to securities sold is set forth in the following table:
SECURITIES SOLD
Three months ended
March 31 Gross Gross Net
In millions Proceeds Gains Losses Gains Taxes
- ----------------------------------------------------------------
2002 $4,500 $14 $10 $4 $1
2001 4,958 32 4 28 10
================================================================
NOTE 12 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 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------------
CALCULATION OF BASIC EARNINGS PER COMMON SHARE
Income from continuing operations $317 $265
Less: Preferred dividends declared 5
- -----------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations applicable to basic earnings per common share 317 260
Income from discontinued operations applicable to basic earnings per common share 5
Cumulative effect of accounting change applicable to basic earnings per common share (5)
- -----------------------------------------------------------------------------------------------------------------------------------
Net income applicable to basic earnings per common share $317 $260
Basic weighted-average common shares outstanding (in thousands) 282,770 289,205
Basic earnings per common share from continuing operations $1.12 $.90
Basic earnings per common share from discontinued operations .02
Basic earnings per common share from cumulative effect of accounting change (.02)
- -----------------------------------------------------------------------------------------------------------------------------------
Basic earnings per common share $1.12 $.90
===================================================================================================================================
CALCULATION OF DILUTED EARNINGS PER COMMON SHARE
Income from continuing operations $317 $265
Less: Dividends declared on nonconvertible Series F preferred stock 4
- -----------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations applicable to diluted earnings per common share 317 261
Income from discontinued operations applicable to diluted earnings per common share 5
Cumulative effect of accounting change applicable to diluted earnings per common share (5)
- -----------------------------------------------------------------------------------------------------------------------------------
Net income applicable to diluted earnings per common share $317 $261
Basic weighted-average common shares outstanding (in thousands) 282,770 289,205
Weighted-average common shares to be issued using average market price and assuming:
Conversion of preferred stock Series A and B 102 111
Conversion of preferred stock Series C and D 821 902
Conversion of debentures 17 17
Exercise of stock options 1,090 2,266
Incentive share awards 428 304
- -----------------------------------------------------------------------------------------------------------------------------------
Diluted weighted-average common shares outstanding (in thousands) 285,228 292,805
Diluted earnings per common share from continuing operations $1.11 $.89
Diluted earnings per common share from discontinued operations .02
Diluted earnings per common share from cumulative effect of accounting change (.02)
- -----------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per common share $1.11 $.89
===================================================================================================================================
41
NOTE 13 SHAREHOLDERS' EQUITY
The following table sets forth the activity in shareholders' equity for the
first three months of 2002.
Deferred Accumulated Other
In millions, except share Preferred Common Capital Retained Benefit Comprehensive Treasury
and per share data Stock Stock Surplus Earnings Expense Income (Loss) Stock Total
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 $1 $1,764 $1,077 $6,549 $(16) $5 $(3,557) $5,823
Net income 317 317
Other comprehensive income (loss),
net of tax (a)
Net unrealized securities losses (17) (17)
Net unrealized losses on cash flow
hedge derivatives (19) (19)
Other 1 1
- -----------------------------------------------------------------------------------------------------------------------------------
Comprehensive income 282
- -----------------------------------------------------------------------------------------------------------------------------------
Cash dividends declared
Common ($.48 per share) (136) (136)
Treasury stock activity
(182,000 net shares purchased) 8 (4) 4
Tax benefit of ESOP and stock option
plans 5 5
Deferred benefit expense 1 1
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 2002 $1 $1,764 $1,090 $6,730 $(15) $(30) $(3,561) $5,979
===================================================================================================================================
(a) A summary of the components of accumulated other comprehensive income
(loss) follows:
Three months ended March 31, 2002 Tax Benefit
In millions Pretax amount (Expense) After-tax Amount
- -----------------------------------------------------------------------------------------------------------------------------------
Unrealized securities losses $(40) $14 $(26)
Less: Reclassification adjustment for losses realized in net income (14) 5 (9)
- -----------------------------------------------------------------------------------------------------------------------------------
Net unrealized securities losses (26) 9 (17)
- -----------------------------------------------------------------------------------------------------------------------------------
Unrealized losses on cash flow hedge derivatives (6) 2 (4)
Less: Reclassification adjustment for gains realized in net income 23 (8) 15
- -----------------------------------------------------------------------------------------------------------------------------------
Net unrealized losses on cash flow hedge derivatives (29) 10 (19)
- -----------------------------------------------------------------------------------------------------------------------------------
Other 2 (1) 1
- -----------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss) $(53) $18 $(35)
===================================================================================================================================
42
NOTE 14 SEGMENT REPORTING
PNC operates seven major businesses engaged in regional community banking,
corporate banking, real estate finance, asset-based lending, wealth management,
asset management and global fund services.
Business results are presented based on PNC's management accounting practices
and the Corporation's management structure. There is no comprehensive,
authoritative body of guidance for management accounting equivalent to generally
accepted accounting principles; therefore, PNC's business results are not
necessarily comparable with similar information for any other company. Financial
results are presented, to the extent practicable, as if each business operated
on a stand-alone basis. Also, certain amounts for 2001 have been reclassified to
conform with the 2002 presentation.
The management accounting process uses various balance sheet and income
statement assignments and transfers to measure performance of the businesses.
Methodologies change from time to time as management accounting practices are
enhanced and businesses change. Securities or borrowings and related net
interest income are assigned based on the net asset or liability position of
each business. Capital is assigned based on management's assessment of inherent
risks and equity levels at independent companies providing similar products and
services. The allowance for credit losses is allocated based on management's
assessment of risk inherent in the loan portfolios. Support areas not directly
aligned with the businesses are allocated primarily based on the utilization of
services.
Total business financial results differ from consolidated results from
continuing operations primarily due to differences between management accounting
practices and generally accepted accounting principles, equity management
activities, minority interest in income of consolidated entities, residual asset
and liability management activities, unallocated reserves, eliminations and
unassigned items, the impact of which is reflected in the "Other" category.
The impact of the institutional lending repositioning and other strategic
actions that occurred during 2001 is reflected in the business results.
BUSINESS SEGMENT PRODUCTS AND SERVICES
Regional Community Banking provides deposit, branch-based brokerage, electronic
banking and credit products and services to retail customers as well as deposit,
credit, treasury management and capital markets products and services to small
businesses primarily within PNC's geographic region.
Corporate Banking provides credit, equipment leasing, treasury management and
capital markets products and services primarily to mid-sized corporations and
government entities within PNC's geographic region.
PNC Real Estate Finance provides credit, capital markets, treasury management,
commercial mortgage loan servicing and other financial products and services to
developers, owners and investors in commercial real estate. PNC's commercial
real estate financial services platform provides processing services through
Midland Loan Services, Inc., a leading third-party provider of loan servicing
and technology to the commercial real estate finance industry, and national
syndication of affordable housing equity through Columbia Housing Partners, LP.
PNC Business Credit provides asset-based lending, capital markets and treasury
management products and services to middle market customers nationally. PNC
Business Credit's lending services include loans secured by accounts receivable,
inventory, machinery and equipment, and other collateral, and its customers
include manufacturing, wholesale, distribution, retailing and service industry
companies.
PNC Advisors provides a full range of tailored investment products and services
to affluent individuals and families, including full-service brokerage through
J.J.B. Hilliard, W.L. Lyons, Inc. and investment advisory services to the
ultra-affluent through Hawthorn. PNC Advisors also serves as investment manager
and trustee for employee benefit plans and charitable and endowment assets.
BlackRock is one of the largest publicly traded investment management firms in
the United States with approximately $238 billion of assets under management at
March 31, 2002. BlackRock manages assets on behalf of institutions and
individuals worldwide through a variety of fixed income, liquidity and equity
mutual funds, separate accounts and alternative investment products. Mutual
funds include the flagship fund families, BlackRock Funds and BlackRock
Provident Institutional Funds. In addition, BlackRock provides risk management
and investment system services to institutional investors under the BlackRock
Solutions name.
PFPC is the largest full-service mutual fund transfer agent and second largest
provider of mutual fund accounting and administration services in the United
States, providing a wide range of fund services to the investment management
industry. PFPC also provides processing solutions to the international
marketplace through its Ireland and Luxembourg operations.
43
RESULTS OF BUSINESSES
Regional PNC PNC
Three months ended March 31 Community Corporate Real Business PNC
In millions Banking Banking Estate Credit Advisors BlackRock PFPC Other Total
Finance
- -----------------------------------------------------------------------------------------------------------------------------------
2002
INCOME STATEMENT
Net interest income $382 $94 $30 $33 $26 $3 $(18) $40 $590
Noninterest income 167 99 21 12 157 146 195 (23) 774
- -----------------------------------------------------------------------------------------------------------------------------------
Total revenue 549 193 51 45 183 149 177 17 1,364
Provision for credit losses 12 46 (5) 28 1 82
Depreciation and amortization 9 2 1 2 5 1 19 39
Other noninterest expense 257 95 35 14 128 91 147 (15) 752
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings before minority
interest and income taxes 271 50 20 3 53 53 29 12 491
Minority interest in income of
consolidated entities 10 10
Income taxes 94 17 (2) 1 20 22 12 164
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings $177 $33 $22 $2 $33 $31 $17 $2 $317
===================================================================================================================================
Inter-segment revenue $5 $2 $13 $4 $2 $(26)
===================================================================================================================================
AVERAGE ASSETS $38,749 $15,217 $5,174 $3,817 $3,042 $667 $1,848 $(355) $68,159
===================================================================================================================================
2001
INCOME STATEMENT
Net interest income $352 $142 $28 $24 $32 $2 $(15) $(11) $554
Noninterest income 188 47 24 14 167 134 193 (52) 715
- -----------------------------------------------------------------------------------------------------------------------------------
Total revenue 540 189 52 38 199 136 178 (63) 1,269
Provision for credit losses 10 57 9 5 (1) 80
Depreciation and amortization 18 3 5 1 4 6 10 17 64
Other noninterest expense 264 102 32 7 124 86 141 (39) 717
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings before minority 248 27 6 25 71 44 27 (40) 408
interest and income taxes
Minority interest in income of
consolidated entities 8 8
Income taxes 88 7 (8) 9 27 19 10 (17) 135
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings $160 $20 $14 $16 $44 $25 $17 $(31) $265
===================================================================================================================================
Inter-segment revenue $1 $1 $19 $3 $(24)
===================================================================================================================================
AVERAGE ASSETS $40,617 $17,686 $5,453 $2,377 $3,505 $500 $1,735 $(88) $71,785
===================================================================================================================================
44
STATISTICAL INFORMATION
THE PNC FINANCIAL SERVICES GROUP, INC.
CONSOLIDATED AVERAGE BALANCE SHEET AND NET INTEREST ANALYSIS
-------------------------------------------------------------------
First Quarter 2002 Fourth Quarter 2001
-------------------------------------------------------------------
Taxable-equivalent basis Average Average Average Average
Dollars in millions Balances Interest Yields/Rates Balances Interest Yields/Rates
- -----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Interest-earning assets
Loans held for sale $4,276 $52 4.85% $2,400 $27 4.49%
Securities
Securities available for sale
U.S. Treasury and government agencies and
corporations 3,506 47 5.33 3,796 49 5.20
Other debt 9,048 125 5.50 8,866 115 5.18
State, municipal and other 94 3 14.24 86 3 12.02
- ------------------------------------------------------------------------ ----------------------
Total securities available for sale 12,648 175 5.52 12,748 167 5.23
Securities held to maturity 363 3 3.61 272 4 6.11
- ------------------------------------------------------------------------ ----------------------
Total securities 13,011 178 5.47 13,020 171 5.25
Loans, net of unearned income
Commercial 16,264 240 5.90 18,215 288 6.19
Commercial real estate 2,452 33 5.36 2,621 38 5.68
Consumer 9,278 156 6.82 9,112 169 7.36
Residential mortgage 5,756 98 6.85 6,381 113 7.05
Lease financing 4,327 70 6.52 4,457 73 6.56
Other 394 4 4.16 407 5 5.13
- ------------------------------------------------------------------------ ----------------------
Total loans, net of unearned income 38,471 601 6.28 41,193 686 6.58
Other 1,867 30 6.38 1,619 22 5.40
- ------------------------------------------------------------------------ ----------------------
Total interest-earning assets/interest income 57,625 861 5.99 58,232 906 6.16
Noninterest-earning assets
Investment in discontinued operations
Allowance for credit losses (637) (727)
Cash and due from banks 2,877 2,949
Other assets 8,294 9,525
- ------------------------------------------------------------------ ---------
Total assets $68,159 $69,979
- ------------------------------------------------------------------ ---------
LIABILITIES, MINORITY INTEREST, CAPITAL SECURITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing liabilities
Interest-bearing deposits
Demand and money market $21,802 60 1.11 $22,295 87 1.56
Savings 1,994 2 .48 1,931 3 .54
Retail certificates of deposit 10,608 101 3.86 11,114 118 4.19
Other time 827 9 4.40 485 8 6.20
Deposits in foreign offices 867 4 1.65 478 2 1.93
- ---------------------------------------------------------------------------- ----------------------
Total interest-bearing deposits 36,098 176 1.97 36,303 218 2.38
Borrowed funds
Federal funds purchased 1,962 9 1.74 1,258 6 1.96
Repurchase agreements 915 3 1.38 801 3 1.63
Bank notes and senior debt 5,675 38 2.68 6,033 52 3.36
Federal Home Loan Bank borrowings 1,873 2 .48 2,247 9 1.66
Subordinated debt 2,209 25 4.60 2,344 28 4.74
Other borrowed funds 538 15 11.11 341 8 9.05
- ---------------------------------------------------------------------------- ----------------------
Total borrowed funds 13,172 92 2.80 13,024 106 3.22
- ---------------------------------------------------------------------------- ----------------------
Total interest-bearing liabilities/interest expense 49,270 268 2.19 49,327 324 2.60
Noninterest-bearing liabilities, minority interest, capital
securities and shareholders' equity
Demand and other noninterest-bearing deposits 8,288 8,318
Accrued expenses and other liabilities 3,675 4,857
Minority interest 177 166
Mandatorily redeemable capital securities of subsidiary
trusts 848 848
Shareholders' equity 5,901 6,463
- ------------------------------------------------------------------ ---------
Total liabilities, minority interest,
capital securities and shareholders' equity $68,159 $69,979
- -----------------------------------------------------------------------------------------------------------------------------------
Interest rate spread 3.80 3.56
Impact of noninterest-bearing sources .32 .40
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income/margin $593 4.12% $582 3.96%
- -----------------------------------------------------------------------------------------------------------------------------------
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. Basis adjustments related to hedged items are included in
noninterest-earning assets and noninterest-bearing liabilities. Average balances
of securities are based on amortized historical cost (excluding SFAS No. 115
adjustments to fair value).
Loan fees for the three months ended March 31, 2002, December 31, 2001,
September 30, 2001, June 30, 2001 and March 31, 2001 were $29 million, $31
million, $29 million, $30 million and $29 million, respectively.
45
- -----------------------------------------------------------------------------------------------------------------------------------
Third Quarter 2001 Second Quarter 2001 First Quarter 2001
- -----------------------------------------------------------------------------------------------------------------------------------
Average Average Average Average Average Average
Balances Interest Yields/Rates Balances Interest Yields/Rates Balances Interest Yields/Rates
- -----------------------------------------------------------------------------------------------------------------------------------
$1,955 $24 4.83% $1,723 $31 7.05% $2,005 $37 7.31%
3,908 56 5.69 3,696 54 5.79 3,933 57 5.84
6,538 97 5.93 7,910 122 6.18 4,001 63 6.32
91 1 7.75 101 2 7.33 127 2 5.63
- ----------------------------- --------------------------- ----------------------------
10,537 154 5.86 11,707 178 6.07 8,061 122 6.08
92 2 6.92
- ----------------------------- --------------------------- ----------------------------
10,629 156 5.87 11,707 178 6.07 8,061 122 6.08
19,296 333 6.76 20,271 375 7.31 20,882 422 8.09
2,548 43 6.67 2,572 48 7.40 2,580 55 8.44
9,102 181 7.86 9,096 188 8.29 9,085 194 8.70
7,771 138 7.11 8,459 152 7.18 12,673 232 7.32
4,381 75 6.76 4,149 74 7.08 3,897 71 7.32
456 7 6.04 459 7 6.66 520 11 7.98
- ----------------------------- --------------------------- ----------------------------
43,554 777 7.04 45,006 844 7.46 49,637 985 7.96
1,725 30 6.86 1,562 30 7.94 1,831 33 7.20
- ----------------------------- --------------------------- ----------------------------
57,863 987 6.75 59,998 1,083 7.19 61,534 1,177 7.67
207
(678) (684) (683)
2,921 2,907 2,977
8,870 8,494 7,957
- -------------- ------------- --------------
$68,976 $70,715 $71,992
- -------------- ------------- --------------
$21,559 123 2.25 $20,944 134 2.57 $20,468 162 3.20
1,925 4 .84 1,936 5 .94 1,919 6 1.31
11,785 142 4.79 12,662 175 5.54 13,724 199 5.90
501 8 6.26 537 8 6.48 565 10 6.67
357 3 3.54 1,096 12 4.17 1,402 20 5.75
- ----------------------------- --------------------------- -------------- -------------
36,127 280 3.07 37,175 334 3.60 38,078 397 4.22
1,457 13 3.55 2,596 28 4.30 2,941 44 5.92
893 7 2.90 958 9 3.64 1,145 14 4.83
4,973 55 4.33 5,189 67 5.08 5,896 91 6.21
2,459 22 3.48 2,550 31 4.78 1,576 21 5.46
2,332 32 5.54 2,364 36 6.15 2,408 42 6.94
413 10 8.87 373 9 9.80 409 9 8.92
- ----------------------------- --------------------------- -------------- -------------
12,527 139 4.35 14,030 180 5.09 14,375 221 6.15
- ----------------------------- --------------------------- -------------- -------------
48,654 419 3.40 51,205 514 4.01 52,453 618 4.75
8,448 8,228 8,190
4,141 3,655 3,716
142 122 114
848 848 848
6,743 6,657 6,671
- -------------- ------------- --------------
$68,976 $70,715 $71,992
- -----------------------------------------------------------------------------------------------------------------------------------
3.35 3.18 2.92
.54 .59 .70
- -----------------------------------------------------------------------------------------------------------------------------------
$568 3.89% $569 3.77% $559 3.62%
- -----------------------------------------------------------------------------------------------------------------------------------
46
QUARTERLY REPORT ON FORM 10-Q
THE PNC FINANCIAL SERVICES GROUP, INC.
Securities and Exchange Commission
Washington, D.C. 20549
Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the quarterly period ended March 31, 2002.
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 30, 2002 The PNC Financial Services Group, Inc. had 283,559,839
shares of common stock ($5 par value) outstanding.
The PNC Financial Services Group, Inc. (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months and (2) has been subject to such filing requirements for the
past 90 days.
The following sections of the Financial Review set forth in the cross-reference
index are incorporated in the Quarterly Report on Form 10-Q.
Cross-reference Page(s)
- --------------------------------------------------------------
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Statement of Income for the
three months ended March 31, 2002 and
2001 33
Consolidated Balance Sheet as of March
31, 2002 and December 31, 2001 34
Consolidated Statement of Cash Flows for
the three months ended March 31, 2002
and 2001 35
Notes to Consolidated Financial 36 - 44
Statements
Consolidated Average Balance Sheet and
Net Interest Analysis 45 - 46
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of
Operations 3 - 32
Item 3 Quantitative and Qualitative
Disclosures About Market Risk 19 - 32
- --------------------------------------------------------------
PART II OTHER FINANCIAL INFORMATION
ITEM 4. SUBMISSION OF MATTERS FOR A VOTE OF SECURITY HOLDERS
An annual meeting of shareholders of The PNC Financial Services Group, Inc. was
held on April 23, 2002 for the purpose of considering and acting upon the
election of 15 directors to serve until the next annual meeting and until their
successors are elected and qualified.
Fifteen directors were elected and the votes cast for or against/withheld were
as follows:
Aggregate Votes
-------------------------------
Nominee For Against/Withheld
- ----------------------------------------------------------------
Paul W. Chellgren 222,481,966 11,008,437
Robert N. Clay 222,472,959 11,017,444
George A. Davidson, Jr. 221,250,810 12,239,593
David F. Girard-diCarlo 219,108,093 14,382,310
Walter E. Gregg, Jr. 222,185,804 11,304,599
William R. Johnson 222,453,217 11,037,186
Bruce C. Lindsay 221,249,400 12,241,003
Thomas H. O'Brien 221,904,771 11,585,632
Jane G. Pepper 221,065,229 12,425,174
James E. Rohr 222,083,926 11,406,477
Lorene K. Steffes 222,435,537 11,054,866
Dennis F. Strigl 222,349,306 11,141,097
Thomas J. Usher 222,428,156 11,062,247
Milton A. Washington 222,308,815 11,181,588
Helge H. Wehmeier 221,303,849 12,186,554
================================================================
47
With respect to the preceding matters, holders of the Corporation's common and
voting preferred stock voted together as a single class. The following table
sets forth, as of the February 28, 2002 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 Rights Shares Entitled Aggregate
Title of Class or Series Per Share to Vote Voting Power
- -------------------------------------------------------------------------------
Common Stock 1 283,182,441 283,182,441
$1.80 Cumulative
Convertible
Preferred Stock -
Series A 8 9,835 78,680
$1.80 Cumulative
Convertible
Preferred Stock -
Series B 8 2,938 23,504
$1.60 Cumulative
Convertible
Preferred Stock -
Series C 4/2.4 200,939 334,898*
$1.80 Cumulative
Convertible
Preferred Stock -
Series D 4/2.4 290,736 484,560*
--------------
Total possible votes 284,104,083*
===============================================================================
* 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The following exhibit index lists Exhibits filed with this Quarterly Report on
Form 10-Q:
10.7 PNC and Affiliates Deferred Compensation Plan, as
amended and restated*
12.1 Computation of Ratio of Earnings to Fixed Charges
12.2 Computation of Ratio of Earnings to Fixed Charges and
Preferred Stock Dividends
===============================================================================
* Denotes management compensatory plan.
Copies of these Exhibits may be obtained electronically at the Securities and
Exchange Commission's home page at www.sec.gov. Copies may also be obtained
without charge by writing to Thomas F. Garbe, Director of Financial Accounting,
at corporate headquarters, by calling (412) 762-1553 or via e-mail at
financial.reporting@pnc.com.
The Corporation did not file any Reports on Form 8-K during the quarter ended
March 31, 2002.
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, 2002, on its
behalf by the undersigned thereunto duly authorized.
THE PNC FINANCIAL SERVICES GROUP, INC.
By: /s/ Robert L. Haunschild
Robert L. Haunschild
Chief Financial Officer
48
CORPORATE INFORMATION
THE PNC FINANCIAL SERVICES GROUP, INC.
CORPORATE HEADQUARTERS
The PNC Financial Services Group, Inc.
One PNC Plaza
249 Fifth Avenue
Pittsburgh, Pennsylvania 15222-2707
(412) 762-2000
STOCK LISTING
The PNC Financial Services Group, Inc. common stock is listed on the New York
Stock Exchange under the symbol PNC.
INTERNET INFORMATION
The PNC Financial Services Group, Inc.'s financial reports and information about
its products and services are available on the Internet at www.pnc.com.
FINANCIAL INFORMATION
The Annual Report on Form 10-K is filed with the Securities and Exchange
Commission ("SEC"). Copies of this document and other filings, including
exhibits thereto, may be obtained electronically at the SEC's home page at
www.sec.gov. Copies may also be obtained without charge by writing to Thomas F.
Garbe, Director of Financial Accounting, at corporate headquarters, by calling
(412) 762-1553 or via e-mail at financial.reporting@pnc.com.
INQUIRIES
For financial services call 1-888-PNC-2265. Individual shareholders should
contact Shareholder Relations at (800) 982-7652.
Analysts and institutional investors should contact William H. Callihan, Vice
President, Investor Relations, at (412) 762-8257 or via e-mail at
investor.relations@pnc.com.
News media representatives and others seeking general information should contact
R. Jeep Bryant, Senior Vice President, Corporate Communications, at (412)
762-8221 or via e-mail at corporate.communications@pnc.com.
COMMON STOCK PRICES/DIVIDENDS DECLARED
The table below sets forth by quarter the range of high and low sale and
quarter-end closing prices for The PNC Financial Services Group, Inc. common
stock and the cash dividends declared per common share.
Cash
Dividends
High Low Close Declared
===================================================================
2002 QUARTER
- -------------------------------------------------------------------
First $62.800 $52.500 $61.490 $.48
===================================================================
2001 QUARTER
- -------------------------------------------------------------------
First $75.813 $56.000 $67.750 $.48
Second 71.110 62.400 65.790 .48
Third 70.390 51.140 57.250 .48
Fourth 60.110 52.300 56.200 .48
- -------------------------------------------------------------------
Total $1.92
===================================================================
DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN
The PNC Financial Services Group, Inc. Dividend Reinvestment and Stock Purchase
Plan enables holders of common and preferred stock to purchase additional shares
of common stock conveniently and without paying brokerage commissions or service
charges. A prospectus and enrollment card may be obtained by writing to
Shareholder Relations at corporate headquarters.
REGISTRAR AND TRANSFER AGENT
The Chase Manhattan Bank
85 Challenger Road
Ridgefield Park, New Jersey 07660
(800) 982-7652
49