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<SEC-DOCUMENT>0000950128-01-000481.txt : 20010313
<SEC-HEADER>0000950128-01-000481.hdr.sgml : 20010313
ACCESSION NUMBER: 0000950128-01-000481
CONFORMED SUBMISSION TYPE: 10-K405
PUBLIC DOCUMENT COUNT: 8
CONFORMED PERIOD OF REPORT: 20001231
FILED AS OF DATE: 20010312
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: PNC FINANCIAL SERVICES GROUP INC
CENTRAL INDEX KEY: 0000713676
STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021]
IRS NUMBER: 251435979
STATE OF INCORPORATION: PA
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K405
SEC ACT:
SEC FILE NUMBER: 001-09718
FILM NUMBER: 1566477
BUSINESS ADDRESS:
STREET 1: ONE PNC PLAZA
STREET 2: 249 FIFTH AVE
CITY: PITTSBURGH
STATE: PA
ZIP: 15265
BUSINESS PHONE: 4127621553
MAIL ADDRESS:
STREET 1: ONE PNC PLAZA
STREET 2: FIFTH AVENUE & WOOD STREET
CITY: PITTSBURGH
STATE: PA
ZIP: 15265
FORMER COMPANY:
FORMER CONFORMED NAME: PNC BANK CORP
DATE OF NAME CHANGE: 19930505
FORMER COMPANY:
FORMER CONFORMED NAME: PNC BANK CORP /PA/
DATE OF NAME CHANGE: 19930428
FORMER COMPANY:
FORMER CONFORMED NAME: PNC FINANCIAL CORP
DATE OF NAME CHANGE: 19920703
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K405
<SEQUENCE>1
<FILENAME>j8606301e10-k405.txt
<DESCRIPTION>THE PNC FINANCIAL SERVICES GROUP, INC.
<TEXT>
<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
COMMISSION FILE NUMBER 1-9718
THE PNC FINANCIAL SERVICES GROUP, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
PENNSYLVANIA 25-1435979
- ------------------------------------------------------- --------------------------------------
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification
organization) No.)
</TABLE>
ONE PNC PLAZA
249 FIFTH AVENUE
PITTSBURGH, PENNSYLVANIA 15222-2707
------------------------------------------------------------
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code - (412) 762-1553
--------------
Securities registered pursuant to Section 12(b) of the Act:
-------------------------------------------------------------
<TABLE>
<CAPTION>
Name of Each Exchange
Title of Each Class on Which Registered
------------------- -------------------
<S> <C>
COMMON STOCK, PAR VALUE $5.00 New York Stock Exchange
$1.60 CUMULATIVE CONVERTIBLE PREFERRED STOCK-SERIES C, PAR VALUE $1.00 New York Stock Exchange
$1.80 CUMULATIVE CONVERTIBLE PREFERRED STOCK-SERIES D, PAR VALUE $1.00 New York Stock Exchange
SERIES G JUNIOR PARTICIPATING PREFERRED SHARE PURCHASE RIGHTS New York Stock Exchange
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
-----------------------------------------------------------
$1.80 CUMULATIVE CONVERTIBLE PREFERRED STOCK - SERIES A, PAR VALUE $1.00
$1.80 CUMULATIVE CONVERTIBLE PREFERRED STOCK - SERIES B, PAR VALUE $1.00
8.25% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2008
Indicate by check mark whether the registrant (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 (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ___
Indicate by check mark if the disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. _X_
The aggregate market value of the voting common equity held by non-affiliates of
the registrant amounted to approximately $20.0 billion at February 28, 2001.
There is no non-voting common equity of the registrant outstanding.
Number of shares of registrant's common stock outstanding at February 28, 2001:
289,606,244
DOCUMENTS INCORPORATED BY REFERENCE
Portions of The PNC Financial Services Group, Inc. 2000 Annual Report ("Annual
Report to Shareholders") are incorporated by reference into Parts I and II and
portions of the definitive Proxy Statement of The PNC Financial Services Group,
Inc. to be filed pursuant to Regulation 14A for the annual meeting of
shareholders to be held on April 24, 2001 ("Proxy Statement") are incorporated
by reference into Part III of this Form 10-K. The incorporation by reference
herein of portions of the Proxy Statement shall not be deemed to specifically
incorporate by reference the information referred to in Item 402(a)(8) and (9)
of Regulation S-K.
<PAGE> 2
TABLE OF CONTENTS
PART I Page
--------
Item 1 Business 3
Item 2 Properties 6
Item 3 Legal Proceedings 6
Item 4 Submission of Matters to a Vote of Security
Holders 6
Executive Officers of the Registrant 7
PART II
Item 5 Market for Registrant's Common Equity and
Related Stockholder Matters 7
Item 6 Selected Financial Data 7
Item 7 Management's Discussion and Analysis of
Financial Condition and Results of
Operations 7
Item 7A Quantitative and Qualitative Disclosures
About Market Risk 7
Item 8 Financial Statements and Supplementary Data 8
Item 9 Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure 8
PART III
Item 10 Directors and Executive Officers of the
Registrant 8
Item 11 Executive Compensation 8
Item 12 Security Ownership of Certain Beneficial
Owners and Management 8
Item 13 Certain Relationships and Related
Transactions 8
PART IV
Item 14 Exhibits, Financial Statement Schedules and
Reports on Form 8-K 8
SIGNATURES 9
EXHIBIT INDEX E-1
PART I
Forward-Looking Statements: From time to time The PNC Financial Services Group,
Inc. ("PNC" or "Corporation") has made and may continue to make written or oral
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act with respect to future financial or business performance,
conditions, strategies, expectations and goals. This report also includes
forward-looking statements. Forward-looking statements are typically identified
by words or phrases such as "believe," "expect," "anticipate," "intend,"
"estimate," "position," "target," "mission," "assume," "achievable,"
"potential," "strategy," "goal," "objective," "plan," "aspiration," "outlook,"
"outcome," "continue," "remain," "maintain," "strive," "trend" and variations of
such words and similar expressions, or future or conditional verbs such as
"will," "would," "should," "could," "may" or similar expressions.
The Corporation cautions that 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 these factors and those mentioned elsewhere in this report, the
following factors, among others, could cause actual results to differ materially
from forward-looking statements or historical performance: decisions the
Corporation makes with respect to the redeployment of available capital; changes
in asset quality and credit risk; economic conditions; changes in financial and
capital markets; the inability to sustain revenue and earnings growth; changes
in interest rates; inflation; changes in values of assets under management and
assets serviced; relative investment performance of assets under management;
customer acceptance of PNC products and services; customer borrowing, repayment,
investment, and deposit practices; customer disintermediation; valuation of debt
and equity investments; the inability to successfully manage risks inherent in
the Corporation's business; the introduction, withdrawal, success and timing of
business initiatives and strategies; the extent and cost of any share
repurchases; decisions the Corporation makes with respect to further reduction
of balance sheet leverage and potential investments in PNC businesses;
competitive conditions; the inability to realize cost savings or revenue
enhancements, implement integration plans and other consequences associated with
mergers, acquisitions, restructurings and divestitures; and the impact, extent
and timing of technological changes, capital management activities, and actions
of the Federal Reserve Board and legislative and regulatory actions and reforms.
Further, an increase in the number of customer or counterparty delinquencies,
bankruptcies, or defaults could result in, among other things, a higher loan
loss provision and reduced profitability.
Some of the above factors are described in more detail in the "Risk Factors"
section of the "Financial Review" included on pages 48 and 49 of the Annual
Report to Shareholders, which is incorporated herein by reference, and factors
relating to credit risk, interest rate risk, liquidity risk, trading activities
and financial derivatives are discussed in the "Risk Management" section of the
"Financial Review" included on pages 49 through 55 of the Annual Report to
Shareholders, which is incorporated herein by reference. Other factors are
described elsewhere in this report.
2
<PAGE> 3
ITEM 1 - BUSINESS
BUSINESS OVERVIEW The Corporation is a bank holding company registered under the
Bank Holding Company Act of 1956, as amended ("BHC Act") and a financial holding
company under the Gramm-Leach-Bliley Act. PNC was incorporated under the laws of
the Commonwealth of Pennsylvania in 1983 with the consolidation of Pittsburgh
National Corporation and Provident National Corporation. Since 1983, PNC has
diversified its geographical presence, business mix and product capabilities
through strategic bank and nonbank acquisitions and the formation of various
nonbanking subsidiaries.
The Corporation is one of the largest diversified financial services companies
in the United States, operating community banking, corporate banking, real
estate finance, asset-based lending, wealth management, asset management and
global fund services businesses. 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 products and services internationally. At December 31, 2000,
the Corporation's consolidated total assets, deposits and shareholders' equity
were $69.8 billion, $47.7 billion and $6.7 billion, respectively. For
information about discontinued operations, see "Note 2 - Discontinued
Operations" of the "Notes to Consolidated Financial Statements" included on page
68 of the Annual Report to Shareholders and incorporated herein by reference.
Financial and other information by segment is included in "Note 22 - Segment
Reporting" of the "Notes to Consolidated Financial Statements" included on pages
80 and 81 of the Annual Report to Shareholders and incorporated herein by
reference.
REVIEW OF BUSINESSES Information relating to the Corporation's businesses, which
reflect its operating structure during 2000, is set forth under the captions
"Overview" and "Review of Businesses" in the "Financial Review" included on
pages 34 through 43 of the Annual Report to Shareholders, which is incorporated
herein by reference.
SUBSIDIARIES The corporate legal structure currently consists of three
subsidiary banks and over 75 active nonbank subsidiaries. PNC Bank, National
Association ("PNC Bank, N.A."), headquartered in Pittsburgh, Pennsylvania, is
the Corporation's principal bank subsidiary. At December 31, 2000, PNC Bank,
N.A. had total consolidated assets representing approximately 90% of the
Corporation's consolidated assets. For additional information on subsidiaries,
see Exhibit 21 to this Form 10-K, which is incorporated herein by reference.
STATISTICAL DISCLOSURE BY BANK HOLDING COMPANIES The following statistical
information is included on the indicated pages of the Annual Report to
Shareholders and is incorporated herein by reference:
Page of
Annual
Report to
Shareholders
- ----------------------------------------------------------------
Average Consolidated Balance Sheet and Net Interest
Analysis 88-89
Analysis of Year-to-Year Changes in Net Interest
Income 87
Book Values of Securities 69
Maturities and Weighted-Average Yield of Securities 70
Loan Types 70
Loan Maturities and Interest Sensitivity 91
Nonaccrual, Past Due and Restructured Loans 49-50 and 71
Potential Problem Loans 50
Summary of Loan Loss Experience 90
Allocation of Allowance for Credit Losses 90
Average Amount and Average Rate Paid on Deposits 88-89
Time Deposits of $100,000 or More 91
Selected Consolidated Financial Data 33
Short-Term Borrowings 91
RISK FACTORS & MANAGEMENT The Corporation is subject to a number of risk factors
including, among others, business and economic conditions, monetary and other
policies, competition, disintermediation, and risk relating to asset management
performance, fund servicing and acquisitions. These factors, and others, could
impact the Corporation's business, financial condition and results of
operations. In the normal course of business, the Corporation assumes various
types of risk, which include, among others, credit risk, interest rate risk,
liquidity risk and risk associated with trading activities and financial
derivatives. PNC has risk management processes designed to provide for risk
identification, measurement and monitoring.
EFFECT OF GOVERNMENTAL, MONETARY AND OTHER POLICIES The activities and results
of operations of bank holding companies and their subsidiaries are affected by
monetary, tax and other policies of the United States government and its
agencies, including the Board of Governors of the Federal Reserve System
("Federal Reserve Board"). An important function of the Federal Reserve Board is
to regulate the national supply of bank credit. The Federal Reserve Board
employs open market operations in U.S. Government securities, changes in the
discount rate on bank borrowings and changes in reserve requirements on bank
deposits to implement its monetary policy objectives. These instruments of
monetary policy are used in varying combinations to influence the overall level
of bank loans, investments and deposits, the interest rates charged on loans and
paid for deposits, the price of the dollar in foreign exchange markets and the
level of inflation. It is not possible to predict the nature or timing of future
changes in monetary, tax and other policies or the effect that they may have on
the Corporation's activities and results of operations.
3
<PAGE> 4
IMPACT OF INFLATION The assets and liabilities of the Corporation are primarily
monetary in nature. Accordingly, future changes in prices do not affect the
obligations to pay or receive fixed and determinable amounts of money. During
periods of inflation, monetary assets lose value in terms of purchasing power
and monetary liabilities have corresponding purchasing power gains. The concept
of purchasing power, however, is not an adequate indicator of the effect of
inflation on banks because it does not take into account changes in interest
rates, which are an important determinant of the Corporation's earnings. A
discussion of interest rate risk is set forth under the caption "Interest Rate
Risk" in the "Risk Management" section of the "Financial Review" included on
pages 51 and 52 of the Annual Report to Shareholders, and is incorporated herein
by reference.
SUPERVISION AND REGULATION The Corporation and its subsidiaries are subject to
numerous governmental regulations, some of which are highlighted below and in
"Note 17 - Regulatory Matters" of the "Notes to Consolidated Financial
Statements" included on pages 74 and 75 of the Annual Report to Shareholders
("Note 17 - Regulatory Matters"), which is incorporated herein by reference.
These regulations cover, among other things, permissible activities and
investments and dividend limitations on the Corporation and its subsidiaries,
and consumer-related protections for loan, deposit, brokerage, fiduciary and
mutual fund and other customers.
As a bank holding company and, as discussed below, a "financial holding
company," the Corporation is subject to supervision and regular inspection by
the Federal Reserve Board. The Federal Reserve Board's prior approval is
required whenever the Corporation proposes to acquire all or substantially all
of the assets of any bank, to acquire direct or indirect ownership or control of
more than 5% of the voting shares of any bank, or to merge or consolidate with
any other bank holding company. When reviewing bank acquisition applications for
approval, the Federal Reserve Board considers, among other things, each
subsidiary bank's record in meeting the credit needs of the communities it
serves in accordance with the Community Reinvestment Act of 1977, as amended
("CRA"). At December 31, 2000, two of the Corporation's bank subsidiaries, PNC
Bank, N.A., and PNC Bank, Delaware, were rated "outstanding" with respect to
CRA; its other bank subsidiary was rated "satisfactory."
The Gramm-Leach-Bliley Act ("GLB Act"), which was enacted on November 12, 1999,
and portions of which became effective on March 11, 2000, permits a qualifying
bank holding company to become a financial holding company and thereby to
affiliate with financial companies engaging in a broader range of activities
than had previously been permitted for a bank holding company. Permitted
affiliates include securities underwriters and dealers, insurance companies and
companies engaged in other activities that are declared by the Federal Reserve
Board, in cooperation with the Treasury Department, to be "financial in nature
or incidental thereto" or are declared by the Federal Reserve Board unilaterally
to be "complementary" to financial activities. A bank holding company may elect
to become a financial holding company if each of its subsidiary banks is "well
capitalized," is "well managed," and has at least a "satisfactory" CRA rating.
PNC became a financial holding company as of March 13, 2000.
The Federal Reserve Board is the umbrella supervisor of a financial holding
company. The GLB Act requires the Federal Reserve Board to defer to the actions
and requirements of the "functional" regulators of subsidiary broker-dealers,
investment managers, investment companies, insurance underwriters and brokers,
banks and other regulated institutions. Thus, the various state and federal
regulators of a financial holding company's subsidiaries retain their
jurisdiction and authority over such operating entities. As the umbrella
supervisor, however, the Federal Reserve Board has the potential to affect the
operations and activities of a financial holding company's subsidiaries through
its authority over the financial holding company parent. In addition, the
Federal Reserve Board retains back-up regulatory authority over functionally
regulated subsidiaries, such as broker-dealers and banks, to intervene directly
in the affairs of the subsidiaries for specific reasons.
The Corporation's subsidiary banks and their subsidiaries are subject to
supervision and examination by applicable federal and state banking agencies,
including such federal agencies as the Office of the Comptroller of the Currency
("OCC") with respect to PNC Bank, N.A. and PNC Advisors, N.A., and the Federal
Deposit Insurance Corporation ("FDIC") with respect to PNC Bank, Delaware. One
aspect of this regulation is that the Corporation's subsidiary banks are subject
to various federal and state restrictions on their ability to pay dividends to
PNC Bancorp, Inc., the parent of the subsidiary banks, which in turn may affect
the ability of PNC Bancorp, Inc. to pay dividends to the Corporation. These
dividends constitute the Corporation's principal source of income. Without
regulatory approval, the amount available for dividend payments to PNC Bancorp,
Inc. by all bank subsidiaries was $634 million at December 31, 2000. The
Corporation's subsidiary banks are also subject to federal laws limiting
extensions of credit to their parent holding company and nonbank affiliates as
discussed in "Note 17 - Regulatory Matters."
Under Federal Reserve Board policy, a bank holding company is expected to act as
a source of financial strength to each of its subsidiary banks and to commit
resources to support each such bank. Consistent with the "source of strength"
policy for subsidiary banks, the Federal Reserve Board has stated that, as a
matter of prudent banking, a bank holding company generally should not maintain
a rate of cash dividends unless its net income available to common shareholders
has been sufficient to fully fund the dividends and the prospective rate of
earnings retention appears to be consistent with the corporation's capital
needs, asset quality and overall financial condition.
4
<PAGE> 5
Subsidiary banks are also limited by law and regulation in the scope of
permitted activities and investments. Subsidiary banks and their operating
subsidiaries may engage in any activities that are determined by the OCC to be
part of or incidental to the business of banking. The GLB Act, however, permits
a national bank, such as PNC Bank, N.A., to engage in expanded activities
through the formation of a "financial subsidiary." PNC Bank, N.A. has filed a
financial subsidiary certification with the OCC and may thus engage through a
financial subsidiary in any activity that is financial in nature or incidental
to a financial activity, except for insurance underwriting, insurance
investments, real estate investment or development, or merchant banking. In
order to qualify to establish or acquire a financial subsidiary, PNC Bank, N.A.
and each of its depository institution affiliates must be "well capitalized" and
"well managed," and may not have a less than "satisfactory" CRA rating. In
addition, the total assets of all financial subsidiaries of a national bank may
not exceed the lesser of $50 billion or 45% of the parent bank's total assets. A
national bank that is one of the largest 50 insured banks in the United States,
such as PNC Bank, N.A., must also have issued debt with a certain rating. In
addition to calculating its risk-based capital on a GAAP basis, a national bank
with one or more financial subsidiaries must also be well capitalized after
excluding from its assets and equity all equity investments, including retained
earnings, in a financial subsidiary, and the assets of the financial subsidiary
from the bank's consolidated assets. Any published financial statement for a
national bank with a financial subsidiary must provide risk-based capital
information both in accordance with GAAP and as described above. The bank must
also have policies and procedures to assess financial subsidiary risk and
protect the bank from such risks and potential liabilities.
A financial holding company or national bank engaging in activities permitted
under the GLB Act can be subject to various corrective actions by the Federal
Reserve Board or OCC, respectively, if the "well capitalized" or "well managed"
requirements noted above are not met. These corrective actions could include
requiring divestiture of the activities conducted in reliance on the GLB Act. In
addition, if the CRA rating requirements discussed above are not met, the
financial holding company or national bank would not be permitted to engage in
new activities, or to make new investments, in reliance on the GLB Act.
The federal banking agencies possess broad powers to take corrective action as
deemed appropriate for an insured depository institution and its holding
company. The extent of these powers depends upon whether the institution in
question is considered "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." Generally, as an institution is deemed to be less well
capitalized, the scope and severity of the agencies' powers increase, ultimately
permitting the agency to appoint a receiver for the institution. Business
activities may also be influenced by an institution's capital classification.
For instance, only a "well capitalized" depository institution may accept
brokered deposits without prior regulatory approval and an "adequately
capitalized" depository institution may accept brokered deposits only with prior
regulatory approval. At December 31, 2000, all of the Corporation's subsidiary
banks exceeded the required ratios for classification as "well capitalized."
Additional discussion of capital adequacy requirements is set forth under the
caption "Capital" in the "Financial Review" on page 47 of the Annual Report to
Shareholders, which is incorporated herein by reference.
All of the Corporation's subsidiary banks are insured by the FDIC and subject to
premium assessments. The FDIC assessment is based upon the institution's
relative risk as measured by regulatory capital ratios and certain other
factors. Under current regulations, the Corporation's subsidiary banks are not
assessed a premium on deposits insured by either the Bank Insurance Fund or the
Savings Association Insurance Fund. However, insured depository institutions
continue to pay premiums based upon deposit levels to service debt issued by a
governmental entity.
The Corporation's subsidiary banks are subject to "cross-guarantee" provisions
under federal law that provide that if one of these banks fails or requires FDIC
assistance, the FDIC may assess a "commonly-controlled" bank for the estimated
losses suffered by the FDIC. Such liability could have a material adverse effect
on the financial condition of any assessed bank and the Corporation. While the
FDIC's claim is junior to the claims of depositors, holders of secured
liabilities, general creditors and subordinated creditors, it is superior to the
claims of shareholders and affiliates, such as the Corporation.
The Corporation's subsidiaries are subject to regulatory restrictions imposed by
the Federal Reserve Board and other federal and state agencies. The
Corporation's registered broker-dealer subsidiaries are regulated by the
Securities and Exchange Commission ("SEC") and either by the OCC or the Federal
Reserve Board. They are also subject to rules and regulations promulgated by the
National Association of Securities Dealers, Inc., among others. Two subsidiaries
are registered as commodity pool operators with the Commodity Futures Trading
Commission and the National Futures Association, and are subject to regulation
by them. Several subsidiaries that are registered investment advisers are
subject to regulation by the SEC and other agencies. Several subsidiaries also
provide investment advisory and other services to registered investment
companies and thus are subject to certain obligations under the Investment
Company Act of 1940, as amended.
5
<PAGE> 6
The rules governing the regulation of financial services institutions and their
holding companies are very detailed and technical. Accordingly, the above
discussion is general in nature and does not purport to be complete or to
describe all of the laws and regulations that apply to the Corporation and its
subsidiaries.
COMPETITION The Corporation and its subsidiaries are subject to intense
competition from various financial institutions and from "nonbank" entities that
engage in similar activities without being subject to bank regulatory
supervision and restrictions. This is particularly true as the Corporation
expands nationally beyond its primary geographic region, where expansion
requires significant investments to penetrate new markets and respond to
competition, and as the Corporation and other entities expand their activities
pursuant to the GLB Act, as discussed above.
In making loans, the subsidiary banks compete with traditional banking
institutions as well as consumer finance companies, leasing companies and other
nonbank lenders. Loan pricing and credit standards are under competitive
pressure as lenders seek to deploy capital and a broader range of borrowers have
access to capital markets. Traditional deposit activities are subject to pricing
pressures and customer migration as a result of intense competition for consumer
investment dollars. The Corporation's subsidiary banks compete for deposits with
not only other commercial banks, savings banks, savings and loan associations
and credit unions, but also insurance companies and issuers of commercial paper
and other securities, including mutual funds. Various nonbank subsidiaries
engaged in investment banking, private equity and venture capital activities
compete with commercial banks, investment banking firms, merchant banks,
insurance companies, venture capital firms and other investment vehicles. In
providing asset management services, the Corporation's subsidiaries compete with
many large banks and other financial institutions, brokerage firms, mutual fund
complexes, investment management firms, and insurance companies.
The ability to access and use technology is an increasingly important
competitive factor in the financial services industry. Technology is not only
important with respect to delivery of financial services, but in processing
information. Each of the Corporation's businesses consistently must make
technological investments to remain competitive.
EMPLOYEES Average full-time equivalent employees totaled approximately 24,900 in
2000, and were approximately 25,300 in December 2000.
ITEM 2 - PROPERTIES
The executive and administrative offices of the Corporation and PNC Bank, N.A.
are located at One PNC Plaza, Pittsburgh, Pennsylvania. The thirty-story
structure is owned by PNC Bank, N.A. The Corporation and PNC Bank, N.A. occupy
the entire building. In addition, PNC Bank, N.A. owns a thirty-four story
structure adjacent to One PNC Plaza, known as Two PNC Plaza, that houses
additional office space.
The Corporation and its subsidiaries own or lease numerous other premises for
use in conducting business activities. The facilities owned or occupied under
lease by the Corporation's subsidiaries are considered by management to be
adequate.
Additional information pertaining to the Corporation's properties is set forth
in "Note 10 - Premises, Equipment and Leasehold Improvements" of the "Notes to
Consolidated Financial Statements" included on page 72 of the Annual Report to
Shareholders, which is incorporated herein by reference.
ITEM 3 - LEGAL PROCEEDINGS
The information set forth in "Note 25 - Litigation" of the "Notes to
Consolidated Financial Statements" included on page 83 of the Annual Report to
Shareholders is incorporated herein by reference.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None during the fourth quarter of 2000.
6
<PAGE> 7
EXECUTIVE OFFICERS OF THE REGISTRANT Information concerning each executive
officer of the Corporation as of March 9, 2001 is set forth below. Each
executive officer held the position indicated or another executive position
with the same entity or one of its affiliates for the past five years.
Year
Name Age Position with Corporation Employed(1)
- --------------------------------------------------------------------
James E. Rohr 52 President, Chief 1972
Executive Officer and
Director
Walter E. Gregg, Jr. 59 Vice Chairman and Director 1974
Joseph C. Guyaux 50 Executive Vice President 1972
and Group Executive,
Regional Community
Banking
Robert L. Haunschild 51 Senior Vice President and 1990
Chief Financial Officer
Ralph S. Michael III 46 Executive Vice President 1979
and Group Executive,
PNC Advisors and PNC
Capital Markets
Thomas E. Paisley III 53 Senior Vice President and 1972
Chairman, Corporate
Credit Policy Committee
Samuel R. Patterson 42 Controller 1986
Helen P. Pudlin 51 Senior Vice President and 1989
General Counsel
Thomas K. Whitford 45 Executive Vice President 1983
and Group Executive,
Strategic Planning
- --------------------------------------------------------------------
(1) Where applicable, refers to year first employed by predecessor company.
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Corporation's common stock is listed on the New York Stock Exchange and is
traded under the symbol "PNC." At the close of business on February 28, 2001,
there were 56,976 common shareholders of record.
Holders of common stock are entitled to receive dividends when declared by the
Board of Directors out of funds legally available therefor. The Board of
Directors may not pay or set apart dividends on the common stock until dividends
for all past dividend periods on any series of outstanding preferred stock have
been paid or declared and set apart for payment. The Board presently intends to
continue the policy of paying quarterly cash dividends. However, the amount of
any future dividends will depend on earnings, the financial condition of the
Corporation and other factors, including contractual restrictions and applicable
government regulations and policies (such as those relating to the ability of
bank and nonbank subsidiaries to upstream dividends to the parent company). The
Federal Reserve Board has the power to prohibit the Corporation from paying
dividends without its approval. Further discussion concerning dividend
restrictions and restrictions on loans or advances from bank subsidiaries to the
parent company is set forth under the caption "Supervision and Regulation" in
Part I, Item 1 of this Form 10-K, under the caption "Liquidity Risk" in the
"Risk Management" section of the "Financial Review" on page 52 and in "Note 17 -
Regulatory Matters" of the Annual Report to Shareholders, which sections are
incorporated herein by reference.
Additional information relating to the common stock is set forth under the
caption "Common Stock Prices/Dividends Declared" on the inside back cover of the
Annual Report to Shareholders, which is incorporated herein by reference.
ITEM 6 - SELECTED FINANCIAL DATA
The information set forth under the caption "Selected Consolidated Financial
Data" in the "Financial Review" on page 33 and the caption "Average Consolidated
Balance Sheet and Net Interest Analysis" in the "Statistical Information" on
pages 88 and 89 of the Annual Report to Shareholders is incorporated herein by
reference.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The discussion of the Corporation's financial condition and results of
operations set forth under the section "Financial Review" on pages 33 through 58
of the Annual Report to Shareholders is incorporated herein by reference.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information set forth under the caption "Risk Management" in the "Financial
Review" and in "Note 2 - Discontinued Operations" on pages 49 through 55 and 68,
respectively, of the Annual Report to Shareholders is incorporated herein by
reference.
7
<PAGE> 8
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The "Report of Ernst & Young LLP, Independent Auditors," "Consolidated Financial
Statements," "Notes to Consolidated Financial Statements" and "Selected
Quarterly Financial Data" on pages 59, 60 through 63, 64 through 85, and 86,
respectively, of the Annual Report to Shareholders are incorporated herein by
reference.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no reportable events.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors and nominees required by this item is set forth
under the caption "Election of Directors - Information Concerning Nominees" in
the Proxy Statement to be filed for the annual meeting of shareholders to be
held on April 24, 2001 and is incorporated herein by reference.
Information regarding compliance with Section 16(a) of the Securities Exchange
Act of 1934 set forth under the caption "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Proxy Statement to be filed for the annual meeting
of shareholders to be held on April 24, 2001 and is incorporated herein by
reference.
Information regarding executive officers of the Corporation is included in Part
I of this Form 10-K under the caption "Executive Officers of the Registrant."
ITEM 11 - EXECUTIVE COMPENSATION
The information required by this item is set forth under the captions "Election
of Directors - Compensation of Directors" and "Compensation of Executive
Officers," excluding the "Personnel and Compensation Committee Report," in the
Proxy Statement to be filed for the annual meeting of shareholders to be held on
April 24, 2001 and is incorporated herein by reference.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is set forth under the caption "Security
Ownership of Directors, Nominees and Executive Officers" in the Proxy Statement
to be filed for the annual meeting of shareholders to be held on April 24, 2001
and is incorporated herein by reference.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is set forth under the caption
"Transactions Involving Directors, Nominees and Executive Officers" in the Proxy
Statement to be filed for the annual meeting of shareholders to be held on April
24, 2001 and is incorporated herein by reference.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
FINANCIAL STATEMENTS The following report of independent auditors and
consolidated financial information of the Corporation included in the Annual
Report to Shareholders are incorporated herein by reference.
Page of
Annual
Report to
Financial Statements Shareholders
- ----------------------------------------------------------------
Report of Ernst & Young LLP, Independent Auditors 59
Consolidated Statement of Income for the three
years ended December 31, 2000 60
Consolidated Balance Sheet as of December 31, 2000
and 1999 61
Consolidated Statement of Shareholders' Equity
for the three years ended December 31, 2000 62
Consolidated Statement of Cash Flows for the
three years ended December 31, 2000 63
Notes to Consolidated Financial Statements 64-85
Selected Quarterly Financial Data 86
- ----------------------------------------------------------------
No financial statement schedules are being filed.
REPORTS ON FORM 8-K No reports on Form 8-K were filed during the quarter ended
December 31, 2000.
EXHIBITS The exhibits listed on the Exhibit Index on pages E-1 and E-2 of this
Form 10-K are filed herewith or are incorporated herein by reference.
8
<PAGE> 9
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
THE PNC FINANCIAL SERVICES GROUP, INC.
(Registrant)
By: /s/ Robert L. Haunschild
- ----------------------------------------------------
Robert L. Haunschild, Senior Vice President
and Chief Financial Officer
March 12, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of The PNC Financial
Services Group, Inc. and in the capacities indicated on March 12, 2001.
<TABLE>
<CAPTION>
Signature Capacities
- ---------------------------------------------------- ----------------------------------------------------
<S> <C>
/s/ James E. Rohr President, Chief Executive Officer and Director
- ---------------------------------------------------- (Principal Executive Officer)
James E. Rohr
/s/ Robert L. Haunschild Senior Vice President and Chief Financial
- ---------------------------------------------------- Officer (Principal Financial Officer)
Robert L. Haunschild
/s/ Samuel R. Patterson Controller
- ---------------------------------------------------- (Principal Accounting Officer)
Samuel R. Patterson
* Paul W. Chellgren; Robert N. Clay; George A. Directors
Davidson, Jr.; David F. Girard-diCarlo; Walter E.
Gregg, Jr.; William R. Johnson; Bruce C. Lindsay;
W. Craig McClelland; Thomas H. O'Brien; Jane G.
Pepper; Jackson H. Randolph; Roderic H. Ross;
Lorene K. Steffes; Thomas J. Usher; Milton A.
Washington; and Helge H. Wehmeier
*By: /s/ Thomas R. Moore
------------------------------------------
Thomas R. Moore, Attorney-in-Fact,
pursuant to Powers of Attorney filed
herewith
</TABLE>
9
<PAGE> 10
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description Method of Filing +
- ------------ -------------------------------------------------------------------- ------------------------------------------------
<S> <C> <C>
3.1 Articles of Incorporation of the Corporation, as amended and Incorporated herein by reference to Exhibit 3.1
restated as of May 15, 2000. of the Corporation's Quarterly Report on
Form 10-Q for the quarter ended March 31, 2000.
3.2 By-Laws of the Corporation, as amended. Incorporated herein by reference to Exhibit 3.2
of the Corporation's Quarterly Report on
Form 10-Q for the quarter ended March 31, 2000.
4.1 There are no instruments with respect to long-term debt of the
Corporation and its subsidiaries that involve securities
authorized under the instrument in an amount exceeding 10
percent of the total assets of the Corporation and its
subsidiaries on a consolidated basis. The Corporation agrees to
provide the SEC with a copy of instruments defining the rights
of holders of long-term debt of the Corporation and its
subsidiaries on request.
4.2 Terms of $1.80 Cumulative Convertible Preferred Stock, Series A. Incorporated herein by reference to Exhibit 3.1
of the Corporation's Quarterly Report on
Form 10-Q for the quarter ended March 31, 2000.
4.3 Terms of $1.80 Cumulative Convertible Preferred Stock, Series B. Incorporated herein by reference to Exhibit 3.1
of the Corporation's Quarterly Report on
Form 10-Q for the quarter ended March 31, 2000.
4.4 Terms of $1.60 Cumulative Convertible Preferred Stock, Series C. Incorporated herein by reference to Exhibit 3.1
of the Corporation's Quarterly Report on
Form 10-Q for the quarter ended March 31, 2000.
4.5 Terms of $1.80 Cumulative Convertible Preferred Stock, Series D. Incorporated herein by reference to Exhibit 3.1
of the Corporation's Quarterly Report on
Form 10-Q for the quarter ended March 31, 2000.
4.6 Terms of Fixed/Adjustable Rate Noncumulative Preferred Stock, Incorporated herein by reference to Exhibit 3.1
Series F. of the Corporation's Quarterly Report on
Form 10-Q for the quarter ended March 31, 2000.
4.7 Terms of Series G Junior Participating Preferred Stock. Incorporated herein by reference to Exhibit 3.1
of the Corporation's Quarterly Report on
Form 10-Q for the quarter ended March 31, 2000.
4.8 Rights Agreement between the Corporation and Chase Manhattan Incorporated herein by reference to Exhibit 1
Bank dated May 15, 2000 to the Corporation's Report on Form 8-A filed
May 23, 2000.
10.1 The Corporation's Supplemental Executive Retirement Plan, as Incorporated herein by reference to Exhibit 10.1
amended as of January 1, 1999. of the Corporation's Annual Report on Form
10-K for the year ended December 31, 1999
("1999 Form 10-K"). *
10.2 The Corporation's ERISA Excess Pension Plan, as amended as of Incorporated herein by reference to Exhibit 10.2
January 1, 1999. of the Corporation's 1999 Form 10-K. *
10.3 The Corporation's Key Executive Equity Program, as amended as of Incorporated herein by reference to Exhibit 10.3
January 1, 1999. of the Corporation's 1999 Form 10-K. *
10.4 The Corporation's Supplemental Incentive Savings Plan, as amended Incorporated herein by reference to Exhibit 10.4
as of January 1, 1999. of the Corporation's 1999 Form 10-K. *
</TABLE>
E-1
<PAGE> 11
<TABLE>
<S> <C> <C>
10.5 The Corporation's 1997 Long-Term Incentive Award Plan, as amended. Incorporated herein by reference to Exhibit 10.5
of the Corporation's Quarterly Report on Form
10-Q for the quarter ended March 31, 2000. *
10.6 The Corporation's 1996 Executive Incentive Award Plan. Incorporated herein by reference to Exhibit 10.2
of the Corporation's Quarterly Report on Form
10-Q for the quarter ended September 30, 1996. *
10.7 PNC Bank Corp. and Affiliates Deferred Compensation Plan, as Incorporated herein by reference to Exhibit 10.11
amended as of January 1, 1999. of the Corporation's 1999 Form 10-K. *
10.8 Form of Change in Control Severance Agreement. Incorporated herein by reference to Exhibit 10.17
of the Corporation's Annual Report on
Form 10-K for the year ended December 31, 1996
("1996 Form 10-K"). *
10.9 Forms of Amendment to Change in Control Severance Agreements. Filed herewith. *
10.10 1992 Director Share Incentive Plan. Incorporated herein by reference to Exhibit
10.13 of the Corporation's 1999 Form 10-K. *
10.11 The Corporation's Directors Deferred Compensation Plan. Incorporated by reference to Exhibit 10.1 of
the Corporation's Quarterly Report on Form 10-Q
for the Quarter ended September 30, 1996. *
10.12 The Corporation's Outside Directors Deferred Stock Unit Plan Incorporated herein by reference to Exhibit 10.15
of the Corporation's 1999 Form 10-K. *
10.13 Amended and Restated Trust Agreement between the Corporation, as Incorporated herein by reference to Exhibit 10.18
Settlor, and Hershey Trust Company, as successor Trustee to of the Corporation's 1996 Form 10-K. *
NationsBank, N.A., Trustee.
10.14 Consulting arrangement between the Corporation and Thomas H. Incorporated herein by reference to Exhibit 10.17
O'Brien of the Corporation's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2000.
12.1 Computation of Ratio of Earnings to Fixed Charges. Filed herewith.
12.2 Computation of Ratio of Earnings to Fixed Charges and Preferred Filed herewith.
Dividends.
13 Excerpts from the Corporation's Annual Report to Shareholders for Filed herewith.
the year ended December 31, 2000. Such Annual Report, except
for the portions thereof that are expressly incorporated by
reference herein, is furnished for information of the SEC only
and is not deemed to be "filed" as part of this Form 10-K.
21 Schedule of Certain Subsidiaries of the Corporation. Filed herewith.
23 Consent of Ernst & Young LLP, independent auditors for the Filed herewith.
Corporation.
24 Powers of Attorney. Filed herewith.
</TABLE>
- ----------------------------------------------------------------------
+ Incorporated document references to filings by the Corporation are to SEC File
No. 1-9718.
* Denotes management contract or compensatory plan.
E-2
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.9
<SEQUENCE>2
<FILENAME>j8606301ex10-9.txt
<DESCRIPTION>FORMS OF AMENDMENT TO CHANGE IN CONTROL SEVERANCE
<TEXT>
<PAGE> 1
EXHIBIT 10.9
FORMS OF AMENDMENT TO CHANGE IN CONTROL SEVERANCE AGREEMENTS
FORM 1
This Amendment to Change in Control Severance Agreement (this
"Amendment") dated as of November 15, 2000 is made by and between The
PNC Financial Services Group, Inc. (formerly known as PNC Bank Corp.),
a Pennsylvania corporation (the "Company"), and ________________ (the
"Executive").
WHEREAS, the Company and the Executive have previously entered
into a Change in Control Severance Agreement dated as of ____________
(the "Agreement"); and
WHEREAS, the Board of Directors of the Company has determined
that it is in the best interests of the Company and its shareholders to
amend the Agreement to (a) reflect certain changes that have been made
to the Company's employee benefit plans and the personnel
classifications applicable to the Company's executives, (b) provide for
the enhancement, under certain circumstances, of certain pension-based
benefits that become payable to the Executive under the Agreement in
the event of a qualifying termination of employment, and (c) revise the
definition of "Classification Factor" and make certain clarifying
changes; and
WHEREAS, Section 7.7 of the Agreement authorizes its
modification in a writing signed by both the Executive and a designated
officer of the Company;
NOW THEREFORE, in consideration of the premises and the mutual
covenants herein contained and intending to be legally bound hereby,
the Company and the Executive hereby amend the Agreement as follows:
1. Defined Terms. The definitions of capitalized terms used in
this Amendment shall be the same as are set forth in the Agreement,
except as herein amended.
2. Term of Agreement. Effective as of November 15, 2000,
Section 2(b) of the Agreement is amended by replacing the phrase "SEG
6" with the phrase "Corporate Executive Group Level or equivalent
successor classification.".
3. Bonus. Effective as of November 15, 2000, Section
5.2(b)(iii) of the Agreement is amended in its entirety to provide
as follows:
"(iii) General. Any payment made to the Executive under this Section
5.2(b) shall be deemed to be a payment made in fulfillment of the
Company's then existing or future annual bonus obligations (whether
payable in cash or in Company stock), if any, to the Executive under
any Company annual incentive compensation plan or program with respect
to such fiscal years, including any portion of such bonus payable in
the form of Company stock."
<PAGE> 2
4. Pension Benefits.Effective as of July 6, 2000, Section
5.2(e) of the Agreement is amended in its entirety to provide as
follows:
"(e) Pension Benefits.
(i) Pension Plan Benefits. The pension benefits accrued by the
Executive under the Pension Plan, the Excess Plan, and the SERP (the
"Company Pension Plans") shall be paid to the Executive in accordance
with the terms of such plans.
(ii) Benefits Period Pension Accruals. In addition to amounts
payable to the Executive pursuant to the Company Pension Plans, the
Company shall pay to the Executive a lump sum amount, in cash, equal to
the discounted present value of the difference between (1) the Adjusted
Lump Sum Amount, and (2) the Date of Termination Lump Sum Amount. Such
discounted present value shall be calculated using an interest rate
equal to the Applicable Interest Rate in effect under the Pension Plan
as of the Date of Termination. For purposes of this Section 5.2(e):
"Adjusted Lump Sum Amount" means the total amount that would be
distributed to the Executive in the form of lump sum payments under the
Pension Plan and the Excess Plan assuming that (A) the Executive (I)
remained employed (after the Date of Termination) for the Benefits
Period, (II) was compensated during the Benefits Period at the
Executive's Annual Base Salary and Annual Bonus, (III) received no
prior distributions under the Pension Plan and the Excess Plan, (IV)
was fully vested under the Pension Plan and the Excess Plan, and (V)
elected to receive his accrued benefits under the Pension Plan and the
Excess Plan in the form of a lump sum distribution payable as of the
last day of the Benefits Period; (B) the Applicable Interest Rate for
purposes of determining the lump sum amounts to be distributed under
the Pension Plan and the Excess Plan as of the last day of the Benefits
Period is the Applicable Interest Rate in effect for purposes of the
Pension Plan and the Excess Plan as of the Date of Termination; and (C)
the Interest Credits in effect for each calendar quarter during the
Benefits Period are determined based on the Applicable Interest Rate
for purposes of the Pension Plan and the Excess Plan as of the Date of
Termination; and "Date of Termination Lump Sum Amount" means the total
amount that would be distributed to the Executive in the form of lump
sum payments from the Pension Plan and the Excess Plan assuming that
the Executive elected to receive the distribution of his accrued
benefits under the Pension Plan and the Excess Plan in the form of lump
sum distributions payable as of the Date of Termination.
(iii) Benefits Period SERP Accruals. In addition to amounts
payable to the Executive pursuant to Section 5.2(e)(ii) hereof and the
Company Pension Plans, the Company shall pay to the Executive a lump
sum amount, in cash, equal to the actuarial equivalent present value of
the additional pension benefits that the Executive would have accrued
under the SERP assuming that the Executive remained employed (after the
Date of Termination) for the Benefits Period, was compensated during
such period at the Executive's Annual Base Salary and Annual Bonus, and
was fully vested under the Company Pension Plans. Such actuarial
equivalent present value amount shall be calculated (1) based on the
pension benefits that would be payable to the Executive as a 180 month
annuity under the SERP commencing as of the last day of the Benefits
Period; and (2) using the same methods and assumptions used under the
SERP in determining the lump sum value of the Executive's accrued
benefit under the SERP as of the Date of Termination.
(iv) Increased Pension Benefits. If the Executive has attained
the age of 50 but has not yet attained the age of 59 on the Date of
Termination, all benefits payable to the Executive under Sections
5.2(e)(i), 5.2(e)(ii), and 5.2(e)(iii) shall be increased by a
percentage factor (the "Pension Increase Factor") determined by
reference to the age the Executive will have attained on the last day
of the Benefits Period (determined assuming the Executive survives to
such date) as set forth in Annex A to this Amendment. The Company shall
pay such increased benefits in a lump sum, in cash, at the time set
forth in Section 5.4.
(v) No Adverse Affect. The determinations made pursuant to
Sections 5.2(e)(ii), (iii) and (iv) shall be made without giving effect
to any amendments made to the Company Pension Plans during the Coverage
Period that adversely affect in any manner the amount of pension
benefits payable to the Executive under the Company Pension Plans."
<PAGE> 3
5. Timing of Payments. Effective as of November 15, 2000, the
first sentence of Section 5.4 of the Agreement is amended to add
"Section 5.2(e)(i)" after the reference to "Section 5.2(c)" in such
sentence.
6. Name Change. Effective July 6, 2000, all references in the
Agreement to "PNC Bank Corp." are amended to provide "The PNC Financial
Services Group, Inc." to reflect the change in the Company's name.
7. Classification Factor. Effective as of November 15, 2000,
Section 8.10 of the Agreement is amended to provide in its entirety as
follows:
"8.10 "Classification Factor" shall mean three (3)."
IN WITNESS WHEREOF, the Company has caused this Amendment to
be executed by its officer, thereunto duly authorized, and the
Executive has executed this Amendment, all as of the day and year first
above written.
THE PNC FINANCIAL SERVICES
GROUP, INC.
By: _____________________________
[Name]
[Title]
By: _____________________________
[Name of Executive]
<PAGE> 4
ANNEX A TO FORM 1
The following table sets forth the Pension Increase Factors referred to
in Section 5.2(e) (iv) for increasing pension benefits when the
Executive's attained age at the end of the Benefits Period falls
between 52 and 62. For purposes of this Annex A and Section 5.2(e)(iv),
the Pension Increase Factor is interpolated to reflect the Executive's
age on the last day of the Benefits Period rounded to the nearest
month.
AGE AT END OF BENEFITS PERIOD PENSION INCREASE FACTOR
61 5%
60 10%
59 15%
58 20%
57 25%
56 20%
55 15%
54 10%
53 5%
52 0%
FORM 2
This Amendment to Change in Control Severance Agreement (this
"Amendment") dated as of November 15, 2000, is made by and between The
PNC Financial Services Group, Inc. (formerly known as PNC Bank Corp.),
a Pennsylvania corporation (the "Company"), and _______________ (the
"Executive").
WHEREAS, the Company and the Executive have previously entered
into a Change in Control Severance Agreement dated as of ____________
(the "Agreement"); and
WHEREAS, the Board of Directors of the Company has determined
that it is in the best interests of the Company and its shareholders to
amend the Agreement to (a) reflect certain changes that have been made
to the Company's employee benefit plans and the personnel
classifications applicable to the Company's executives, (b) provide for
the enhancement, under certain circumstances, of certain pension-based
benefits that become payable to the Executive under the Agreement in
the event of a qualifying termination of employment and (c) revise the
definition of "Classification Factor" and make certain clarifying
changes; and
WHEREAS, Section 7.7 of the Agreement authorizes its
modification in a writing signed by both the Executive and a designated
officer of the Company;
NOW THEREFORE, in consideration of the premises and the mutual
covenants herein contained and intending to be legally bound hereby,
the Company and the Executive hereby amend the Agreement as follows:
1. Defined Terms. The definitions of capitalized terms used in
this Amendment shall be the same as are set forth in the Agreement,
except as herein amended.
<PAGE> 5
2. Term of Agreement. Effective as of November 15, 2000,
Section 2(b) of the Agreement is amended by replacing the phrase "SEG
6" with the phrase "Corporate Executive Group Level or equivalent
successor classification.".
3. Bonus. Effective as of November 15, 2000, Section
5.2(b)(iii) of the Agreement is amended in its entirety to provide as
follows:
"(iii) General. Any payment made to the Executive under this Section
5.2(b) shall be deemed to be a payment made in fulfillment of the
Company's then existing or future annual bonus obligations (whether
payable in cash or in Company stock), if any, to the Executive under
any Company annual incentive compensation plan or program with respect
to such fiscal years, including any portion of such bonus payable in
the form of Company stock."
4. Pension Benefits. Effective as of July 6, 2000, Section
5.2(e) of the Agreement is amended in its entirety to provide as
follows:
"(e) Pension Benefits.
(i) Pension Plan Benefits. The pension benefits accrued by the
Executive under the Pension Plan, the Excess Plan, and the SERP (the
"Company Pension Plans") shall be paid to the Executive in accordance
with the terms of such plans.
(ii) Benefits Period Pension Accruals. In addition to amounts
payable to the Executive pursuant to the Company Pension Plans, the
Company shall pay to the Executive a lump sum amount, in cash, equal to
the discounted present value of the difference between (1) the Adjusted
Lump Sum Amount, and (2) the Date of Termination Lump Sum Amount. Such
discounted present value shall be calculated using an interest rate
equal to the Applicable Interest Rate in effect under the Pension Plan
as of the Date of Termination. For purposes of this Section 5.2(e):
"Adjusted Lump Sum Amount" means the total amount that would be
distributed to the Executive in the form of lump sum payments under the
Company Pension Plans assuming that (A) the Executive (I) remained
employed (after the Date of Termination) for the Benefits Period, (II)
was compensated during the Benefits Period at the Executive's Annual
Base Salary and Annual Bonus, (III) received no prior distributions
under the Company Pension Plans, (IV) was fully vested under the
Company Pension Plans, and (V) elected to receive his accrued benefits
under the Company Pension Plans in the form of a lump sum distribution
payable as of the last day of the Benefits Period; (B) the Applicable
Interest Rate for purposes of determining the lump sum amounts to be
distributed under the Company Pension Plans as of the last day of the
Benefits Period is the Applicable Interest Rate in effect for purposes
of the Company Pension Plans as of the Date of Termination; and (C) the
Interest Credits in effect for each calendar quarter during the
Benefits Period are determined based on the Applicable Interest Rate
for purposes of the Company Pension Plans as of the Date of
Termination; and "Date of Termination Lump Sum Amount" means the total
amount that would be distributed to the Executive in the form of lump
sum payments from the Company Pension Plans assuming that the Executive
elected to receive the distribution of his accrued benefits under the
Company Pension Plans in the form of lump sum distributions payable as
of the Date of Termination.
(iii) Increased Pension Benefits. If the Executive has
attained the age of 50 but has not yet attained the age of 59 on the
Date of Termination, all benefits payable to the Executive under
Section 5.2(e)(i) and Section 5.2(e)(ii) shall be increased by a
percentage factor (the "Pension Increase Factor") determined by
reference to the age the Executive will have attained on the last day
of the Benefits Period (determined assuming the Executive survives to
such date) as set forth in Annex A to this Amendment. The Company shall
pay such increased benefits in a lump sum, in cash, at the time set
forth in Section 5.4.
<PAGE> 6
(iv) No Adverse Affect. The determinations made pursuant to
Sections 5.2(e)(ii) and (iii) shall be made without giving effect to
any amendments made to the Company Pension Plans during the Coverage
Period that adversely affect in any manner the amount of pension
benefits payable to the Executive under the Company Pension Plans."
5. Timing of Payments. Effective as of November 15, 2000, the
first sentence of Section 5.4 of the Agreement is amended to add
"Section 5.2(e)(i)" after the reference to "Section 5.2(c)" in such
sentence.
6. Name Change. Effective as of July 6, 2000, all references
in the Agreement to "PNC Bank Corp." are amended to provide "The PNC
Financial Services Group, Inc." to reflect the change in the Company's
name.
7. Classification Factor. Section 8.10 of the Agreement is
amended to provide in its entirety as follows:
"8.10 "Classification Factor" shall mean three (3)."
IN WITNESS WHEREOF, the Company has caused this Amendment to
be executed by its officer, thereunto duly authorized, and the
Executive has executed this Amendment, all as of the day and year first
above written.
THE PNC FINANCIAL SERVICES
GROUP, INC.
By: _____________________________
[Name]
[Title]
By: _____________________________
[Name of Executive]
<PAGE> 7
ANNEX A TO FORM 2
The following table sets forth the Pension Increase Factors referred to
in Section 5.2(e) (iii) for increasing pension benefits when the
Executive's attained age at the end of the Benefits Period falls
between 52 and 62. For purposes of this Annex A and Section
5.2(e)(iii), the Pension Increase Factor is interpolated to reflect the
Executive's age on the last day of the Benefits Period rounded to the
nearest month.
Age at end of Benefits Period Pension Increase Factor
61 5%
60 10%
59 15%
58 20%
57 25%
56 20%
55 15%
54 10%
53 5%
52 0%
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-12.1
<SEQUENCE>3
<FILENAME>j8606301ex12-1.txt
<DESCRIPTION>COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TEXT>
<PAGE> 1
THE PNC FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES EXHIBIT 12.1
COMPUTATION OF RATIO OF EARNINGS
TO FIXED CHARGES
<TABLE>
<CAPTION>
Year ended December 31
Dollars in millions 2000 1999 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
EARNINGS
Income from continuing operations before taxes $1,848 $1,788 $1,651 $1,595 $1,526
Fixed charges excluding interest on deposits 1,033 980 1,159 1,080 1,014
--------------------------------------------------------------
Subtotal 2,881 2,768 2,810 2,675 2,540
Interest on deposits 1,653 1,369 1,471 1,457 1,428
--------------------------------------------------------------
Total $4,534 $4,137 $4,281 $4,132 $3,968
==============================================================
FIXED CHARGES
Interest on borrowed funds $915 $870 $1,065 $1,010 $985
Interest component of rentals 50 44 33 26 27
Amortization of notes and debentures 1 1 1 1 1
Distributions on Mandatorily Redeemable Capital
Securities of Subsidiary Trusts 67 65 60 43 1
--------------------------------------------------------------
Subtotal 1,033 980 1,159 1,080 1,014
Interest on deposits 1,653 1,369 1,471 1,457 1,428
--------------------------------------------------------------
Total $2,686 $2,349 $2,630 $2,537 $2,442
==============================================================
RATIO OF EARNINGS TO FIXED CHARGES
Excluding interest on deposits 2.79x 2.82x 2.42x 2.48x 2.50x
Including interest on deposits 1.69 1.76 1.63 1.63 1.62
================================================================================================================================
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-12.2
<SEQUENCE>4
<FILENAME>j8606301ex12-2.txt
<DESCRIPTION>EXHIBIT 12.2
<TEXT>
<PAGE> 1
THE PNC FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES EXHIBIT 12.2
COMPUTATION OF RATIO OF EARNINGS
TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
<TABLE>
<CAPTION>
Year ended December 31
Dollars in millions 2000 1999 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
EARNINGS
Income from continuing operations before taxes $1,848 $1,788 $1,651 $1,595 $1,526
Fixed charges and preferred stock dividends excluding interest
on deposits 1,063 1,010 1,188 1,110 1,022
----------------------------------------------------------
Subtotal 2,911 2,798 2,839 2,705 2,548
Interest on deposits 1,653 1,369 1,471 1,457 1,428
----------------------------------------------------------
Total $4,564 $4,167 $4,310 $4,162 $3,976
==========================================================
FIXED CHARGES
Interest on borrowed funds $915 $870 $1,065 $1,010 $985
Interest component of rentals 50 44 33 26 27
Amortization of notes and debentures 1 1 1 1 1
Distributions on Mandatorily Redeemable Capital Securities
of Subsidiary Trusts 67 65 60 43 1
Preferred stock dividend requirements 30 30 29 30 8
----------------------------------------------------------
Subtotal 1,063 1,010 1,188 1,110 1,022
Interest on deposits 1,653 1,369 1,471 1,457 1,428
----------------------------------------------------------
Total $2,716 $2,379 $2,659 $2,567 $2,450
==========================================================
RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK
DIVIDENDS
Excluding interest on deposits 2.74x 2.77x 2.39x 2.44x 2.49x
Including interest on deposits 1.68 1.75 1.62 1.62 1.62
================================================================================================================================
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-13
<SEQUENCE>5
<FILENAME>j8606301ex13.txt
<DESCRIPTION>ANNUAL REPORT TO SHAREHOLDERS
<TEXT>
<PAGE> 1
Exhibit 13
TABLE OF CONTENTS
The PNC Financial Services Group, Inc.
FINANCIAL REVIEW
33 Selected Consolidated Financial Data
34 Overview
35 Review of Businesses
37 Community Banking
38 Corporate Banking
39 PNC Real Estate Finance
40 PNC Business Credit
41 PNC Advisors
42 BlackRock
43 PFPC
44 Consolidated Income Statement Review
46 Consolidated Balance Sheet Review
48 Risk Factors
49 Risk Management
56 1999 Versus 1998
58 Forward-Looking Statements
REPORTS ON CONSOLIDATED FINANCIAL STATEMENTS
59 Management's Responsibility for Financial Reporting
59 Report of Ernst & Young LLP, Independent Auditors
CONSOLIDATED FINANCIAL STATEMENTS
60 Consolidated Statement of Income
61 Consolidated Balance Sheet
62 Consolidated Statement of Shareholders' Equity
63 Consolidated Statement of Cash Flows
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
64 NOTE 1 - Accounting Policies
68 NOTE 2 - Discontinued Operations
68 NOTE 3 - Sale of Subsidiary Stock
69 NOTE 4 - Cash Flows
69 NOTE 5 - Trading Activities
69 NOTE 6 - Securities Available for Sale
70 NOTE 7 - Loans and Commitments to Extend Credit
71 NOTE 8 - Nonperforming Assets
72 NOTE 9 - Allowance for Credit Losses
72 NOTE 10 - Premises, Equipment and Leasehold Improvements
72 NOTE 11 - Goodwill and Other Amortizable Assets
72 NOTE 12 - Securitizations
73 NOTE 13 - Deposits
73 NOTE 14 - Borrowed Funds
73 NOTE 15 - Capital Securities of Subsidiary Trusts
73 NOTE 16 - Shareholders' Equity
74 NOTE 17 - Regulatory Matters
75 NOTE 18 - Financial Derivatives
76 NOTE 19 - Employee Benefit Plans
78 NOTE 20 - Stock-Based Compensation Plans
79 NOTE 21 - Income Taxes
80 NOTE 22 - Segment Reporting
82 NOTE 23 - Earnings Per Share
83 NOTE 24 - Comprehensive Income
83 NOTE 25 - Litigation
83 NOTE 26 - Fair Value of Financial Instruments
84 NOTE 27 - Unused Line of Credit
85 NOTE 28 - Parent Company
STATISTICAL INFORMATION
86 Selected Quarterly Financial Data
87 Analysis of Year-to-Year Changes in Net Interest Income
88 Average Consolidated Balance Sheet and Net Interest Analysis
90 Allowance for Credit Losses
91 Short-Term Borrowings
91 Loan Maturities and Interest Sensitivity
91 Time Deposits of $100,000 or More
| 32
<PAGE> 2
FINANCIAL REVIEW
The PNC Financial Services Group, Inc.
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
Year ended December 31
Dollars in millions, except per share data 2000 1999 1998 1997 1996
==================================================================================================================================
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Interest income ..................................... $4,732 $4,583 $5,024 $4,912 $4,812
Interest expense .................................... 2,568 2,239 2,536 2,467 2,413
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest income ................................. 2,164 2,344 2,488 2,445 2,399
Provision for credit losses ......................... 136 163 225 70
Noninterest income before net securities gains ...... 2,871 2,428 2,070 1,583 1,217
Net securities gains ................................ 20 22 16 40 22
Noninterest expense ................................. 3,071 2,843 2,698 2,403 2,112
- ----------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations before
income taxes ....................................... 1,848 1,788 1,651 1,595 1,526
Income taxes ........................................ 634 586 571 557 535
- ----------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations ................... 1,214 1,202 1,080 1,038 991
Income from discontinued operations ................. 65 62 35 14 1
- ----------------------------------------------------------------------------------------------------------------------------------
Net income .......................................... $1,279 $1,264 $1,115 $1,052 $992
==================================================================================================================================
PER COMMON SHARE DATA
Basic earnings
Continuing operations ............................ $4.12 $3.98 $3.53 $3.29 $2.91
Discontinued operations .......................... .23 .21 .11 .04
Net income ....................................... 4.35 4.19 3.64 3.33 2.91
Diluted earnings
Continuing operations ............................ 4.09 3.94 3.49 3.24 2.88
Discontinued operations .......................... .22 .21 .11 .04
Net income ....................................... 4.31 4.15 3.60 3.28 2.88
Diluted cash earnings (a)
Continuing operations ............................ 4.48 4.21 3.70 3.40 3.02
Discontinued operations .......................... .22 .21 .12 .05 .02
Net income ....................................... 4.70 4.42 3.82 3.45 3.04
Book value .......................................... 21.88 19.23 18.86 16.87 17.13
Cash dividends declared ............................. 1.83 1.68 1.58 1.50 1.42
==================================================================================================================================
BALANCE SHEET HIGHLIGHTS
(at December 31)
Assets .............................................. $69,844 $69,286 $70,754 $71,694 $71,312
Earning assets ...................................... 59,373 60,268 63,547 63,798 64,028
Loans, net of unearned income ....................... 50,601 49,673 57,633 54,235 51,791
Securities available for sale ....................... 5,902 5,960 4,472 8,040 11,512
Loans held for sale ................................. 1,655 3,477 467 18 40
Deposits ............................................ 47,664 45,802 46,150 46,956 45,043
Borrowed funds ...................................... 11,718 14,229 15,939 16,958 18,345
Shareholders' equity ................................ 6,656 5,946 6,043 5,384 5,869
Common shareholders' equity ......................... 6,344 5,633 5,729 5,069 5,553
==================================================================================================================================
SELECTED RATIOS
FROM CONTINUING OPERATIONS
Return on
Average common shareholders' equity .............. 20.52% 21.29% 20.14% 19.74% 17.15%
Average assets ................................... 1.76 1.76 1.55 1.52 1.44
Net interest margin ................................. 3.64 3.86 3.99 3.98 3.85
Noninterest income to total revenue ................. 56.99 50.87 45.35 39.61 33.73
Efficiency (b) ...................................... 56.85 55.54 54.81 55.33 55.87
FROM NET INCOME
Return on
Average common shareholders' equity .............. 21.63 22.41 20.81 20.01 17.18
Average assets ................................... 1.68 1.69 1.49 1.49 1.40
Net interest margin ................................. 3.37 3.68 3.85 3.94 3.83
Noninterest income to total revenue ................. 59.28 52.79 46.97 41.29 35.68
Efficiency (c) ...................................... 55.17 54.82 54.76 56.07 56.95
Dividend payout ..................................... 42.06 40.22 43.43 45.39 48.89
Leverage (d) ........................................ 8.03 6.61 7.28 7.30 7.70
Common shareholders' equity to assets ............... 9.08 8.13 8.10 7.07 7.79
Average common shareholders' equity to average assets 8.44 8.13 7.56 7.57 8.32
==================================================================================================================================
</TABLE>
(a) Excludes amortization of goodwill.
(b) Excludes amortization and distributions on capital securities.
(c) Excludes amortization, distributions on capital securities and residential
mortgage banking risk management activities.
(d) Includes discontinued operations in the years 1996 through 1999.
33 |
<PAGE> 3
This Financial Review should be read in conjunction with The PNC Financial
Services Group, Inc. and subsidiaries' ("Corporation" or "PNC") Consolidated
Financial Statements and Statistical Information included herein. For
information regarding business risks, see the Risk Management and Risk Factors
sections in this Financial Review. Also, see the Forward-Looking Statements
section in this Financial Review for 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 community banking, corporate banking, real
estate finance, asset-based lending, wealth management, asset management and
global fund services businesses. 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 products and services internationally.
Financial services organizations today are challenged to demonstrate that
they can generate sustainable and consistent earnings growth in an increasingly
competitive and volatile environment. PNC has responded to these challenges by
aggressively pursuing strategies designed to achieve more consistent results.
These strategies include repositioning leverage-based businesses and improving
the earnings stream by building a diverse group of higher-valuation businesses.
Increasing contributions from growth businesses, including asset management and
processing and the fee-based segments within PNC's banking franchise, have
strengthened the Corporation's revenue and earnings mix. In addition, the
Corporation seeks to enhance consolidated value by leveraging technology,
information, branding, marketing and financial resources across all businesses.
As a result of these strategies, PNC's financial characteristics have
changed significantly over the past five years. Noninterest income grew 23%
annualized during this time period while net interest income decreased by
approximately $300 million and total assets declined by $3.4 billion.
Noninterest income to total revenue increased from 36% in 1996 to 59% in 2000.
The loan to deposit ratio improved from 113% to 106% as a result of exiting
lower-return lending businesses, while growing the deposit franchise. Over this
period, return on average common shareholders' equity improved from 17% to 22%.
As part of this transition, the Corporation implemented a number of
initiatives designed to improve the risk/return characteristics of its lending
businesses. These included the sale of the credit card business and exiting or
downsizing certain non-strategic lending businesses.
On October 2, 2000, PNC announced that it reached a definitive agreement to
sell its residential mortgage banking business. The capital made available by
the sale will be redeployed in a number of ways, which may include repurchasing
common stock, continuing to reduce balance sheet leverage, reducing debt and
making targeted investments in higher-growth businesses. The amount of capital
available for redeployment and the income statement impact of the sale will
depend on fair market values and other factors, and will not be determined until
final settlement. The transaction closed on January 31, 2001.
PNC also expanded its fee-based services by acquiring Investor Services
Group ("ISG") in December 1999. The combination of ISG with PFPC, the
Corporation's global fund services subsidiary, created one of the nation's
leading full-service processors for pooled investment products.
Other strategic acquisitions during 2000 included Automated Business
Development Corp. ("ABD"), the leading provider of blue sky compliance services
to the mutual fund industry, Univest Financial Group LLC ("Univest"), a
privately held provider of technology and data management services to the
commercial real estate finance industry, and the origination and servicing
business of U.B. Vehicle Leasing Inc.
SUMMARY FINANCIAL RESULTS
Consolidated net income for 2000 was $1.279 billion or $4.31 per diluted share,
a 10% increase compared with core earnings per diluted share for 1999. Return on
average common shareholders' equity was 21.63% and return on average assets was
1.68% for 2000 compared with core returns of 21.24% and 1.60%, respectively, a
year ago. Cash earnings per diluted share, which exclude goodwill amortization,
were $4.70 for 2000, a 12% increase compared with core cash earnings per diluted
share a year ago. Core earnings for the prior year exclude one-time gains that
were partially offset by the cost of certain strategic initiatives. Reported
earnings for 1999 were $1.264 billion or $4.15 per diluted share.
The residential mortgage banking business is reflected in discontinued
operations throughout the Corporation's consolidated financial statements.
Accordingly, the earnings and net assets of the residential mortgage banking
business are shown separately on one line in the income statement and balance
sheet, respectively, for all periods presented.
| 34
<PAGE> 4
EFFECT OF DISCONTINUED OPERATIONS
<TABLE>
<CAPTION>
-----------------------------------
Year ended December 31 2000 1999 1999
Dollars in millions, except per share data Reported Core Reported
==================================================================================
<S> <C> <C> <C>
Income from continuing
operations ............................... $1,214 $1,137 $1,202
Discontinued operations ..................... 65 62 62
- ----------------------------------------------------------------------------------
Total net income ......................... $1,279 $1,199 $1,264
==================================================================================
Diluted EPS - continuing
operations ............................... $4.09 $3.72 $3.94
Discontinued operations ..................... .22 .21 .21
- ----------------------------------------------------------------------------------
Total diluted EPS ........................ $4.31 $3.93 $4.15
==================================================================================
Cash diluted EPS - continuing
operations (a) ........................... $4.48 $4.00 $4.21
Discontinued operations (a) ................. .22 .21 .21
- ----------------------------------------------------------------------------------
Total cash diluted EPS (a)................ $4.70 $4.21 $4.42
==================================================================================
</TABLE>
(a) Excludes amortization of goodwill.
The remainder of the discussion and information in this Financial Review
reflects continuing operations, unless otherwise noted.
Earnings from continuing operations for 2000 of $1.214 billion or $4.09
per diluted share increased 10% compared with core earnings per diluted share
for 1999.
Taxable-equivalent net interest income was $2.182 billion for 2000, a $184
million decrease compared with 1999. The net interest margin was 3.64% for 2000
compared with 3.86% for 1999. The decreases were primarily due to funding costs
related to the ISG acquisition, changes in balance sheet composition and a
higher interest rate environment in 2000.
The provision for credit losses was $136 million for 2000 and net
charge-offs were $135 million or .27% of average loans. The provision for credit
losses was $163 million and net charge-offs were $161 million or .31% of average
loans in 1999. The decreases were primarily due to the sale of the credit card
business in the first quarter of 1999, partially offset by higher commercial net
charge-offs in 2000.
Noninterest income of $2.891 billion for 2000 increased 28% compared with
1999, excluding non-core items from the prior year, and represented 57% of total
revenue. The increase was primarily driven by strong growth in certain fee-based
businesses, the impact of the ISG acquisition and higher equity management
income. Excluding ISG, noninterest income increased 13% compared with the prior
year.
Noninterest expense was $3.071 billion and the efficiency ratio was 57% in
2000 compared with $2.703 billion and 55%, respectively, in 1999, excluding
non-core items. The increases were primarily due to the ISG acquisition.
Excluding ISG, noninterest expense increased 2% compared with the prior year.
Total assets were $69.8 billion at December 31, 2000 compared with $69.3
billion at December 31, 1999. Average earning assets were $59.9 billion for 2000
compared with $61.3 billion for 1999. Average earning assets declined primarily
due to a decrease in loans that resulted from the downsizing and exiting of
certain non-strategic lending businesses.
Shareholders' equity totaled $6.7 billion at December 31, 2000. The
regulatory capital ratios were 8.03% for leverage, 8.60% for tier I risk-based
and 12.57% for total risk-based capital. During 2000, PNC repurchased 6.7
million shares of common stock.
The ratio of nonperforming assets to total loans, loans held for sale and
foreclosed assets was .71% at December 31, 2000 compared with .61% at December
31, 1999. Nonperforming assets were $372 million at December 31, 2000 compared
with $325 million at December 31, 1999. The increase was primarily due to higher
commercial nonperforming loans partially offset by lower commercial real estate
and residential mortgage nonperforming loans.
The allowance for credit losses was $675 million and represented 1.33% of
total loans and 209% of nonaccrual loans at December 31, 2000. The comparable
ratios were 1.36% and 232%, respectively, at December 31, 1999.
REVIEW OF BUSINESSES
PNC operates seven major businesses engaged in community banking, corporate
banking, real estate finance, asset-based lending, wealth management, asset
management and global fund services: Community Banking, Corporate Banking, PNC
Real Estate Finance, PNC Business Credit, PNC Advisors, BlackRock and PFPC.
Business results are presented based on PNC's management accounting
practices and the Corporation's management structure. There is no comprehensive,
authoritative body of guidance for management accounting equivalent to generally
accepted accounting principles; therefore, PNC's business results are not
necessarily comparable with similar information for any other financial services
institution. Financial results are presented, to the extent practicable, as if
each business operated on a stand-alone basis.
35 |
<PAGE> 5
The presentation of business results was changed to reflect the
Corporation's operating structure during 2000. Middle market and equipment
leasing activities (previously included in Community Banking) are reported in
Corporate Banking. In addition, PNC Real Estate Finance and PNC Business Credit
are reported separately within PNC Secured Finance. Regional real estate lending
activities (previously included in Community Banking) are reported in PNC Real
Estate Finance. Business financial results for 2000 and 1999 are presented
consistent with this structure.
The management accounting process uses various balance sheet and income
statement assignments and transfers to measure performance of the businesses.
Methodologies change from time to time as management accounting practices are
enhanced and businesses change. Securities or borrowings and related net
interest income are assigned based on the net asset or liability position of
each business. Capital is assigned based on management's assessment of inherent
risks and equity levels at independent companies providing similar products and
services. The allowance for credit losses is allocated to the businesses based
on 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, divested and exited
businesses, equity management activities, minority interests, residual asset and
liability management activities, eliminations and unassigned items, the impact
of which is reflected in the "Other" category. The results of the residential
mortgage banking business, previously PNC Mortgage, are included in results from
discontinued operations.
RESULTS OF BUSINESSES
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
Revenue Return on
Earnings (taxable-equivalent basis) Assigned Capital Average Assets
------------------------------------------------------------------------------------
Year ended December 31 - dollars in millions 2000 1999 2000 1999 2000 1999 2000 1999
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PNC Bank
Community Banking ....................... $590 $543 $2,033 $1,968 22% 21% $38,958 $37,502
Corporate Banking ....................... 244 246 839 745 20 21 16,382 15,587
- -------------------------------------------------------------------------------------------- -----------------
Total PNC Bank ........................ 834 789 2,872 2,713 22 21 55,340 53,089
- -------------------------------------------------------------------------------------------- -----------------
PNC Secured Finance
PNC Real Estate Finance ................. 82 74 220 212 21 19 5,506 5,554
PNC Business Credit ..................... 49 29 119 82 32 25 2,271 1,759
- -------------------------------------------------------------------------------------------- -----------------
Total PNC Secured Finance ............. 131 103 339 294 24 20 7,777 7,313
- -------------------------------------------------------------------------------------------- -----------------
Asset Management
PNC Advisors ............................ 173 147 792 738 32 27 3,500 3,353
BlackRock ............................... 87 59 477 381 27 36 537 448
PFPC .................................... 47 45 690 264 22 40 1,578 308
- -------------------------------------------------------------------------------------------- -----------------
Total Asset Management ................ 307 251 1,959 1,383 28 30 5,615 4,109
- -------------------------------------------------------------------------------------------- -----------------
Total businesses ........................ 1,272 1,143 5,170 4,390 23 23 68,732 64,511
Other ...................................... (58) (6) (97) 227 (241) 3,403
- -------------------------------------------------------------------------------------------- -----------------
Results from continuing operations - core .. 1,214 1,137 5,073 4,617 21 20 68,491 67,914
Gain on sale of credit card business ....... 125 193
Gain on sale of equity interest in EPS ..... 63 97
BlackRock IPO gain ......................... 59 64
Branch gains ............................... 17 27
Gain on sale of Concord stock net of
PNC Foundation contribution ............. 16 41
Wholesale lending repositioning ............ (126) (195)
Costs related to efficiency initiatives .... (64)
Write-down of an equity investment ......... (18) (28)
Mall ATM buyout ............................ (7)
- -------------------------------------------------------------------------------------------- -----------------
Results from continuing operations -
reported ............................... 1,214 1,202 5,073 4,816 21 21 68,491 67,914
Results from discontinued operations ....... 65 62 307 384 13 14 487 449
- -------------------------------------------------------------------------------------------- -----------------
Total consolidated - reported ........... $1,279 $1,264 $5,380 $5,200 22 22 $68,978 $68,363
==================================================================================================================================
</TABLE>
| 36
<PAGE> 6
COMMUNITY BANKING
Year ended December 31 ------------------------
Dollars in millions 2000 1999
====================================================================
INCOME STATEMENT
Net interest income ...................... $1,414 $1,418
Noninterest income ....................... 619 550
- --------------------------------------------------------------------
Total revenue ......................... 2,033 1,968
Provision for credit losses .............. 45 61
Noninterest expense ...................... 1,071 1,057
- --------------------------------------------------------------------
Pretax earnings ....................... 917 850
Income taxes ............................. 327 307
- --------------------------------------------------------------------
Earnings .............................. $590 $543
====================================================================
AVERAGE BALANCE SHEET
Loans
Consumer
Home equity ......................... $5,419 $5,176
Indirect ............................ 1,215 1,945
Education ........................... 102 849
Other consumer ...................... 795 727
- --------------------------------------------------------------------
Total consumer .................... 7,531 8,697
Commercial ............................ 3,649 3,708
Residential mortgage .................. 11,619 11,285
Other ................................. 1,466 1,254
- --------------------------------------------------------------------
Total loans ......................... 24,265 24,944
Securities available for sale ............ 5,539 5,735
Loans held for sale ...................... 1,297 510
Assigned assets and other assets ......... 7,857 6,313
- --------------------------------------------------------------------
Total assets .......................... $38,958 $37,502
====================================================================
Deposits
Noninterest-bearing demand ............ $4,548 $5,000
Interest-bearing demand ............... 5,428 4,894
Money market .......................... 10,253 8,990
Savings ............................... 1,992 2,328
Certificates .......................... 13,745 13,280
- --------------------------------------------------------------------
Total deposits ...................... 35,966 34,492
Other liabilities ........................ 363 479
Assigned capital ......................... 2,629 2,531
- --------------------------------------------------------------------
Total funds ........................... $38,958 $37,502
====================================================================
PERFORMANCE RATIOS
Return on assigned capital ............... 22% 21%
Noninterest income to total revenue ...... 30 28
Efficiency ............................... 51 52
====================================================================
Community Banking provides deposit, branch-based brokerage, electronic banking
and credit products and services to retail customers as well as credit, treasury
management and capital markets products and services to small businesses
primarily within PNC's geographic region.
Community Banking's strategic focus is on driving sustainable revenue
growth while aggressively managing the revenue/expense relationship. 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.
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.
Community Banking contributed 46% of total business earnings for 2000
compared with 48% for 1999. Earnings increased $47 million or 9% to $590 million
for 2000 and the noninterest income to total revenue and efficiency ratios
improved. Excluding the impact of downsizing the indirect automobile lending
portfolio and the sale of certain branches in the third quarter of 1999,
earnings increased 11% in the comparison.
Total revenue was $2.033 billion for 2000 compared with $1.968 billion for
1999. The increase was primarily due to a $69 million or 13% increase in
noninterest income that was driven by higher consumer transaction volume.
The provision for credit losses for 2000 decreased $16 million or 26%
compared with the prior year. The decrease was primarily due to lower net
charge-offs related to the downsizing of the indirect automobile lending
portfolio.
Consumer loans declined in the comparison primarily due to the continued
downsizing of the indirect automobile lending portfolio and the decision to sell
education loans in repayment, which are included in loans held for sale. There
was a shift from noninterest-bearing demand deposits to interest-bearing demand
deposits due to strategies designed to increase customer satisfaction and
retention. Money market deposits increased $1.3 billion or 14% primarily due to
successful consumer marketing initiatives.
37 |
<PAGE> 7
Corporate Banking
Year ended December 31 ----------------------------
Dollars in millions 2000 1999
=========================================================================
INCOME STATEMENT
Credit-related revenue ................ $406 $372
Noncredit revenue ..................... 433 373
- -------------------------------------------------------------------------
Total revenue ...................... 839 745
Provision for credit losses ........... 79 16
Noninterest expense ................... 384 360
- -------------------------------------------------------------------------
Pretax earnings .................... 376 369
Income taxes .......................... 132 123
- -------------------------------------------------------------------------
Earnings ........................... $244 $246
=========================================================================
AVERAGE BALANCE SHEET
Loans
Middle market ...................... $5,866 $5,655
Specialized industries ............. 3,780 3,975
Large corporate .................... 2,564 2,276
Leasing ............................ 1,844 1,340
Other .............................. 254 454
- -------------------------------------------------------------------------
Total loans ...................... 14,308 13,700
Other assets .......................... 2,074 1,887
- -------------------------------------------------------------------------
Total assets ....................... $16,382 $15,587
=========================================================================
Deposits .............................. $4,701 $4,499
Assigned funds and other liabilities... 10,452 9,919
Assigned capital ...................... 1,229 1,169
- -------------------------------------------------------------------------
Total funds ........................ $16,382 $15,587
=========================================================================
PERFORMANCE RATIOS
Return on assigned capital ............ 20% 21%
Noncredit revenue to total revenue .... 52 50
Efficiency ............................ 45 48
=========================================================================
Corporate Banking provides credit, equipment leasing, treasury management and
capital markets products and services to large and mid-sized corporations,
institutions and government entities primarily within PNC's geographic region.
The strategic focus for Corporate Banking is to emphasize higher-margin
noncredit products and services, especially treasury management and capital
markets. Lending activities are focused primarily within PNC's geographic region
with consideration given to risk/return characteristics and are a complement to
sales of noncredit products and services. Loans are syndicated to meet the
credit needs of larger borrowers and to reduce and diversify credit exposure.
Approximately 40% of the total loan portfolio at December 31, 2000 was the
result of syndications.
Corporate Banking made the decision to exit certain non-strategic lending
businesses during 1999. These activities are excluded from business results in
both periods presented. Management continues to evaluate opportunities to reduce
lending exposure and improve the risk/return characteristics of this business,
including the downsizing of certain specialized industry portfolios.
Corporate Banking contributed 19% of total business earnings for 2000
compared with 21% for 1999. Earnings of $244 million for 2000 were comparable
with earnings of $246 million for 1999.
Total revenue of $839 million for 2000 increased $94 million or 13%
compared with the prior year. Average loans and credit-related revenue increased
in the period-to-period comparison primarily driven by loans to middle market
and large corporate customers that utilize higher-margin noncredit products and
services and the expansion of equipment leasing. Noncredit revenue includes
noninterest income and the benefit of compensating balances received in lieu of
fees. Noncredit revenue increased $60 million or 16% compared with 1999
primarily driven by increases in treasury management and capital markets fees
and income associated with equity investments. Noncredit revenue comprised 52%
of total revenue for 2000 compared with 50% last year, reflecting the emphasis
on sales of fee-based products.
The provision for credit losses was $79 million for 2000 compared with $16
million for 1999. The higher provision reflected an increase in net charge-offs
associated with the impact of a slowing economy primarily on the specialized
industry portfolios. The provision for credit losses for 2001 could increase
further if the economy continues to deteriorate or asset quality otherwise
declines. See Credit Risk in the Risk Management section of this Financial
Review for additional information regarding credit risk.
The increase in noninterest expense in the period-to-period comparison was
associated with growth in noncredit products and services.
Treasury management and capital markets products offered through Corporate
Banking are sold by several businesses across the Corporation and related
profitability is included in the results of those businesses. Consolidated
revenue from treasury management was $341 million for 2000, an 11% increase
compared with 1999. Consolidated revenue from capital markets was $133 million
for 2000, a 21% increase compared with 1999.
| 38
<PAGE> 8
PNC REAL ESTATE FINANCE
Year ended December 31 -----------------------------
Dollars in millions 2000 1999
===========================================================================
INCOME STATEMENT
Net interest income .................... $115 $112
Noninterest income
Net commercial mortgage banking ..... 68 64
Other ............................... 37 36
- ---------------------------------------------------------------------------
Total noninterest income .......... 105 100
- ---------------------------------------------------------------------------
Total revenue ....................... 220 212
Provision for credit losses ............ (7) (5)
Noninterest expense .................... 139 126
- ---------------------------------------------------------------------------
Pretax earnings ..................... 88 91
Income taxes ........................... 6 17
- ---------------------------------------------------------------------------
Earnings ............................ $82 $74
===========================================================================
AVERAGE BALANCE SHEET
Loans
Commercial - real estate related..... $1,970 $2,156
Commercial real estate .............. 2,424 2,515
- ---------------------------------------------------------------------------
Total loans ....................... 4,394 4,671
Commercial mortgages held for sale ..... 174 124
Other assets ........................... 938 759
- ---------------------------------------------------------------------------
Total assets ........................ $5,506 $5,554
===========================================================================
Deposits ............................... $288 $315
Assigned funds and other liabilities ... 4,834 4,848
Assigned capital ....................... 384 391
- ---------------------------------------------------------------------------
Total funds ......................... $5,506 $5,554
===========================================================================
PERFORMANCE RATIOS
Return on assigned capital ............. 21% 19%
Noninterest income to total revenue .... 48 47
Efficiency ............................. 51 47
===========================================================================
PNC Real Estate Finance provides credit, capital markets, treasury management,
commercial mortgage loan servicing and other products and services to
developers, owners and investors in commercial real estate. PNC's commercial
real estate financial services platform includes Midland Loan Services, Inc.
("Midland"), one of the largest national servicers of commercial mortgage loans,
and Columbia Housing Partners, LP, a national syndicator of affordable housing
equity, among other businesses.
On October 27, 2000, Midland acquired Univest, a privately held provider of
technology and data management services to the commercial real estate finance
industry. The combined company created one of the nation's leading providers of
Web-enabled loan servicing and asset administration solutions for commercial
real estate portfolio lenders, financial institutions and commercial
mortgage-backed securities.
Over the past three years, PNC Real Estate Finance has been strategically
shifting to a more balanced and valuable revenue stream by focusing on real
estate processing businesses, including commercial loan servicing. During 2000,
48% of total revenue was generated by fee-based activities.
PNC Real Estate Finance made the decision to exit the cyclical mortgage
warehouse lending business and certain non-strategic commercial real estate
portfolios at the end of 1999. These activities are excluded from business
results in both periods presented. Management continues to evaluate
opportunities to reduce lending exposure and improve the risk/return
characteristics of this business.
PNC Real Estate Finance contributed 6% of total business earnings for both
2000 and 1999. Earnings increased $8 million or 11% in the year-to-year
comparison primarily due to growth in commercial mortgage servicing and the
affordable housing business. Average loans decreased 6% reflecting management's
strategy to reduce balance sheet leverage.
Total revenue was $220 million for 2000 compared with $212 million in the
prior year. Increases in treasury management and commercial mortgage servicing
fees were partially offset by lower commercial mortgage-backed securitization
gains.
The provision for credit losses positively impacted earnings in 2000 and
1999 due to net recoveries in both years. Management does not expect to be in a
net recovery position in 2001. See Credit Risk in the Risk Management section of
this Financial Review for additional information regarding credit risk.
Noninterest expense was $139 million and the efficiency ratio was 51% for
2000 compared with $126 million and 47%, respectively, in 1999. The increases
were primarily due to non-cash losses on affordable housing equity investments
and investments in technology to support the loan servicing platform. The
increase in non-cash losses on low income housing investments was more than
offset by related income tax credits.
COMMERCIAL MORTGAGE SERVICING PORTFOLIO
-----------------------
In billions 2000 1999
=============================================================
January 1 ........................ $45 $39
Acquisitions/additions ........... 17 17
Repayments/transfers ............. (8) (11)
- -------------------------------------------------------------
December 31 ................... $54 $45
=============================================================
39 |
<PAGE> 9
PNC BUSINESS CREDIT
<TABLE>
<CAPTION>
Year ended December 31 ----------------------
Dollars in millions 2000 1999
=================================================================
<S> <C> <C>
INCOME STATEMENT
Net interest income .................... $99 $71
Noninterest income ..................... 20 11
- -----------------------------------------------------------------
Total revenue ....................... 119 82
Provision for credit losses ............ 12 11
Noninterest expense .................... 30 25
- -----------------------------------------------------------------
Pretax earnings ..................... 77 46
Income taxes ........................... 28 17
- -----------------------------------------------------------------
Earnings ............................ $49 $29
=================================================================
AVERAGE BALANCE SHEET
Loans .................................. $2,197 $1,726
Other assets ........................... 74 33
- -----------------------------------------------------------------
Total assets ........................ $2,271 $1,759
=================================================================
Deposits ............................... $66 $50
Assigned funds and other liabilities ... 2,053 1,591
Assigned capital ....................... 152 118
- -----------------------------------------------------------------
Total funds ......................... $2,271 $1,759
=================================================================
PERFORMANCE RATIOS
Return on assigned capital ............. 32% 25%
Efficiency ............................. 24 28
=================================================================
</TABLE>
PNC Business Credit provides asset-based lending, capital markets and treasury
management products and services to middle market customers on a national basis.
PNC Business Credit's lending services include loans secured by accounts
receivable, inventory, machinery and equipment, and other collateral, and its
customers include manufacturing, wholesale, distribution, retailing and service
industry companies.
PNC Business Credit's strategic focus is to build scale through the
disciplined expansion of existing offices as well as the addition of new
marketing locations. At December 31, 2000, PNC Business Credit operated 15
offices in 13 states. PNC Business Credit continues to emphasize risk management
practices. In addition, a centralized back office is intended to provide
consistency to the control environment as well as cost efficiencies.
PNC Business Credit contributed 4% of total business earnings for 2000
compared with 3% for 1999. Earnings increased $20 million or 69% in the
year-to-year comparison to $49 million for 2000.
Revenue was $119 million for 2000, a $37 million or 45% increase compared
with 1999 primarily due to the impact of higher average loans associated with
business expansion.
Noninterest expense was $30 million and the efficiency ratio improved to
24% for 2000 compared with $25 million and 28%, respectively, in 1999. The
efficiency ratio improved in the comparison primarily due to economies of scale.
The return on assigned capital improved to 32% for 2000 due to strong revenue
growth and improved efficiency.
Management expects the provision for credit losses to increase in 2001
commensurate with a larger loan portfolio. See Credit Risk in the Risk
Management section of this Financial Review for additional information regarding
credit risk.
| 40
<PAGE> 10
PNC ADVISORS
Year ended December 31 ------------------------
Dollars in millions 2000 1999
==================================================================
INCOME STATEMENT
Net interest income .................... $136 $130
Noninterest income
Investment management and trust ..... 421 388
Brokerage ........................... 171 149
Other ............................... 64 71
- ------------------------------------------------------------------
Total noninterest income .......... 656 608
- ------------------------------------------------------------------
Total revenue ....................... 792 738
Provision for credit losses ............ 5 7
Noninterest expense .................... 511 494
- ------------------------------------------------------------------
Pretax earnings ..................... 276 237
Income taxes ........................... 103 90
- ------------------------------------------------------------------
Earnings ............................ $173 $147
==================================================================
AVERAGE BALANCE SHEET
Loans
Residential mortgage ................ $962 $959
Consumer ............................ 965 940
Commercial .......................... 602 631
Other ............................... 532 389
- ------------------------------------------------------------------
Total loans ....................... 3,061 2,919
Other assets ........................... 439 434
- ------------------------------------------------------------------
Total assets ........................ $3,500 $3,353
==================================================================
Deposits ............................... $2,034 $2,164
Assigned funds and other liabilities ... 917 641
Assigned capital ....................... 549 548
- ------------------------------------------------------------------
Total funds ......................... $3,500 $3,353
==================================================================
PERFORMANCE RATIOS
Return on assigned capital ............. 32% 27%
Noninterest income to total revenue .... 83 82
Efficiency ............................. 64 66
==================================================================
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 strives to be the "financial advisor of choice" in the growing
high-net-worth market, providing a full range of high-quality, customized and
predominantly fee-based investment products and services. PNC Advisors continues
to expand Hilliard Lyons throughout the Corporation's geographic region, which
includes some of the nation's wealthiest metropolitan areas.
PNC Advisors contributed 14% of total business earnings for 2000 compared
with 13% for 1999. Earnings of $173 million for 2000 increased $26 million or
18% compared with last year.
Revenue increased $54 million or 7% in the year-to-year comparison despite
the impact of weak equity market conditions. The increase was primarily driven
by growth in brokerage revenue, resulting from the continued expansion of
Hilliard Lyons' distribution network and strong investment management sales.
Noninterest expense increased 3% in the year-to-year comparison primarily due to
effective expense management initiatives that resulted in improved operating
efficiency.
ASSETS UNDER MANAGEMENT (a)
--------------------
December 31 - in billions 2000 1999 (b)
===========================================================
Personal investment management
and trust ........................ $50 $52
Institutional trust ................. 15 14
- -----------------------------------------------------------
Total ............................ $65 $66
===========================================================
(a) Assets under management do not include brokerage assets
administered.
(b) Restated to reflect the transfer of assets under management between PNC
businesses.
Personal assets under management decreased primarily due to the equity component
of customers' portfolios. The weak equity market in 2000 reduced assets under
management by approximately $3 billion. This decline was partially offset by new
customers' assets added during the year as a result of strong investment sales
activity.
Brokerage assets administered by PNC Advisors were $28 billion at December
31, 2000 compared with $27 billion at December 31, 1999.
41 |
<PAGE> 11
BLACKROCK
Year ended December 31 ------------------------
Dollars in millions 2000 1999
=================================================================
INCOME STATEMENT
Investment advisory and
administrative fees ................ $453 $362
Other income .......................... 24 19
- -----------------------------------------------------------------
Total revenue ...................... 477 381
Operating expense ..................... 248 181
Fund administration and servicing
costs - affiliates ................. 76 79
Amortization .......................... 10 10
- -----------------------------------------------------------------
Total expense ...................... 334 270
Operating income ...................... 143 111
Nonoperating income (expense) ......... 7 (8)
- -----------------------------------------------------------------
Pretax earnings .................... 150 103
Income taxes .......................... 63 44
- -----------------------------------------------------------------
Earnings ........................... $87 $59
=================================================================
PERIOD-END BALANCE SHEET
Intangible assets ..................... $192 $194
Other assets .......................... 345 254
- -----------------------------------------------------------------
Total assets ....................... $537 $448
=================================================================
Borrowings ............................ $28
Other liabilities ..................... $169 139
Stockholders' equity .................. 368 281
- ---------------------------------------------------------------
Total liabilities and
stockholders' equity ............. $537 $448
=================================================================
PERFORMANCE DATA
Return on equity ................ 27% 36%
Operating margin (a) ............ 36 37
Diluted earnings per share ...... $1.35 $1.04(b)
=================================================================
(a) Excludes the impact of fund administration and servicing costs - affiliates.
(b) Proforma diluted earnings per share reflecting the impact of BlackRock's
initial public offering ("IPO") were $0.99.
BlackRock is one of the largest publicly traded investment management firms in
the United States with $204 billion of assets under management at December 31,
2000. BlackRock manages assets on behalf of institutions and individuals through
a variety of fixed income, liquidity, equity and alternative investment separate
accounts and mutual funds, including its flagship fund families, BlackRock Funds
and BlackRock Provident Institutional Funds. In addition, BlackRock provides
risk management and technology services to a growing number of institutional
investors under the BlackRock Solutions name.
BlackRock contributed 7% of total business earnings for 2000 compared with
5% for 1999. Earnings of $87 million for 2000 increased 47% compared with 1999.
Total revenue for 2000 increased $96 million or 25% compared with 1999 primarily
due to strong growth in investment advisory and administrative fees resulting
from higher assets under management. Net asset growth for 2000, including new
client mandates and additional funding from existing clients, was $33 billion or
85% of the $39 billion increase in assets under management. The increase in
operating expense in the period-to-period comparison supported revenue growth.
ASSETS UNDER MANAGEMENT
---------------------
December 31 - in billions 2000 1999
==================================================================
Separate accounts
Fixed income (a) ........................ $107 $75
Liquidity ............................... 18 21
Equity (a) .............................. 9 3
- ------------------------------------------------------------------
Total separate accounts ............... 134 99
- ------------------------------------------------------------------
Mutual funds
Fixed income ............................ 13 13
Liquidity ............................... 43 37
Equity .................................. 14 16
- ------------------------------------------------------------------
Total mutual funds .................... 70 66
- ------------------------------------------------------------------
Total assets under management ........... $204 $165
==================================================================
Proprietary mutual funds
BlackRock Funds ......................... $26 $27
BlackRock Provident Institutional
Funds ................................. 36 26
- ------------------------------------------------------------------
Total proprietary mutual funds .......... $62 $53
==================================================================
(a) Includes alternative investment products.
BlackRock, Inc. is approximately 70% owned by PNC and is listed on the New York
Stock Exchange under the symbol BLK. Additional information about BlackRock is
available in its filings with the Securities and Exchange Commission ("SEC") and
may be obtained electronically at the SEC's home page at www.sec.gov.
| 42
<PAGE> 12
PFPC
Year ended December 31 -------------------------
Dollars in millions 2000 1999
=====================================================================
INCOME STATEMENT
Revenue .................................. $690 $264
Operating expense ........................ 501 181
Amortization ............................. 31 4
- ---------------------------------------------------------------------
Operating income ...................... 158 79
Debt financing ........................... 80 7
- ---------------------------------------------------------------------
Pretax earnings ....................... 78 72
Income taxes ............................. 31 27
- ---------------------------------------------------------------------
Earnings .............................. $47 $45
=====================================================================
AVERAGE BALANCE SHEET
Intangible assets ........................ $1,107 $103
Other assets ............................. 471 205
- ---------------------------------------------------------------------
Total assets .......................... $1,578 $308
=====================================================================
Assigned funds and other liabilities ..... $1,369 $196
Assigned capital ......................... 209 112
- ---------------------------------------------------------------------
Total funds ........................... $1,578 $308
=====================================================================
PERFORMANCE RATIOS
Return on assigned capital ............... 22% 40%
Operating margin ......................... 23 30
=====================================================================
Providing a wide range of global fund services to the investment management
industry, 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. As an extension of its domestic services, PFPC also provides
customized processing services to the international marketplace through its
Dublin, Ireland and Luxembourg operations.
To meet the growing needs of the European marketplace, PFPC will continue
its pursuit of offshore expansion. Additionally, PFPC will continue focusing
technological resources on targeted Web-based initiatives and exploring
strategic alliances.
On December 1, 1999, PFPC acquired ISG, one of the nation's leading
providers of back-office services to mutual funds and retirement plans. The
acquisition added key related businesses, including retirement plan servicing,
to PFPC's expanding operations. The integration of ISG into PFPC continues as
planned and the acquisition was accretive to PNC's earnings in the fourth
quarter of 2000. During 2001, PFPC will continue to execute its ISG integration
strategy.
On May 31, 2000, PFPC completed the acquisition of ABD, the leading
provider of blue sky compliance services to the mutual fund industry.
PFPC contributed 4% of total business earnings for both 2000 and 1999.
Earnings increased $2 million in the year-to-year comparison primarily due to
the impact of the ISG acquisition. Excluding ISG, earnings increased 21% in the
period-to-period comparison. Cash earnings, which exclude goodwill amortization,
increased 81% to $87 million for 2000, including ISG.
Revenue of $690 million for 2000 increased $426 million compared with 1999.
The acquisition of ISG accounted for $406 million of the increase in revenue.
Excluding ISG, revenue increased 22% primarily driven by new and existing client
growth. Operating expense increased in the period-to-period comparison and
performance ratios were impacted as a result of the ISG acquisition. Excluding
ISG, noninterest expense increased 21% commensurate with fee-based revenue
growth.
SERVICING STATISTICS
------------------------
December 31 2000 1999
================================================================
Accounting/administration
assets ( $in billions) .............. $463 $412
Custody assets ( $in billions) ......... 437 388
Shareholder accounts (in millions) ..... 43 34
================================================================
43 |
<PAGE> 13
CONSOLIDATED INCOME STATEMENT REVIEW
NET INTEREST INCOME ANALYSIS
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
Average Balances Interest Income/Expense Average Yields/Rates
Taxable-equivalent basis ------------------------------- ------------------------- --------------------------
Year ended December 31 - dollars in millions 2000 1999 Change 2000 1999 Change 2000 1999 Change
============================================================================= ========================= ==========================
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets
Loans held for sale ..................... $2,507 $1,392 $1,115 $204 $104 $100 8.14% 7.47% 67bp
Securities available for sale ........... 6,061 6,084 (23) 389 366 23 6.42 6.02 40
Loans, net of unearned income
Consumer .............................. 9,177 10,310 (1,133) 791 844 (53) 8.62 8.19 43
Credit card ........................... 672 (672) 100 (100) 14.88 NM
Residential mortgage .................. 12,599 12,258 341 900 859 41 7.14 7.01 13
Commercial ............................ 21,685 23,082 (1,397) 1,839 1,792 47 8.48 7.76 72
Commercial real estate ................ 2,685 3,362 (677) 240 265 (25) 8.94 7.88 106
Lease financing ....................... 3,222 2,564 658 235 182 53 7.29 7.10 19
Other ................................. 650 532 118 55 40 15 8.46 7.52 94
- ---------------------------------------------------------------------------- -------------------------
Total loans, net of
unearned income ..................... 50,018 52,780 (2,762) 4,060 4,082 (22) 8.12 7.73 39
Other ................................... 1,289 1,045 244 97 53 44 7.53 5.07 246
- ---------------------------------------------------------------------------- -------------------------
Total interest-earning assets/
interest income ..................... 59,875 61,301 (1,426) 4,750 4,605 145 7.93 7.51 42
Noninterest-earning assets ................. 8,616 6,613 2,003
Investment in discontinued
operations .............................. 487 449 38
- ----------------------------------------------------------------------------
Total assets ............................ $68,978 $68,363 $615
============================================================================
Interest-bearing liabilities
Deposits
Demand and money market ............... $18,735 $16,921 $1,814 658 493 165 3.51 2.91 60
Savings ............................... 2,050 2,390 (340) 36 39 (3) 1.76 1.63 13
Retail certificates of deposit ........ 14,642 14,220 422 826 708 118 5.64 4.98 66
Other time ............................ 621 1,515 (894) 40 85 (45) 6.44 5.61 83
Deposits in foreign offices ........... 1,473 872 601 93 44 49 6.31 5.05 126
- ---------------------------------------------------------------------------- -------------------------
Total interest-bearing
deposits ......................... 37,521 35,918 1,603 1,653 1,369 284 4.41 3.81 60
Borrowed funds .......................... 13,746 15,466 (1,720) 915 870 45 6.66 5.63 103
- ---------------------------------------------------------------------------- -------------------------
Total interest-bearing liabilities/
interest expense ........................ 51,267 51,384 (117) 2,568 2,239 329 5.01 4.36 65
------------------------- ----------------------
Noninterest-bearing liabilities,
capital securities and
shareholders' equity .................... 17,711 16,979 732
- ----------------------------------------------------------------------------
Total liabilities, capital securities
and shareholders' equity .............. $68,978 $68,363 $615
============================================================================
Interest rate spread ....................... 2.92 3.15 (23)
Impact of noninterest-bearing
sources ................................. .72 .71 1
----------------------
Net interest income/margin .............. $2,182 $2,366 $(184) 3.64% 3.86% (22)bp
====================================================================================================================================
</TABLE>
NM - not meaningful
NET INTEREST INCOME
Changes in net interest income and margin result from the interaction between
the volume and composition of earning assets, related yields and associated
funding costs. Accordingly, portfolio size, composition and yields earned and
funding costs can have a significant impact on net interest income and margin.
Taxable-equivalent net interest income was $2.182 billion for 2000, a $184
million decrease compared with 1999. The net interest margin was 3.64% for 2000
compared with 3.86% for 1999. The decreases were primarily due to funding costs
related to the ISG acquisition, changes in balance sheet composition and a
higher interest rate environment in 2000.
| 44
<PAGE> 14
As a result of the sale of the credit card business and exiting or
downsizing certain non-strategic lending businesses, average loans decreased
$2.8 billion and represented 84% of average earning assets for 2000 compared
with 86% for the prior year. Average loans held for sale increased $1.1 billion
in the year-to-year comparison, reflecting the decisions to exit certain
non-strategic lending businesses and to sell student loans in repayment.
Funding cost is affected by the volume and composition of funding sources
as well as related rates paid thereon. Average deposits comprised 66% and 65% of
total sources of funds for 2000 and 1999, respectively, with the remainder
primarily comprised of wholesale funding obtained at prevailing market rates.
Average demand and money market deposits increased $1.8 billion or 11% to
$18.7 billion for 2000, primarily reflecting the impact of strategic marketing
initiatives to grow more valuable transaction accounts, while other time
deposits decreased in the period-to-period comparison. Average borrowed funds
for 2000 decreased $1.7 billion compared with 1999 as lower bank notes and
Federal Home Loan Bank borrowings more than offset increases in federal funds
purchased, subordinated debt and other borrowed funds. The overall decrease in
average borrowed funds was primarily due to the combined impact of deposit
growth and a stable level of total assets.
PROVISION FOR CREDIT LOSSES
The provision for credit losses was $136 million for 2000 compared with $163
million for 1999. Net charge-offs were $135 million or .27% of average loans for
2000 compared with $161 million or .31%, respectively, for 1999. The decreases
were primarily due to the sale of the credit card business in the first quarter
of 1999, partially offset by higher commercial net charge-offs in 2000. PNC's
provision for credit losses fully covered net charge-offs in both years. See
Credit Risk in the Risk Management section of this Financial Review for
additional information regarding credit risk.
NONINTEREST INCOME
Noninterest income was $2.891 billion for 2000 and represented 57% of total
revenue. On a comparable basis, noninterest income increased $640 million or 28%
compared with full year 1999, excluding the non-core items that are detailed in
the 1999 Versus 1998 section of this Financial Review. The increase was
primarily driven by growth in certain fee-based businesses, the benefit of the
ISG acquisition and higher equity management income. Excluding ISG, noninterest
income increased 13% compared with the prior year.
Asset management fees of $809 million for 2000 increased $128 million or
19% primarily driven by new business. Assets under management were $253 billion
at December 31, 2000, a 19% increase compared with December 31, 1999. Fund
servicing fees were $654 million for 2000, a $403 million increase compared with
the prior year primarily driven by the ISG acquisition. Excluding ISG, fund
servicing fees increased 22% mainly due to existing and new client growth.
Brokerage fees of $249 million for 2000 increased $30 million or 14%
reflecting the continued expansion of Hilliard Lyons' distribution network.
Consumer services revenue of $209 million for 2000 increased 7% compared with
the prior year, excluding credit card fees. The increase was primarily due to
higher consumer transaction volume.
Corporate services revenue of $342 million for 2000 increased 7% compared
with the prior year, excluding the impact of valuation adjustments in 1999. The
increase was primarily driven by higher treasury management and commercial
mortgage servicing fees that were partially offset by a lower level of
commercial mortgage-backed securitization gains.
Equity management income was $133 million for 2000 compared with $100
million in the prior year. Equity investments are carried at estimated fair
value and, accordingly, revenue related to these investments may be affected by
market volatility. While equity management income was strong in the first half
of 2000, weak capital markets caused the second half to be near break even.
Net securities gains were $20 million for 2000 compared with $22 million
for 1999. The net securities gains in 1999 included a $41 million gain from the
sale of Concord EFS, Inc. ("Concord") stock that was partially offset by a $28
million write-down of an equity investment.
Sale of subsidiary stock of $64 million in 1999 reflected the gain from the
BlackRock IPO.
Other noninterest income of $269 million for 2000 increased $24 million or
10% compared with the prior year excluding non-core items, primarily due to
growth in customer derivative and foreign exchange activity.
45 |
<PAGE> 15
NONINTEREST EXPENSE
Noninterest expense was $3.071 billion for 2000 compared with $2.703 billion for
1999, excluding non-core items that are detailed in the 1999 Versus 1998 section
of this Financial Review. The efficiency ratio was 57% for 2000 compared with
55% for the prior year, also excluding non-core items. The increases were
primarily related to the ISG acquisition. Excluding ISG, noninterest expense
increased 2% compared with the prior year. Average full-time equivalent
employees totaled approximately 24,900 and 22,700 for 2000 and 1999,
respectively. The increase was primarily due to the ISG acquisition, partially
offset by the impact of efficiency initiatives in traditional banking businesses
and the sale of the credit card business in the first quarter of 1999.
CONSOLIDATED BALANCE SHEET REVIEW
LOANS
Loans were $50.6 billion at December 31, 2000, a $928 million increase from
year-end 1999 as increases in residential mortgage loans and lease financing
were partially offset by lower consumer, commercial and commercial real estate
loans.
DETAILS OF LOANS
-----------------------
December 31 - in millions 2000 1999
================================================================
Consumer
Home equity ...................... $6,228 $6,059
Automobile ....................... 1,166 1,691
Other ............................ 1,739 1,598
- ----------------------------------------------------------------
Total consumer ................. 9,133 9,348
- ----------------------------------------------------------------
Residential mortgage ................ 13,264 12,506
Commercial
Manufacturing .................... 5,581 5,355
Retail/wholesale ................. 4,413 4,301
Service providers ................ 2,900 3,208
Real estate related .............. 2,689 2,862
Communications ................... 1,286 1,370
Health care ...................... 766 772
Financial services ............... 823 1,300
Other ............................ 2,749 2,300
- ----------------------------------------------------------------
Total commercial ............... 21,207 21,468
- ----------------------------------------------------------------
Commercial real estate
Mortgage ......................... 673 761
Real estate project .............. 1,910 1,969
- ----------------------------------------------------------------
Total commercial real estate ... 2,583 2,730
- ----------------------------------------------------------------
Lease financing ..................... 4,845 3,663
Other ............................... 568 682
Unearned income ..................... (999) (724)
- ----------------------------------------------------------------
Total, net of unearned income .... $50,601 $49,673
================================================================
LOANS HELD FOR SALE
Loans held for sale were $1.7 billion at December 31, 2000 compared with $3.5
billion at December 31, 1999. The decrease was primarily due to dispositions of
loans designated for exit. Total outstandings and exposure designated for exit
during 1999 totaled $3.7 billion and $10.5 billion, respectively. At December
31, 2000, total outstandings associated with this initiative were $1.0 billion
of which $286 million were classified as loans held for sale, with the remainder
included in loans. Total exposure relating to this initiative was $2.7 billion
at December 31, 2000.
DETAILS OF LOANS HELD FOR SALE
----------------------
December 31 - in millions 2000 1999
===============================================================
Loans designated for exit ............ $286 $1,813
Student loans in repayment ........... 1,201 1,344
Other ................................ 168 320
- ---------------------------------------------------------------
Total loans held for sale ......... $1,655 $3,477
===============================================================
SECURITIES AVAILABLE FOR SALE
The fair value of securities available for sale at December 31, 2000 was $5.9
billion compared with $6.0 billion at December 31, 1999. Securities represented
8% of total assets at December 31, 2000. The expected weighted-average life of
securities available for sale was 4 years and 5 months at December 31, 2000
compared with 4 years and 7 months at year-end 1999.
At December 31, 2000, the securities available for sale balance included a
net unrealized loss of $54 million, which represented the difference between
fair value and amortized cost. The comparable amount at December 31, 1999 was a
net unrealized loss of $184 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.
| 46
<PAGE> 16
DETAILS OF SECURITIES AVAILABLE FOR SALE
------------------------------
In millions Amortized Cost Fair Value
===================================================================
December 31, 2000
Debt securities
U.S. Treasury and government
agencies ............................ $313 $313
Mortgage-backed ....................... 4,037 4,002
Asset-backed .......................... 902 893
State and municipal ................... 94 96
Other debt ............................ 73 73
Corporate stocks and other ............... 537 525
- -------------------------------------------------------------------
Total securities available for sale ... $5,956 $5,902
===================================================================
December 31, 1999
Debt securities
U.S. Treasury and government
agencies ............................ $411 $400
Mortgage-backed ....................... 3,918 3,769
Asset-backed .......................... 1,051 1,027
State and municipal ................... 134 131
Other debt ............................ 40 39
Corporate stocks and other ............... 590 594
- -------------------------------------------------------------------
Total securities available for sale ... $6,144 $5,960
===================================================================
FUNDING SOURCES
Total funding sources were $59.4 billion at December 31, 2000 and $60.0 billion
at December 31, 1999. Increases in demand and money market deposits allowed PNC
to reduce higher-cost funding sources including deposits in foreign offices,
Federal Home Loan Bank borrowings and bank notes and senior debt.
DETAILS OF FUNDING SOURCES
------------------------
December 31 - in millions 2000 1999
===============================================================
Deposits
Demand, savings and
money market .................. $30,686 $27,823
Retail certificates of deposit .. 14,175 14,153
Other time ...................... 567 633
Deposits in foreign offices ..... 2,236 3,193
- ---------------------------------------------------------------
Total deposits ................ 47,664 45,802
- ---------------------------------------------------------------
Borrowed funds
Federal funds purchased ......... 1,445 1,281
Repurchase agreements ........... 607 402
Bank notes and senior debt ...... 6,110 6,975
Federal Home Loan Bank
borrowings .................... 500 2,258
Subordinated debt ............... 2,407 2,327
Other borrowed funds ............ 649 986
- ---------------------------------------------------------------
Total borrowed funds .......... 11,718 14,229
- ---------------------------------------------------------------
Total ........................... $59,382 $60,031
===============================================================
CAPITAL
The access to and cost of funding new business initiatives including
acquisitions, the ability to engage in expanded business activities, the ability
to pay dividends, deposit insurance costs, and the level and nature of
regulatory oversight depend, in large part, on a financial institution's capital
strength. At December 31, 2000, the Corporation and each bank subsidiary were
considered well capitalized based on regulatory capital ratio requirements.
RISK-BASED CAPITAL
---------------------------
December 31 - dollars in millions 2000 1999 (a)
=========================================================================
Capital components
Shareholders' equity
Common .............................. $6,344 $5,633
Preferred ........................... 312 313
Trust preferred capital securities .... 848 848
Goodwill and other .................... (2,214) (2,318)
Net unrealized securities losses ...... 77 255
- -------------------------------------------------------------------------
Tier I risk-based capital ........... 5,367 4,731
Subordinated debt ..................... 1,824 2,040
Eligible allowance for credit losses .. 667 667
Investment in unconsolidated
finance subsidiary .................. (13)
- -------------------------------------------------------------------------
Total risk-based capital .............. $7,845 $7,438
=========================================================================
Assets
Risk-weighted assets and
off-balance-sheet instruments ....... $62,430 $67,118
Average tangible assets ............... 66,809 71,617
=========================================================================
Capital ratios
Tier I risk-based ..................... 8.60% 7.05%
Total risk-based ...................... 12.57 11.08
Leverage .............................. 8.03 6.61
=========================================================================
(a) Includes discontinued operations.
The capital position is managed through balance sheet size and composition,
issuance of debt and equity instruments, treasury stock activities, dividend
policies and retention of earnings.
During 2000, PNC repurchased 6.7 million shares of common stock. On
February 15, 2001, the Board of Directors authorized the Corporation to purchase
up to 15 million shares of common stock through February 28, 2002. This new
program replaces the prior program that was rescinded.
47 |
<PAGE> 17
RISK FACTORS
The Corporation is subject to a number of risk factors, including among others,
those described below and in the Risk Management and Forward-Looking Statements
sections of this Financial Review. These factors and others could impact the
Corporation's business, financial condition and results of operations.
BUSINESS AND ECONOMIC CONDITIONS
The Corporation's business and results of operations are sensitive to general
business and economic conditions in the United States. These conditions include
the level and movement of interest rates, inflation, monetary supply,
fluctuations in both debt and equity capital markets, and the strength of the
U.S. economy, in general, and the regional economies in which the Corporation
conducts business. An economic downturn or higher interest rates could decrease
the demand for loans and other products and services offered by the Corporation,
increase usage of unfunded commitments or increase the number of customers and
counterparties who become delinquent, file for protection under bankruptcy laws
or default on their loans or other obligations to the Corporation. An increase
in the number of delinquencies, bankruptcies or defaults could result in a
higher level of net charge-offs that could result in a higher provision for
credit losses. Changes in interest rates could affect the value of certain
on-balance-sheet and off-balance-sheet financial instruments of the Corporation.
Higher interest rates would also increase the Corporation's cost to borrow funds
and may increase the rate paid on deposits. Also, changes in equity markets
could affect the value of equity investments and the net asset value of assets
under management and administration. A decline in the equity markets could
negatively affect noninterest revenues.
MONETARY AND OTHER POLICIES
The financial services industry is subject to various monetary and other
policies and regulations of the United States government and its agencies, which
include the Federal Reserve Board, the Office of the Comptroller of Currency,
the Federal Deposit Insurance Corporation and 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 determine, to a significant extent, the cost to the Corporation of funds.
COMPETITION
The Corporation operates in a highly competitive environment, both in terms of
the products and services offered and the geographic markets in which PNC
conducts business. This environment could become even more competitive in the
future. The Corporation competes with local, regional and national banks,
thrifts, credit unions and non-bank financial institutions, such as investment
banking firms, investment advisory firms, brokerage firms, investment companies,
venture capital firms, mutual fund complexes and insurance companies, as well as
other entities that offer financial services, and through alternative delivery
channels such as the World Wide Web. Technological advances and new legislation,
among other changes, have lowered barriers to entry and have made it possible
for non-bank institutions to offer products and services that traditionally have
been provided by banks. Many of the Corporation's competitors benefit from fewer
regulatory constraints and lower cost structures, allowing for more competitive
pricing of products and services.
The Gramm-Leach-Bliley Act ("the Act"), which was enacted on November 12,
1999, permits affiliations among banks, securities firms and insurance
companies. The Act significantly changes the competitive environment in which
the Corporation conducts business. This environment could result in a loss of
customers and related revenue.
DISINTERMEDIATION
Disintermediation is the process of eliminating the role of the intermediary in
completing a transaction. For the financial services industry, this means
eliminating or significantly reducing the role of banks and other depository
institutions in completing transactions that have traditionally involved banks.
Disintermediation could result in, among others, the loss of customer deposits
and decreases in transactions that generate fee income.
| 48
<PAGE> 18
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 prices of debt and
equity instruments, among other things, could cause asset management revenue to
decline.
Investment performance is an important factor for the level of assets under
management. Poor investment performance could impair revenue and growth as
existing clients might withdraw funds in favor of better performing products.
Also, performance fees could be lower or nonexistent. Additionally, the ability
to attract funds from existing and new clients might diminish.
FUND SERVICING
Fund servicing fees are primarily based on the market value of the assets and
the number of shareholder accounts administered by the Corporation for its
clients. A rise in interest rates or a decline in the debt and equity markets
could influence an investor's decision whether to invest or maintain an
investment in a mutual fund. As a result, fluctuations may occur in assets that
the Corporation has under administration. A significant investor migration from
mutual fund investments could have a negative impact on the Corporation's
revenues by reducing the assets and the number of shareholder accounts it
administers. There has been and continues to be merger, acquisition and
consolidation activity in the financial services industry. Mergers or
consolidations of financial institutions in the future could reduce the number
of existing or potential fund servicing clients.
ACQUISITIONS
The Corporation expands its business from time to time by acquiring other
financial services companies. Factors pertaining to acquisitions that could
adversely affect the Corporation's business and earnings include, among others:
o anticipated cost savings or potential revenue enhancements that may not be
fully realized or realized within the expected time frame;
o customer loss or revenue loss following an acquisition that may be greater
than expected; and
o costs or difficulties related to the integration of businesses that may be
greater than expected.
RISK MANAGEMENT
In the normal course of business, the Corporation assumes various types of risk,
which include, among others, credit risk, interest rate risk, liquidity risk,
and risk associated with trading activities and financial derivatives. PNC has
risk management processes designed to provide for risk identification,
measurement and monitoring.
CREDIT RISK
Credit risk represents the possibility that a borrower or counterparty may not
perform in accordance with contractual terms. Credit risk is inherent in the
financial services business and results from extending credit to customers,
purchasing securities and entering into off-balance-sheet financial derivative
transactions. The Corporation seeks to manage credit risk through, among other
things, diversification, limiting exposure to any single industry or customer,
requiring collateral, selling participations to third parties, and purchasing
credit-related derivatives.
NONPERFORMING ASSETS
---------------------
December 31 - dollars in millions 2000 1999
================================================================
Nonaccrual loans
Commercial ........................... $312 $219
Commercial real estate ............... 3 21
Residential mortgage ................. 4 48
Consumer ............................. 2 2
Lease financing ...................... 2 1
- ----------------------------------------------------------------
Total nonaccrual loans ............. 323 291
Foreclosed and other assets
Commercial real estate ............... 3 5
Residential mortgage ................. 8 7
Other ................................ 38 22
- ----------------------------------------------------------------
Total foreclosed and other assets .. 49 34
- ----------------------------------------------------------------
Total nonperforming assets ........... $372 $325
================================================================
Nonaccrual loans to total loans ......... .64% .59%
Nonperforming assets to total loans,
loans held for sale and
foreclosed assets .................... .71 .61
Nonperforming assets to total assets .... .53 .47
================================================================
The above table excludes $18 million and $13 million of equity management assets
at December 31, 2000 and 1999, respectively, that are carried at estimated fair
value.
49 |
<PAGE> 19
The amount of nonperforming loans that were current as to principal and
interest was $67 million at December 31, 2000 and $42 million at December 31,
1999. There were no troubled debt restructured loans outstanding as of either
period end.
The increase in nonaccrual loans during 2000 was primarily in specialized
industry segments. A sustained or further weakening of the economy, among other
things, could result in an increase in the number of delinquencies, bankruptcies
or defaults, which could result in a higher level of nonperforming assets, net
charge-offs and provision for credit losses in future periods. See the
Forward-Looking Statements section of this Financial Review for additional
factors that could cause actual results to differ materially from
forward-looking statements or historical performance.
CHANGE IN NONPERFORMING ASSETS
-----------------------
In millions 2000 1999
============================================================
January 1 ......................... $325 $319
Transferred from accrual .......... 471 394
Returned to performing ............ (13) (8)
Principal reductions .............. (184) (265)
Sales ............................. (79) (31)
Charge-offs and other ............. (148) (84)
- ------------------------------------------------------------
December 31 .................... $372 $325
============================================================
ACCRUING LOANS PAST DUE 90 DAYS OR MORE
------------------------------------
Amount Percent of Loans
------------------------------------
December 31 - dollars in millions 2000 1999 2000 1999
========================================================================
Commercial ...................... $46 $30 .22% .14%
Commercial real estate .......... 6 5 .23 .18
Residential mortgage ............ 36 24 .27 .19
Consumer ........................ 24 25 .26 .27
Lease financing ................. 1 2 .03 .07
- --------------------------------------------------
Total ......................... $113 $86 .22 .17
========================================================================
Loans not included in nonaccrual or past due categories, but where information
about possible credit problems causes management to be uncertain about the
borrower's ability to comply with existing repayment terms over the next six
months totaled $182 million at December 31, 2000.
ALLOWANCE FOR CREDIT LOSSES
In determining the adequacy of the allowance for credit losses, the Corporation
makes specific allocations to impaired loans and to pools of watchlist and
nonwatchlist loans for various credit risk factors. Allocations to loan pools
are developed by business segment and risk rating and are based on historical
loss trends and management's judgment concerning those trends and other relevant
factors. Those factors may include, among other things, actual versus estimated
losses, regional and national economic conditions, business segment and
portfolio concentrations, industry competition and consolidation, and the impact
of government regulations. Consumer and residential mortgage loan allocations
are made at a total portfolio level based on historical loss experience adjusted
for portfolio activity and economic conditions.
While PNC's pool reserve methodologies strive to reflect all risk factors,
there continues to be a certain element of risk associated with, but not limited
to, potential estimation or judgmental errors. Unallocated reserves are designed
to provide coverage for such risks. While allocations are made to specific loans
and pools of loans, the total reserve is available for all credit losses.
Senior management's Reserve Adequacy Committee provides oversight for the
allowance evaluation process, including quarterly evaluations and methodology
and estimation changes. The results of the evaluations are reported to the
Credit Committee of the Board of Directors.
The provision for credit losses for 2000 and the evaluation of the
allowance for credit losses as of December 31, 2000 reflected changes in loan
portfolio composition and changes in asset quality. The unallocated portion of
the allowance for credit losses represented 20% of the total allowance and .26%
of total loans at December 31, 2000 compared with 20% and .27%, respectively, at
December 31, 1999.
| 50
<PAGE> 20
ROLLFORWARD OF ALLOWANCE FOR CREDIT LOSSES
---------------------
In millions 2000 1999
===========================================================
January 1 ....................... $674 $753
Charge-offs ..................... (186) (216)
Recoveries ...................... 51 55
- -----------------------------------------------------------
Net charge-offs .............. (135) (161)
Provision for credit losses ..... 136 163
Divestitures .................... (81)
- -----------------------------------------------------------
December 31 .................. $675 $674
===========================================================
The allowance as a percent of nonaccrual loans and total loans was 209% and
1.33%, respectively, at December 31, 2000. The comparable year-end 1999
percentages were 232% and 1.36%, respectively.
CHARGE-OFFS AND RECOVERIES
<TABLE>
<CAPTION>
------------------------------------------------------
Percent of
Year ended December 31 Net Average
Dollars in millions Charge-offs Recoveries Charge-offs Loans
=================================================================================
<S> <C> <C> <C> <C>
2000
Commercial .............. $121 $21 $100 .46%
Commercial real estate .. 3 4 (1) (.04)
Residential mortgage .... 8 2 6 .05
Consumer ................ 46 22 24 .26
Lease financing ......... 8 2 6 .19
- ------------------------------------------------------------------
Total ................. $186 $51 $135 .27
=================================================================================
1999
Commercial .............. $72 $22 $50 .22%
Commercial real estate .. 4 4
Residential mortgage .... 8 1 7 .06
Consumer ................ 63 25 38 .37
Credit card ............. 60 2 58 8.63
Lease financing ......... 9 1 8 .31
- ------------------------------------------------------------------
Total ................. $216 $55 $161 .31
=================================================================================
</TABLE>
INTEREST RATE RISK
Interest rate risk arises primarily through the Corporation's traditional
business activities of extending loans and accepting deposits. Many factors,
including economic and financial conditions, movements in interest rates and
consumer preferences affect the spread between interest earned on assets and
interest paid on liabilities. In managing interest rate risk, the Corporation
seeks to minimize its reliance on a particular interest rate scenario as a
source of earnings while maximizing net interest income and net interest margin.
To further these objectives, the Corporation uses securities purchases and
sales, short-term and long-term funding, financial derivatives and other capital
markets instruments.
Interest rate risk is centrally managed by Asset and Liability Management.
The Corporation actively measures and monitors components of interest rate risk
including term structure or repricing risk, yield curve or nonparallel rate
shift risk, basis risk and options risk. The Corporation measures and manages
both the short-term and long-term effects of changing interest rates. An income
simulation model is designed to measure the sensitivity of net interest income
to changing interest rates over the next twenty-four month period. An economic
value of equity model is designed to measure the sensitivity of the value of
existing on-balance-sheet and off-balance-sheet positions to changing interest
rates.
The income simulation model is the primary tool used to measure the
direction and magnitude of changes in net interest income resulting from changes
in interest rates. Forecasting net interest income and its sensitivity to
changes in interest rates requires that the Corporation make assumptions about
the volume and characteristics of new business and the behavior of existing
positions. These business assumptions are based on the Corporation's experience,
business plans and published industry experience. Key assumptions employed in
the model include prepayment speeds on mortgage-related assets and consumer
loans, loan volumes and pricing, deposit volumes and pricing, the expected life
and repricing characteristics of nonmaturity loans and deposits, and
management's financial and capital plans.
Because these assumptions are inherently uncertain, the model cannot
precisely estimate net interest income or precisely predict the effect of higher
or lower interest rates on net interest income. Actual results will differ from
simulated results due to the timing, magnitude and frequency of interest rate
changes, the difference between actual experience and the assumed volume and
characteristics of new business and behavior of existing positions, and changes
in market conditions and management strategies, among other factors.
The Corporation's interest rate risk management policies provide that net
interest income should not decrease by more than 3% if interest rates gradually
increase or decrease from current rates by 100 basis points over a twelve-month
period. At December 31, 2000, if interest rates were to gradually increase by
100 basis points over the next twelve months, the model indicated that net
interest income would decrease by .3%. If interest rates were to gradually
decrease by 100 basis points over the next twelve months, the model indicated
that net interest income would increase by .4%.
51 |
<PAGE> 21
The Corporation models additional interest rate scenarios covering a wider
range of rate movements to identify yield curve, term structure and basis risk
exposures. These scenarios are developed based on historical rate relationships
or management's expectations regarding the future direction and level of
interest rates. Depending on market conditions and other factors, these
scenarios may be modeled more or less frequently. Such analyses are used to
identify inherent risk and develop appropriate strategies.
An economic value of equity model is used by the Corporation to value all
current on-balance-sheet and off-balance-sheet positions under a range of
instantaneous interest rate changes. The resulting change in the value of equity
is the measure of overall long-term interest rate risk inherent in the
Corporation's existing on-balance-sheet and off-balance-sheet positions. The
Corporation uses the economic value of equity model to complement the net
interest income simulation modeling process.
The Corporation's risk management policies provide that the change in
economic value of equity should not decline by more than 1.5% of the book value
of assets for a 200 basis point instantaneous increase or decrease in interest
rates. Based on the results of the economic value of equity model at December
31, 2000, if interest rates were to instantaneously increase by 200 basis
points, the model indicated that the economic value of existing on-balance-sheet
and off-balance-sheet positions would decline by .8% of assets. If interest
rates were to instantaneously decrease by 200 basis points, the model indicated
that the economic value of existing on-balance-sheet and off-balance-sheet
positions would decrease by .1% of assets.
LIQUIDITY RISK
Liquidity represents the Corporation's ability to obtain cost-effective funding
to meet the needs of customers as well as the Corporation's financial
obligations. Liquidity is centrally managed by Asset and Liability Management,
with oversight provided by the Corporate Asset and Liability Committee and the
Finance Committee of the Board of Directors.
Access to capital markets funding sources is a key factor affecting
liquidity management. Access to such markets is in part based on the
Corporation's credit ratings, which are influenced by a number of factors
including capital ratios, credit quality and earnings. Additional factors that
impact liquidity include the maturity structure of existing assets, liabilities,
and off-balance-sheet positions, the level of liquid securities and loans
available for sale, and the Corporation's ability to securitize and sell various
types of loans.
Liquidity can also be provided through the sale of liquid assets, which
consist of short-term investments, loans held for sale and securities available
for sale. At December 31, 2000, such assets totaled $8.7 billion, with $3.8
billion pledged as collateral for borrowings, trust and other commitments.
Liquidity can also be obtained through secured advances from the Federal Home
Loan Bank, of which PNC Bank, N.A., PNC's largest bank subsidiary, is a member.
These borrowings are generally secured by residential mortgages and
mortgage-backed securities. At December 31, 2000, approximately $7.3 billion of
residential mortgages were available as collateral for borrowings from the
Federal Home Loan Bank. Funding can also be obtained through alternative forms
of borrowing, including federal funds purchased, repurchase agreements and
short-term and long-term debt issuances.
Liquidity for the parent company and subsidiaries is also generated through
the issuance of securities in public or private markets and lines of credit. At
December 31, 2000, the Corporation had unused capacity under effective shelf
registration statements of approximately $1.4 billion of debt and equity
securities and $400 million of trust preferred capital securities. In addition,
the Corporation had an unused line of credit of $500 million.
The principal source of parent company revenue and cash flow is dividends
from subsidiary banks. PNC Bancorp, Inc. is a wholly-owned subsidiary of the
parent company and is the holding company for all bank subsidiaries. There are
legal limitations on the ability of bank subsidiaries to pay dividends and make
other distributions to PNC Bancorp, Inc. and in turn to the parent company.
Without regulatory approval, the amount available for dividend payments to PNC
Bancorp, Inc. by all bank subsidiaries was $634 million at December 31, 2000.
Dividends may also be impacted by capital needs, regulatory requirements,
corporate policies, contractual restrictions and other factors.
Management believes the Corporation has sufficient liquidity to meet
current obligations to borrowers, depositors, debt holders and others. The
impact of replacing maturing liabilities is reflected in the income simulation
model in the overall asset and liability management process.
| 52
<PAGE> 22
TRADING ACTIVITIES
Most of PNC's trading activities are designed to provide capital markets
services to customers and not to position the Corporation's portfolio for gains
from market movements. PNC participates in derivatives and foreign exchange
trading as well as "market making" in equity securities as an accommodation to
customers. PNC also engages in trading activities as part of risk management
strategies.
Risk associated with trading, capital markets and foreign exchange
activities is managed using a value-at-risk approach that combines interest rate
risk, foreign exchange rate risk, spread risk and volatility risk. Using this
approach, exposure is measured as the potential loss due to a two standard
deviation, one-day move in interest rates. The combined period-end value-at-risk
of all trading operations using this measurement was estimated as less than $500
thousand at December 31, 2000.
FINANCIAL DERIVATIVES
The Corporation uses a variety of off-balance-sheet financial derivatives as
part of the overall risk management process to manage the interest rate, market
and credit risk inherent in the Corporation's business activities. Interest rate
swaps and purchased interest rate caps and floors are the primary instruments
used for interest rate risk management. Interest rate swaps are agreements to
exchange fixed and floating interest rate payments calculated on a notional
principal amount. The floating rate is based on a money market index, primarily
short-term LIBOR. Purchased interest rate caps and floors are agreements where,
for a fee, the counterparty agrees to pay the Corporation the amount, if any, by
which a specified market interest rate exceeds or is less than a defined rate
applied to a notional amount, respectively.
Forward contracts provide for the delivery of financial instruments at a
specified future date and at a specified price or yield. Such contracts are
primarily used to manage risk positions associated with certain student lending
activities.
Credit-related derivatives provide, for a fee, an assumption of a portion
of the credit risk associated with the underlying financial instruments. Such
contracts are primarily used to mitigate credit risk and lower the required
regulatory capital associated with commercial lending activities.
Financial derivatives involve, to varying degrees, interest rate, market
and credit risk in excess of the amount on the balance sheet, but less than the
notional amount of the contract. For interest rate swaps, caps and floors, only
periodic cash payments and, with respect to caps and floors, premiums, are
exchanged. Therefore, cash requirements and exposure to credit risk are
significantly less than the notional value.
Not all elements of interest rate, market and credit risk are addressed
through the use of financial derivatives, and such instruments may be
ineffective for their intended purposes due to unanticipated market
characteristics among other reasons.
During 2000, financial derivatives used in interest rate risk management
decreased net interest income by $57 million compared with a $43 million
increase in the prior year.
The following table sets forth changes in the notional value of
off-balance-sheet financial derivatives used for risk management during 2000.
FINANCIAL DERIVATIVES ACTIVITY
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
Weighted-
Average
2000 - dollars in millions January 1 Additions Maturities Terminations December 31 Maturity
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Interest rate risk management
Interest rate swaps
Receive fixed ................................ $7,413 $368 $(2,025) $(1,000) $4,756 2 yrs. 9 mos.
Pay fixed .................................... 5 (4) 1 9 mos.
Basis swaps .................................. 1,650 773 (193) 2,230 3 yrs. 6 mos.
Interest rate caps ............................. 474 (134) (32) 308 3 yrs. 10 mos.
Interest rate floors ........................... 3,311 (55) (18) 3,238 1 yr. 5 mos.
- -----------------------------------------------------------------------------------------------------------------
Total interest rate risk management .......... 12,853 1,141 (2,411) (1,050) 10,533
- -----------------------------------------------------------------------------------------------------------------
Commercial mortgage banking risk management
Interest rate swaps ............................ 643 1,617 (228) (1,646) 386 7 yrs. 4 mos.
Student lending activities - Forward contracts .... 681 143 (3) (474) 347 1 yr. 10 mos.
Credit-related activities - Credit default swaps .. 4,315 169 (88) (5) 4,391 8 mos.
- -----------------------------------------------------------------------------------------------------------------
Total .......................................... $18,492 $3,070 $(2,730) $(3,175) $15,657
===================================================================================================================================
</TABLE>
53 |
<PAGE> 23
The following table sets forth, by designated assets and liabilities, the
notional value and the estimated fair value of financial derivatives used for
risk management. Weighted-average interest rates presented are based on the
implied forward yield curve at December 31, 2000.
FINANCIAL DERIVATIVES
<TABLE>
<CAPTION>
---------------------------------------------------------
Weighted-Average Interest Rates
Notional Estimated -------------------------------
December 31, 2000 - dollars in millions Value Fair Value Paid Received
===================================================================================================================================
<S> <C> <C> <C> <C>
Interest rate risk management
Asset rate conversion
Interest rate swaps (1)
Receive fixed designated to loans ............................ $3,250 $27 5.96% 5.56%
Basis swaps designated to other earning assets ............... 226 3 5.63 5.85
Interest rate caps designated to loans (2) ..................... 308 4 NM NM
Interest rate floors designated to loans (3) ................... 3,238 (1) NM NM
- --------------------------------------------------------------------------------------------------
Total asset rate conversion ................................ 7,022 33
- --------------------------------------------------------------------------------------------------
Liability rate conversion
Interest rate swaps (1)
Receive fixed designated to:
Interest-bearing deposits .................................. 125 4 5.85 6.73
Borrowed funds ............................................. 1,381 57 5.96 6.60
Pay fixed designated to borrowed funds ....................... 1 5.88 5.78
Basis swaps designated to borrowed funds ..................... 2,004 10 5.76 5.79
- --------------------------------------------------------------------------------------------------
Total liability rate conversion ............................ 3,511 71
- --------------------------------------------------------------------------------------------------
Total interest rate risk management ............................ 10,533 104
- --------------------------------------------------------------------------------------------------
Commercial mortgage banking risk management
Pay fixed interest rate swaps designated to securities (1) ....... 135 (8) 6.94 6.04
Pay fixed interest rate swaps designated to loans (1) ............ 251 (2) 6.27 6.04
- --------------------------------------------------------------------------------------------------
Total commercial mortgage banking risk management .............. 386 (10)
- --------------------------------------------------------------------------------------------------
Student lending activities - Forward contracts ...................... 347 NM NM
Credit-related activities - Credit default swaps .................... 4,391 (2) NM NM
- --------------------------------------------------------------------------------------------------
Total financial derivatives ...................................... $15,657 $92
=============================================================================================================================
</TABLE>
(1) The floating rate portion of interest rate contracts is based on
money-market indices. As a percent of notional value, 62% were based on
1-month LIBOR, 36% on 3-month LIBOR and the remainder on other short-term
indices.
(2) Interest rate caps with notional values of $61 million, $95 million and
$150 million require the counterparty to pay the Corporation the excess, if
any, of 3-month LIBOR over a weighted-average strike of 6.00%, 1-month
LIBOR over a weighted-average strike of 5.68% and Prime over a weighted-
average strike of 8.76%, respectively. At December 31, 2000, 3-month LIBOR
was 6.40%, 1-month LIBOR was 6.56% and Prime was 9.50%.
(3) Interest rate floors with notional values of $3.0 billion, require the
counterparty to pay the excess, if any, of the weighted-average strike of
4.63% over 3-month LIBOR. At December 31, 2000, 3-month LIBOR was 6.40%.
NM - Not meaningful
OTHER DERIVATIVES
To accommodate customer needs, PNC enters into customer-related financial
derivative transactions primarily consisting of interest rate swaps, caps,
floors and foreign exchange contracts. Risk exposure from customer positions is
managed through transactions with other dealers.
Additionally, the Corporation enters into other derivative transactions for
risk management purposes. These positions are recorded at estimated fair value
and changes in value are included in results of operations.
| 54
<PAGE> 24
OTHER DERIVATIVES
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
At December 31, 2000
--------------------------------------------------------- 2000
Positive Negative Average
Notional Fair Fair Net Asset Fair
In millions Value Value Value (Liability) Value
=======================================================================================================
<S> <C> <C> <C> <C> <C>
Customer-related
Interest rate
Swaps ................... $13,567 $120 $(127) $(7) $(1)
Caps/floors
Sold .................. 5,145 (17) (17) (23)
Purchased ............. 3,914 15 15 21
Foreign exchange .......... 6,108 79 (82) (3) 7
Other ..................... 2,544 59 (59) 4
- -------------------------------------------------------------------------------------------------------
Total customer-related 31,278 273 (285) (12) 8
Other ........................ 1,207 13 (1) 12 8
- -------------------------------------------------------------------------------------------------------
Total other derivatives ... $32,485 $286 $(286) $16
=======================================================================================================
</TABLE>
The following table sets forth, by designated assets and liabilities, the
notional value and the estimated fair value of financial derivatives used for
risk management. Weighted-average interest rates presented are based on the
implied forward yield curve at December 31, 1999.
FINANCIAL DERIVATIVES
<TABLE>
<CAPTION>
-------------------------------------------------------------
Weighted-Average Interest Rates
Notional Estimated -------------------------------
December 31, 1999 - dollars in millions Value Fair Value Paid Received
=============================================================================================================================
<S> <C> <C> <C> <C>
Interest rate risk management
Asset rate conversion
Interest rate swaps (1)
Receive fixed designated to loans ....................... $5,550 $(48) 6.53% 5.49%
Basis swaps designated to other earning assets .......... 226 3 6.44 6.72
Interest rate caps designated to loans (2) ................ 474 12 NM NM
Interest rate floors designated to loans (3) .............. 3,311 NM NM
- ---------------------------------------------------------------------------------------------
Total asset rate conversion ........................... 9,561 (33)
- ---------------------------------------------------------------------------------------------
Liability rate conversion
Interest rate swaps (1)
Receive fixed designated to:
Interest-bearing deposits ............................. 150 (2) 6.85 6.65
Borrowed funds ........................................ 1,713 (23) 6.75 6.24
Pay fixed designated to borrowed funds .................. 5 1 6.09 7.04
Basis swaps designated to borrowed funds ................ 1,424 7 6.70 6.71
- ---------------------------------------------------------------------------------------------
Total liability rate conversion ....................... 3,292 (17)
- ---------------------------------------------------------------------------------------------
Total interest rate risk management ....................... 12,853 (50)
- ---------------------------------------------------------------------------------------------
Commercial mortgage banking risk management
Pay fixed interest rate swaps designated to securities (1) .. 144 3 7.16 6.08
Pay fixed interest rate swaps designated to loans (1) ....... 499 48 5.49 7.05
- ---------------------------------------------------------------------------------------------
Total commercial mortgage banking risk management ......... 643 51
- ---------------------------------------------------------------------------------------------
Student lending activities - Forward contracts ................. 681 NM NM
Credit-related activities - Credit default swaps ............... 4,315 (4) NM NM
- ---------------------------------------------------------------------------------------------
Total financial derivatives ................................. $18,492 $(3)
=============================================================================================================================
</TABLE>
(1) The floating rate portion of interest rate contracts is based on
money-market indices. As a percent of notional value, 27% were based on
1-month LIBOR, 70% on 3-month LIBOR and the remainder on other short-term
indices.
(2) Interest rate caps with notional values of $142 million, $129 million and
$199 million require the counterparty to pay the Corporation the excess, if
any, of 3-month LIBOR over a weighted-average strike of 6.16%, 1-month
LIBOR over a weighted-average strike of 5.72% and Prime over a
weighted-average strike of 8.76%, respectively. At December 31, 1999,
3-month LIBOR was 6.00%, 1-month LIBOR was 5.82% and Prime was 8.50%.
(3) Interest rate floors with notional values of $3.0 billion require the
counterparty to pay the Corporation the excess, if any, of the
weighted-average strike of 4.63% over 3-month LIBOR. At December 31, 1999,
3-month LIBOR was 6.00%.
NM - Not meaningful
55 |
<PAGE> 25
1999 VERSUS 1998
CONSOLIDATED INCOME STATEMENT REVIEW
OVERVIEW
Earnings for 1999 were $1.202 billion or $3.94 per diluted share and included
one-time gains that were partially offset by the cost of certain strategic
initiatives. Cash earnings per diluted share were $4.21 for 1999, a 14% increase
compared with 1998.
Core earnings, which exclude one-time gains and the cost of certain
strategic initiatives, were $1.137 billion or $3.72 per diluted share, a 7%
increase compared with 1998. On a core basis, return on average common
shareholders' equity was 20.12% and return on average assets was 1.66% compared
with 20.14% and 1.55%, respectively, in the prior year. Core cash earnings per
diluted share were $4.00 for 1999, an 8% increase compared with 1998.
The following table summarizes one-time gains and the cost of certain
strategic initiatives and reconciles reported to core earnings for 1999.
-----------------------------
Year ended December 31, 1999 - in millions Pretax After-tax
==============================================================================
Reported earnings ............................ $1,788 $1,202
Gain on sale of credit card business ...... (193) (125)
Gain on sale of equity interest in EPS .... (97) (63)
BlackRock IPO gain ........................ (64) (59)
Branch gains .............................. (27) (17)
Gain on sale of Concord stock,
net of PNC Foundation
contribution .............................. (11) (16)
Wholesale lending repositioning ........... 195 126
Costs related to efficiency initiatives ... 98 64
Write-down of an equity investment ........ 28 18
Mall ATM buyout ........................... 12 7
- ------------------------------------------------------------------------------
Core earnings ................................ $1,729 $1,137
==============================================================================
NET INTEREST INCOME
Taxable-equivalent net interest income was $2.366 billion for 1999, a $148
million decrease compared with 1998. The net interest margin was 3.86% for 1999
compared with 3.99% in the prior year. These declines were primarily due to the
sale of the credit card business in the first quarter of 1999. Excluding the
credit card business, net interest income for 1999 increased $107 million or 5%
and the net interest margin widened nine basis points compared with the prior
year. The increases were primarily due to higher commercial and other loans that
resulted from strong growth in middle market lending and the strategic expansion
of secured and equipment lease financing.
PROVISION FOR CREDIT LOSSES
The provision for credit losses was $163 million in 1999 compared with $225
million in 1998. Net charge-offs were $161 million or .31% of average loans for
1999 compared with $447 million or .80%, respectively, in 1998. The decreases
were primarily due to the sale of the credit card business in the first quarter
of 1999. Excluding credit cards, net charge-offs were .20% of average loans for
1999 compared with .32% in 1998.
NONINTEREST INCOME
Noninterest income was $2.450 billion for 1999 and represented 51% of total
revenue compared with $2.086 billion and 45%, respectively, in 1998. The
increases were primarily due to strong growth in fee-based businesses.
Asset management fees of $681 million for 1999 increased $143 million or
26% compared with 1998, excluding performance fees associated with BAI, a pooled
investment fund that was liquidated in 1999, and revenue from the corporate
trust business that was sold in 1998. Assets under management increased to
approximately $213 billion at December 31, 1999 compared with $174 billion at
December 31, 1998.
Mutual fund servicing fees of $251 million for 1999 increased $69 million
or 38% compared with 1998 of which $30 million was attributable to the one-month
impact of the ISG acquisition. The remaining increase was primarily due to new
and existing client growth as well as market appreciation.
Service charges on deposits of $207 million were consistent with the prior
year. Brokerage income of $219 million in 1999 increased $128 million compared
with 1998 primarily due to the acquisition of Hilliard Lyons. Consumer services
revenue of $218 million for 1999 decreased $67 million compared with 1998
primarily due to the sale of the credit card business in the first quarter of
1999.
| 56
<PAGE> 26
The decrease in corporate services revenue primarily reflected the impact
of $188 million of valuation adjustments in 1999 associated with the exit of
certain non-strategic lending businesses. Excluding valuation adjustments in
both years, corporate services revenue was $321 million and $275 million for
1999 and 1998, respectively, a 17% increase primarily due to growth in
commercial mortgage banking, capital markets and treasury management fees.
Equity management income was $100 million for 1999 and $96 million for
1998. Both years benefited from strong equity market conditions. Net securities
gains for 1999 were $22 million and included a $41 million gain from the sale of
Concord stock that was partially offset by a $28 million write-down of an equity
investment. Sale of subsidiary stock of $64 million in 1999 reflected the gain
from the BlackRock IPO.
Other noninterest income included a $193 million gain from the sale of the
credit card business in the first quarter of 1999. Also included in other
noninterest income was a $97 million gain from the sale of an equity interest in
Electronic Payment Services, Inc. ("EPS"), $27 million of gains from the sale of
retail branches and $7 million of valuation adjustments. During 1998, other
noninterest income included a $97 million gain from the sale of the corporate
trust business, $86 million of branch gains and a $21 million loss from the sale
of a credit card portfolio. Excluding these items, other noninterest income
increased $65 million in the comparison primarily due to the Hilliard Lyons
acquisition.
NONINTEREST EXPENSE
Noninterest expense was $2.843 billion for 1999 compared with $2.698 billion in
1998. The increase was primarily to support revenue growth in fee-based
businesses. On a comparable basis, noninterest expense increased $81 million or
3% excluding $98 million of costs related to efficiency initiatives
(compensation - $22 million, net occupancy - $35 million, equipment - $38
million and other - $3 million), a $30 million contribution to the PNC
Foundation and $12 million of expense associated with the buyout of PNC's mall
ATM marketing representative from 1999. For 1998, $55 million of costs related
to consumer banking initiatives and $21 million of merger and acquisition
integration costs were excluded from the comparison. The efficiency ratio was
55% for 1999 and 1998 reflecting a continued focus on improving returns in
traditional businesses. Average full-time equivalent employees were relatively
consistent in the year-to-year comparison and totaled approximately 22,700 and
23,000 in 1999 and 1998, respectively.
CONSOLIDATED BALANCE SHEET REVIEW
LOANS
Loans were $49.7 billion at December 31, 1999, an $8.0 billion decrease from
year-end 1998 primarily due to the impact of strategies designed to reduce
balance sheet leverage in lower-return businesses.
SECURITIES AVAILABLE FOR SALE
Securities available for sale increased $1.5 billion from December 31, 1998, to
$6.0 billion at December 31, 1999. The expected weighted-average life of
securities available for sale increased to 4 years and 7 months at December 31,
1999, compared with 2 years and 8 months at year-end 1998.
FUNDING SOURCES
Total funding sources were $60.0 billion at December 31, 1999, a decrease of
$2.1 billion compared with December 31, 1998 primarily resulting from reduced
wholesale funding related to the credit card business that was sold in the first
quarter of 1999.
Total demand, savings and money market deposits decreased approximately
$190 million in the year-to-year comparison as increases in money market
deposits were more than offset by decreases in time deposits, primarily due to
decreases in higher-rate certificates of deposit.
ASSET QUALITY
The ratio of nonperforming assets to total loans, loans held for sale and
foreclosed assets was .61% at December 31, 1999 and .55% at December 31, 1998.
Nonperforming assets were $325 million at December 31, 1999 compared with $319
million at December 31, 1998. The allowance for credit losses was $674 million
and represented 232% of nonaccrual loans and 1.36% of total loans at December
31, 1999. The comparable ratios were 263% and 1.31%, respectively, at December
31, 1998.
CAPITAL
Shareholders' equity totaled $5.9 billion and $6.0 billion at December 31, 1999
and 1998, respectively, and the leverage ratio was 6.61% and 7.28% in the
comparison. Tier I and total risk-based capital ratios were 7.05% and 11.08%,
respectively, at December 31, 1999, compared with 7.80% and 11.16%,
respectively, at December 31, 1998, computed on a basis including discontinued
operations.
57 |
<PAGE> 27
FORWARD-LOOKING STATEMENTS
This report and other documents filed by the Corporation with the SEC include
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act with respect to future financial or business performance,
conditions, strategies, expectations and goals. In addition, the Corporation may
also include forward-looking statements in other written or oral statements.
Forward-looking statements are typically identified by words or phrases such as
"believe," "expect," "anticipate," "intend," "estimate," "position," "target,"
"mission," "assume," "achievable," "potential," "strategy," "goal," "objective,"
"plan," "aspiration," "outlook," "outcome," "continue," "remain," "maintain,"
"strive," "trend" and variations of such words and similar expressions, or
future or conditional verbs such as "will," "would," "should," "could," "may" or
similar expressions.
The Corporation cautions that 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 these factors and those mentioned elsewhere in this report,
the following factors, among others, could cause actual results to differ
materially from forward-looking statements or historical performance: decisions
the Corporation makes with respect to the redeployment of available capital;
changes in asset quality and credit risk; economic conditions; changes in
financial and capital markets; the inability to sustain revenue and earnings
growth; changes in interest rates; inflation; changes in values of assets under
management and assets serviced; relative investment performance of assets under
management; customer acceptance of PNC products and services; customer
borrowing, repayment, investment, and deposit practices; customer
disintermediation; valuation of debt and equity investments; the inability to
successfully manage risks inherent in the Corporation's business; the
introduction, withdrawal, success and timing of business initiatives and
strategies; the extent and cost of any share repurchases; decisions the
Corporation makes with respect to further reduction of balance sheet leverage
and potential investments in PNC businesses; competitive conditions; the
inability to realize cost savings or revenue enhancements, implement integration
plans and other consequences associated with mergers, acquisitions,
restructurings and divestitures; and the impact, extent and timing of
technological changes, capital management activities, and actions of the Federal
Reserve Board and legislative and regulatory actions and reforms. Further, an
increase in the number of customer or counterparty delinquencies, bankruptcies,
or defaults could result in, among other things, a higher loan loss provision
and reduced profitability.
Some of the above factors are described in more detail in the Risk Factors
section of this Financial Review and factors relating to credit risk, interest
rate risk, liquidity risk, trading activities and financial derivatives are
discussed in the Risk Management section of this Financial Review. Other factors
are described elsewhere in this report.
| 58
<PAGE> 28
REPORTS ON CONSOLIDATED FINANCIAL STATEMENTS
The PNC Financial Services Group, Inc.
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
The PNC Financial Services Group, Inc. is responsible for the preparation,
integrity and fair presentation of its published financial statements. The
accompanying consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States and, as such,
include judgments and estimates of management. The PNC Financial Services Group,
Inc. also prepared the other information included in the Annual Report and is
responsible for its accuracy and consistency with the consolidated financial
statements.
Management is responsible for establishing and maintaining effective
internal control over financial reporting. The internal control system is
augmented by written policies and procedures and by audits performed by an
internal audit staff, which reports to the Audit Committee of the Board of
Directors. The Audit Committee, composed solely of independent directors,
provides oversight to management's conduct of the financial reporting process.
There are inherent limitations in the effectiveness of any system of
internal control, including the possibility of human error and circumvention or
overriding of controls. Accordingly, even effective internal control can provide
only reasonable assurance with respect to financial statement preparation.
Further, because of changes in conditions, the effectiveness of internal control
may vary over time.
Management assessed The PNC Financial Services Group, Inc.'s internal
control over financial reporting as of December 31, 2000. This assessment was
based on criteria for effective internal control over financial reporting
described in "Internal Control-Integrated Framework" issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on this assessment,
management believes that The PNC Financial Services Group, Inc. maintained an
effective internal control system over financial reporting as of December 31,
2000.
/s/ James E. Rohr /s/ Robert L. Haunschild
- --------------------------- ----------------------------
James E. Rohr Robert L. Haunschild
President and Senior Vice President and
Chief Executive Officer Chief Financial Officer
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Shareholders and Board of Directors
The PNC Financial Services Group, Inc.
We have audited the accompanying consolidated balance sheet of The PNC Financial
Services Group, Inc. and subsidiaries as of December 31, 2000 and 1999, and the
related consolidated statements of income, shareholders' equity, and cash flows
for each of the three years in the period ended December 31, 2000. These
financial statements are the responsibility of The PNC Financial Services Group,
Inc.'s management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of The PNC
Financial Services Group, Inc. and subsidiaries at December 31, 2000 and 1999,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 2000, in conformity with
accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
- -------------------------------
Pittsburgh, Pennsylvania
January 31, 2001
59 |
<PAGE> 29
CONSOLIDATED STATEMENT OF INCOME
The PNC Financial Services Group, Inc.
<TABLE>
<CAPTION>
Year ended December 31
----------------------------------------
In millions, except per share data 2000 1999 1998
===========================================================================================================
<S> <C> <C> <C>
INTEREST INCOME
Loans and fees on loans ................................. $4,045 $4,064 $4,585
Securities available for sale ........................... 386 362 361
Loans held for sale ..................................... 204 104 21
Other ................................................... 97 53 57
- ----------------------------------------------------------------------------- ----------------------
Total interest income .............................. 4,732 4,583 5,024
- ----------------------------------------------------------------------------- ----------------------
INTEREST EXPENSE
Deposits ................................................ 1,653 1,369 1,471
Borrowed funds .......................................... 915 870 1,065
- ----------------------------------------------------------------------------- ----------------------
Total interest expense ............................. 2,568 2,239 2,536
- ----------------------------------------------------------------------------- ----------------------
Net interest income ................................ 2,164 2,344 2,488
Provision for credit losses ............................. 136 163 225
- ----------------------------------------------------------------------------- ----------------------
Net interest income less provision for credit losses 2,028 2,181 2,263
============================================================================= ======================
NONINTEREST INCOME
Asset management ........................................ 809 681 626
Fund servicing .......................................... 654 251 182
Service charges on deposits ............................. 206 207 203
Brokerage ............................................... 249 219 91
Consumer services ....................................... 209 218 285
Corporate services ...................................... 342 133 245
Equity management ....................................... 133 100 96
Net securities gains .................................... 20 22 16
Sale of subsidiary stock ................................ 64
Other ................................................... 269 555 342
- ----------------------------------------------------------------------------- ----------------------
Total noninterest income ........................... 2,891 2,450 2,086
============================================================================= ======================
NONINTEREST EXPENSE
Staff expense ........................................... 1,616 1,380 1,269
Net occupancy ........................................... 203 224 189
Equipment ............................................... 224 232 192
Amortization ............................................ 110 92 110
Marketing ............................................... 70 70 92
Distributions on capital securities ..................... 67 65 60
Other ................................................... 781 780 786
- ----------------------------------------------------------------------------- ----------------------
Total noninterest expense .......................... 3,071 2,843 2,698
============================================================================= ======================
Income from continuing operations before income taxes ... 1,848 1,788 1,651
Income taxes ............................................ 634 586 571
- ----------------------------------------------------------------------------- ----------------------
Income from continuing operations ....................... 1,214 1,202 1,080
Income from discontinued operations
(less applicable income taxes of $44, $41, and $24) .. 65 62 35
- ----------------------------------------------------------------------------- ----------------------
Net income ......................................... $1,279 $1,264 $1,115
============================================================================= ======================
EARNINGS PER COMMON SHARE
CONTINUING OPERATIONS
Basic ................................................... $4.12 $3.98 $3.53
Diluted ................................................. 4.09 3.94 3.49
NET INCOME
Basic ................................................... 4.35 4.19 3.64
Diluted ................................................. 4.31 4.15 3.60
CASH DIVIDENDS DECLARED PER COMMON SHARE ................ 1.83 1.68 1.58
AVERAGE COMMON SHARES OUTSTANDING
Basic ................................................... 290.0 296.9 300.8
Diluted ................................................. 292.8 300.0 305.1
============================================================================= ======================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
| 60
<PAGE> 30
CONSOLIDATED BALANCE SHEET
The PNC Financial Services Group, Inc.
<TABLE>
<CAPTION>
December 31
-----------------------------
In millions, except par value 2000 1999
==============================================================================================================
<S> <C> <C>
ASSETS
Cash and due from banks ...................................................... $3,662 $3,080
Short-term investments ....................................................... 1,151 1,100
Loans held for sale .......................................................... 1,655 3,477
Securities available for sale ................................................ 5,902 5,960
Loans, net of unearned income of $999 and $724 ............................... 50,601 49,673
Allowance for credit losses ............................................... (675) (674)
- --------------------------------------------------------------------------------------------------------------
Net loans ............................................................... 49,926 48,999
Goodwill and other amortizable assets ........................................ 2,468 2,512
Investment in discontinued operations ........................................ 356 263
Other ........................................................................ 4,724 3,895
- --------------------------------------------------------------------------------------------------------------
Total assets ............................................................ $69,844 $69,286
==============================================================================================================
LIABILITIES
Deposits
Noninterest-bearing ....................................................... $8,490 $8,161
Interest-bearing .......................................................... 39,174 37,641
- --------------------------------------------------------------------------------------------------------------
Total deposits .......................................................... 47,664 45,802
Borrowed funds
Federal funds purchased ................................................... 1,445 1,281
Repurchase agreements ..................................................... 607 402
Bank notes and senior debt ................................................ 6,110 6,975
Federal Home Loan Bank borrowings ......................................... 500 2,258
Subordinated debt ......................................................... 2,407 2,327
Other borrowed funds ...................................................... 649 986
- --------------------------------------------------------------------------------------------------------------
Total borrowed funds .................................................... 11,718 14,229
Other ........................................................................ 2,958 2,461
- --------------------------------------------------------------------------------------------------------------
Total liabilities ....................................................... 62,340 62,492
==============================================================================================================
Mandatorily redeemable capital securities of subsidiary trusts ............... 848 848
SHAREHOLDERS' EQUITY
Preferred stock .............................................................. 7 7
Common stock - $5 par value
Authorized 450 shares
Issued 353 shares ......................................................... 1,764 1,764
Capital surplus .............................................................. 1,303 1,276
Retained earnings ............................................................ 6,736 6,006
Deferred benefit expense ..................................................... (25) (17)
Accumulated other comprehensive loss from continuing operations .............. (43) (132)
Accumulated other comprehensive loss from discontinued operations ............ (45) (135)
Common stock held in treasury at cost: 63 and 60 shares ...................... (3,041) (2,823)
- --------------------------------------------------------------------------------------------------------------
Total shareholders' equity .............................................. 6,656 5,946
- --------------------------------------------------------------------------------------------------------------
Total liabilities, capital securities and shareholders' equity .......... $69,844 $69,286
==============================================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
61 |
<PAGE> 31
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
The PNC Financial Services Group, Inc.
<TABLE>
<CAPTION>
Accumulated Other
Comprehensive Loss from
------------------------
Deferred
Preferred Common Capital Retained Benefit Continuing Discontinued Treasury
In millions Stock Stock Surplus Earnings Expense Operations Operations Stock Total
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1998 ................ $7 $1,742 $1,042 $4,641 $(41) $(19) $(4) $(1,984) $5,384
Net income ................................ 1,115 1,115
Net unrealized securities gains (losses) .. 2 (15) (13)
Minimum pension liability adjustment ...... (7) (7)
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income ................... 1,095
- ------------------------------------------------------------------------------------------------------------------------------------
Cash dividends declared
Common ................................. (476) (476)
Preferred .............................. (19) (19)
Common stock issued (4.4 shares) .......... 22 99 121
Treasury stock activity
(1.1 net shares purchased) ............. 90 (177) (87)
Tax benefit of ESOP and
stock option plans ..................... 19 1 20
Deferred benefit expense .................. 5 5
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 ........... 7 1,764 1,250 5,262 (36) (24) (19) (2,161) 6,043
===================================================================================================================================
Net income ................................ 1,264 1,264
Net unrealized securities losses .......... (103) (116) (219)
Minimum pension liability adjustment ...... (5) (5)
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income ................... 1,040
- ------------------------------------------------------------------------------------------------------------------------------------
Cash dividends declared
Common ................................. (501) (501)
Preferred .............................. (19) (19)
Treasury stock activity
(11.0 net shares purchased) ............ 13 (662) (649)
Tax benefit of ESOP and
stock option plans ..................... 13 13
Deferred benefit expense .................. 19 19
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 ........... 7 1,764 1,276 6,006 (17) (132) (135) (2,823) 5,946
===================================================================================================================================
Net income ................................ 1,279 1,279
Net unrealized securities gains ........... 88 90 178
Minimum pension liability adjustment ...... 1 1
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income ................... 1,458
- -----------------------------------------------------------------------------------------------------------------------------------
Cash dividends declared
Common ................................. (530) (530)
Preferred .............................. (19) (19)
Treasury stock activity
(3.1 net shares purchased) ............. 6 (218) (212)
Tax benefit of ESOP and
stock option plans ..................... 21 21
Deferred benefit expense .................. (8) (8)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2000 ........... $7 $1,764 $1,303 $6,736 $(25) $(43) $(45) $(3,041) $6,656
===================================================================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
| 62
<PAGE> 32
CONSOLIDATED STATEMENT OF CASH FLOWS
The PNC Financial Services Group, Inc.
<TABLE>
<CAPTION>
Year ended December 31
---------------------------------------------
In millions 2000 1999 1998
==================================================================================================================
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income ................................................... $1,279 $1,264 $1,115
Income from discontinued operations .......................... (65) (62) (35)
- -------------------------------------------------------------------------------- ----------------------------
Net income from continuing operations ..................... 1,214 1,202 1,080
Adjustments to reconcile net income from continuing operations
to net cash provided by operating activities
Provision for credit losses ............................... 136 163 225
Depreciation, amortization and accretion .................. 340 305 310
Deferred income taxes ..................................... 376 97 207
Net securities gains ...................................... (29) (25) (16)
Gain on sale of businesses ................................ (317) (162)
Valuation adjustments ..................................... 27 195 30
Change in
Loans held for sale ....................................... 1,652 175 (878)
Other ..................................................... (668) (23) (70)
- -------------------------------------------------------------------------------- ----------------------------
Net cash provided by operating activities ................. 3,048 1,772 726
================================================================================ ============================
INVESTING ACTIVITIES
Net change in loans .......................................... (1,505) 348 (6,020)
Repayment of securities available for sale ................... 920 1,303 813
Sales
Securities available for sale ............................. 8,427 7,553 9,646
Loans ..................................................... 551 648 3,030
Foreclosed assets ......................................... 24 36 63
Purchases
Securities available for sale ............................. (9,147) (9,576) (6,864)
Loans ..................................................... (363) (129)
Net cash (paid) received for divestitures/acquisitions ....... (30) 1,854 (1,031)
Other ........................................................ (301) (139) (241)
- -------------------------------------------------------------------------------- ----------------------------
Net cash (used) provided by investing activities .......... (1,061) 1,664 (733)
================================================================================ ============================
FINANCING ACTIVITIES
Net change in
Noninterest-bearing deposits .............................. 329 (1,289) (444)
Interest-bearing deposits ................................. 1,533 1,328 272
Federal funds purchased ................................... 164 891 (3,242)
Sale/issuance
Repurchase agreements ..................................... 171,850 131,084 94,297
Bank notes and senior debt ................................ 2,849 2,416 9,229
Federal Home Loan Bank borrowings ......................... 1,781 1,696 4,326
Subordinated debt ......................................... 100 650 140
Other borrowed funds ...................................... 37,060 32,997 92,859
Capital securities ........................................ 198
Common stock .............................................. 189 141 123
Repayment/maturity
Repurchase agreements ..................................... (171,645) (131,129) (94,336)
Bank notes and senior debt ................................ (3,715) (5,827) (8,672)
Federal Home Loan Bank borrowings ......................... (3,539) (1,802) (2,253)
Subordinated debt ......................................... (20) (104)
Other borrowed funds ...................................... (37,367) (32,614) (93,363)
Acquisition of treasury stock ................................ (428) (803) (342)
Cash dividends paid .......................................... (546) (520) (495)
- -------------------------------------------------------------------------------- ----------------------------
Net cash used by financing activities ..................... (1,405) (2,885) (1,703)
================================================================================ ============================
INCREASE (DECREASE) IN CASH AND DUE FROM BANKS ............... 582 551 (1,710)
Cash and due from banks at beginning of year .............. 3,080 2,529 4,239
- -------------------------------------------------------------------------------- ----------------------------
Cash and due from banks at end of year .................... $3,662 $3,080 $2,529
================================================================================ ============================
CASH PAID FOR
Interest .................................................. $2,598 $2,237 $2,540
Income taxes .............................................. 289 344 362
NON-CASH ITEMS
Transfer to (from) loans from (to) loans held for sale .... 143 (3,378) 429
Transfer from loans to other assets ....................... 23 37 40
Conversion of debt to equity .............................. 55
================================================================================ ============================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
63 |
<PAGE> 33
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
community banking, corporate banking, real estate finance, asset-based lending,
wealth management, asset management and global fund services businesses. 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 products and services
internationally. PNC is subject to intense competition from other financial
services companies and is subject to regulation by certain federal and state
agencies and undergoes periodic examinations by those authorities.
NOTE 1 ACCOUNTING POLICIES
BASIS OF FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements include the accounts of PNC and its
subsidiaries, most of which are wholly owned. Such statements have been prepared
in accordance with accounting principles generally accepted in the United
States. All significant intercompany accounts and transactions have been
eliminated. Certain prior-period amounts have been reclassified to conform with
the current period presentation. These classifications did not impact the
Corporation's financial condition or results of operations.
In preparing the consolidated financial statements, management is required
to make estimates and assumptions that affect the amounts reported. Actual
results will differ from such estimates and the differences may be material to
the consolidated financial statements.
The Consolidated Financial Statements and Notes to Consolidated Financial
Statements reflect the residential mortgage banking business, which was sold on
January 31, 2001, as discontinued operations, unless otherwise noted.
LOANS HELD FOR SALE
Loans are designated as held for sale when the Corporation has a positive intent
to sell them. Loans are transferred at the lower of cost or market to the loans
held for sale category. Upon the transfer, related write-downs on loans
classified as nonaccrual are charged against the allowance for credit losses and
for all other loans write-downs are charged to noninterest income. Such loans
are carried at the lower of cost or aggregate market value and related valuation
adjustments subsequent to transfer are included in noninterest income.
SECURITIES
Securities purchased with the intention of recognizing short-term profits are
placed in the trading account, carried at market value and classified as
short-term investments. Gains and losses on trading securities are included in
noninterest income. Securities not classified as trading are designated as
securities available for sale and carried at fair value with unrealized gains
and losses, net of income taxes, reflected in accumulated other comprehensive
income or loss. Gains and losses realized on the sale of securities available
for sale are computed on a specific security basis and included in noninterest
income.
LOANS
Loans are stated at the principal amounts outstanding, net of unearned income.
Interest income with respect to loans is accrued on the principal amount
outstanding, except for lease financing income which is recognized over its
respective terms using methods which approximate the level yield method.
Significant loan fees are deferred and accreted to interest income over the
respective lives of the loans.
LOAN SECURITIZATIONS AND RETAINED INTERESTS
The Corporation sells mortgage and other loans through secondary market
securitizations. In certain cases, the Corporation will retain interest-only
strips, servicing rights and cash reserve accounts, all of which are associated
with the securitized asset. Any gain or loss recognized on the sale of the loans
depends in part on the previous carrying amount, allocated between the loans
sold and the retained interests, based on their relative fair market values at
the date of transfer. The Corporation generally estimates fair value based on
the present value of future expected cash flows using assumptions as to discount
rates, prepayment speeds, credit losses and servicing costs, if applicable.
| 64
<PAGE> 34
Servicing rights are maintained at the lower of carrying value or fair
market value and are amortized in proportion to estimated net servicing income.
Retained interests in loan securitizations are carried at fair market value and,
if included in securities available for sale, adjusted to fair market value
through accumulated other comprehensive income or loss. Fair market value
adjustments for all other retained interests are recorded in noninterest income.
For servicing rights retained, the Corporation generally receives a fee for
servicing the securitized loans.
NONPERFORMING ASSETS
Nonperforming assets are comprised of nonaccrual loans, troubled debt
restructurings, nonaccrual loans held for sale and foreclosed assets. Generally,
loans other than consumer are classified as nonaccrual when it is determined
that the collection of interest or principal is doubtful or when a default of
interest or principal has existed for 90 days or more, unless the loans are well
secured and in the process of collection. When interest accrual is discontinued,
accrued but uncollected interest credited to income in the current year is
reversed and unpaid interest accrued in the prior year, if any, is charged
against the allowance for credit losses. Consumer loans are generally charged
off when payments are past due 120 days.
A loan is categorized as a troubled debt restructuring in the year of
restructuring if a concession is granted to the borrower due to a deterioration
in the financial condition of the borrower.
Nonperforming loans are generally not returned to performing status until
the obligation is brought current and has performed in accordance with the
contractual terms for a reasonable period of time and collection of the
contractual principal and interest is no longer doubtful.
Loans held for sale, which are carried at lower of cost or aggregate market
value, are considered nonaccrual when it is determined that the collection of
interest or principal is doubtful or when a default of interest or principal has
existed for 90 days or more, unless the loans are well secured and in the
process of collection. Nonaccrual loans held for sale are reported as other
nonperforming assets.
Foreclosed assets are comprised of property acquired through a foreclosure
proceeding or acceptance of a deed-in-lieu of foreclosure. These assets are
recorded on the date acquired at the lower of the related loan balance or market
value of the collateral less estimated disposition costs. Market values are
estimated primarily based on appraisals. Subsequently, foreclosed assets are
valued at the lower of the amount recorded at acquisition date or the current
market value less estimated disposition costs. Gains or losses realized from
disposition of such property are reflected in noninterest expense.
Impaired loans consist of nonaccrual commercial and commercial real estate
loans and troubled debt restructurings. Interest collected on these loans is
recognized on the cash basis or cost recovery method.
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses is established through provisions charged
against income. Loans deemed to be uncollectible are charged against the
allowance and recoveries of previously charged-off loans are credited to the
allowance.
The allowance is maintained at a 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. This evaluation is
inherently subjective as it requires material estimates, including, among
others, the amounts and timing of expected future cash flows on impaired loans,
estimated losses on consumer loans and residential mortgages, and general
amounts for historical loss experience, economic conditions, uncertainties in
estimating losses and inherent risks in the various credit portfolios, all of
which may be susceptible to significant change.
In determining the adequacy of the allowance for credit losses, the
Corporation makes specific allocations to impaired loans and to pools of
watchlist and nonwatchlist loans for various credit risk factors. Allocations to
loan pools are developed by business segment and risk rating and are based on
historical loss trends and management's judgment concerning those trends and
other relevant factors. These factors may include, among others, actual versus
estimated losses, regional and national economic conditions, business segment
portfolio concentrations, industry competition and consolidation, and the impact
of government regulations. Consumer and residential mortgage loan allocations
are made at a total portfolio level based on historical loss experience adjusted
for portfolio activity and economic conditions.
While PNC's pool reserve methodologies strive to reflect all risk factors,
there continues to be a certain element of risk associated with, but not limited
to, potential estimation or judgmental errors. Unallocated reserves are designed
to provide coverage for such risks. While allocations are made to specific loans
and pools of loans, the total reserve is available for all credit losses.
65 |
<PAGE> 35
EQUITY MANAGEMENT ASSETS
Equity management assets are included in other assets. These investments are
carried at estimated fair value with changes in fair value recognized in
noninterest income.
GOODWILL AND OTHER AMORTIZABLE ASSETS
Goodwill is amortized to expense on a straight-line basis over periods ranging
from 15 to 25 years. Other amortizable assets are amortized to expense using
accelerated or straight-line methods over their respective estimated useful
lives. On a periodic basis, management reviews goodwill and other amortizable
assets and evaluates events or changes in circumstances that may indicate
impairment in the carrying amount of such assets. In such instances, impairment,
if any, is measured on a discounted future cash flow basis.
DEPRECIATION AND AMORTIZATION
For financial reporting purposes, premises and equipment are depreciated
principally using the straight-line method over the estimated useful lives
ranging from one to 39 years. Accelerated methods are used for federal income
tax purposes. Leasehold improvements are amortized over their estimated useful
lives or the respective lease terms, whichever is shorter.
REPURCHASE AND RESALE AGREEMENTS
Repurchase and resale agreements are treated as collateralized financing
transactions and are carried at the amounts that the securities will be
subsequently reacquired or resold, including accrued interest, as specified in
the respective agreements. The Corporation's policy is to take possession of
securities purchased under agreements to resell. The market value of securities
to be repurchased and resold is monitored, and additional collateral may be
obtained where considered appropriate to protect against credit exposure.
TREASURY STOCK
The Corporation records common stock purchased for treasury at cost. At the date
of subsequent reissue, the treasury stock account is reduced by the cost of such
stock on the first-in, first-out basis.
FINANCIAL DERIVATIVES
The Corporation uses off-balance-sheet financial derivatives as part of the
overall asset and liability management process, for commercial mortgage banking
risk management and to manage credit risk. Substantially all such instruments
are used to manage risk related to changes in interest rates. Financial
derivatives primarily consist of interest rate swaps, purchased interest rate
caps and floors, forward contracts and credit default swaps.
Interest rate swaps are agreements with a counterparty to exchange periodic
interest payments calculated on a notional principal 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 is higher or lower than a defined rate applied to a notional amount.
Interest rate swaps, caps and floors that modify the interest rate
characteristics (such as from fixed to variable, variable to fixed, or one
variable index to another) of designated interest-bearing assets or liabilities
are accounted for under the accrual method. The net amount payable or receivable
from the derivative contract is accrued as an adjustment to interest income or
interest expense of the designated instrument. Premiums on contracts are
deferred and amortized over the life of the agreement as an adjustment to
interest income or interest expense of the designated instruments. Unamortized
premiums are included in other assets.
Changes in the fair value of financial derivatives accounted for under the
accrual method are not reflected in results of operations. Realized gains and
losses, except losses on terminated interest rate caps and floors, are deferred
as an adjustment to the carrying amount of the designated instruments and
amortized over the shorter of the remaining original life of the agreements or
the designated instruments. Losses on terminated interest rate caps and floors
are recognized immediately in results of operations. If the designated
instruments are disposed, the fair value of the associated derivative contracts
and any unamortized deferred gains or losses are included in the determination
of gain or loss on the disposition of such instruments. Contracts not qualifying
for accrual accounting are marked to market with gains or losses included in
noninterest income.
Forward contracts provide for the delivery of financial instruments at a
specified future date and at a specified price or yield. The Corporation uses
forward contracts primarily to manage risk associated with its student lending
activities. Realized gains and losses on mandatory and optional delivery forward
commitments are recorded in noninterest income in the period settlement occurs.
Unrealized gains or losses are considered in the lower of cost or market
valuation of loans held for sale.
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<PAGE> 36
Credit-related derivatives are entered into to mitigate credit risk and
lower the required regulatory capital associated with commercial lending
activities. If the credit-related derivative qualifies for hedge accounting
treatment, the premium paid to enter the credit-related derivative is recorded
in other assets and is deferred and amortized to noninterest expense over the
life of the agreement. Changes in the fair value of credit-related derivatives
qualifying for hedge accounting treatment are not reflected in the Corporation's
financial position and have no impact on results of operations.
If the credit-related derivative does not qualify for hedge accounting
treatment or if the Corporation is the seller of credit protection, the
credit-related derivative is marked to market with gains or losses included in
noninterest income.
To accommodate customer needs, PNC also enters into financial derivative
transactions primarily consisting of interest rate swaps, caps, floors and
foreign exchange contracts. Interest rate risk exposure from customer positions
is managed through transactions with other dealers. These positions are recorded
at estimated fair value and changes in value are included in noninterest income.
Additionally, the Corporation enters into other derivative transactions for
risk management purposes that do not qualify for accrual accounting. These
transactions are recorded at estimated fair value and changes in value are
included in noninterest income.
INCOME TAXES
Income taxes are accounted for under the liability method. Deferred tax assets
and liabilities are determined based on differences between financial reporting
and tax bases of assets and liabilities and are measured using the enacted tax
rates and laws that will be in effect when the differences are expected to
reverse.
STOCK OPTIONS
For stock options granted at exercise prices not less than the fair market value
of common stock on the date of grant, no compensation expense is recognized.
EARNINGS PER COMMON SHARE
Basic earnings per common share is calculated by dividing net income adjusted
for preferred stock dividends declared by the weighted-average number of shares
of common stock outstanding.
Diluted earnings per common share is based on net income adjusted for
dividends declared on nonconvertible preferred stock. The weighted-average
number of shares of common stock outstanding is increased by the assumed
conversion of outstanding convertible preferred stock and debentures from the
beginning of the year or date of issuance, if later, and the number of shares of
common stock that would be issued assuming the exercise of stock options and the
issuance of incentive shares. Such adjustments to net income and the
weighted-average number of shares of common stock outstanding are made only when
such adjustments are expected to dilute earnings per common share.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended by SFAS No. 137 and No. 138,
which is required to be adopted effective January 1, 2001. The statement will
require the Corporation to recognize all derivatives on the balance sheet at
fair value. Derivatives that are not designated as hedges must be adjusted to
their fair value through earnings. If the derivative is designated as a hedge,
depending on the nature of the hedge, changes in its fair value either will be
offset against the changes in fair value or expected future cash flows of the
hedged assets, liabilities or firm commitments through earnings or recognized in
accumulated other comprehensive income until the hedged items are recognized in
earnings. The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings.
The Corporation adopted the new statement effective January 1, 2001. As a
result, the Corporation recognized an after-tax loss from the cumulative effect
of a change in accounting principle of $5 million, to be reported in the
consolidated statement of income for the quarter ended March 31, 2001, and an
after-tax increase in accumulated other comprehensive loss of $4 million. The
impact of the adoption of this standard related to the residential mortgage
banking business that was sold will be reflected in the results of discontinued
operations in the first quarter of 2001.
67 |
<PAGE> 37
SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities" (a replacement of SFAS No. 125) was issued
in September 2000 and replaces SFAS No. 125. Although SFAS No. 140 has changed
many of the rules regarding securitizations, it continues to require an entity
to recognize the financial and servicing assets it controls and the liabilities
it has incurred and to derecognize financial assets when control has been
surrendered in accordance with the criteria provided in the standard. As
required, the Corporation will apply the new rules prospectively to transactions
beginning in the second quarter of 2001. Based on current circumstances,
management believes that the application of the new rules will not have a
material impact on the Corporation's financial position or results of
operations. SFAS No. 140 requires certain disclosures pertaining to
securitization transactions effective for fiscal years ending after December 15,
2000. These disclosures are included in Note 12.
NOTE 2 DISCONTINUED OPERATIONS
On October 2, 2000, PNC announced that it reached a definitive agreement to sell
its residential mortgage banking business. The capital made available by the
sale will be redeployed in a number of ways, which may include repurchasing
common stock, continuing to reduce balance sheet leverage, reducing debt and
making targeted investments in higher-growth businesses. The amount of capital
available for redeployment and the income statement impact of the sale will
depend on fair market values and other factors, and will not be determined until
final settlement. The transaction closed on January 31, 2001.
Earnings for the residential mortgage banking business for the years ended
December 31, 2000, 1999 and 1998 were $65 million, $62 million and $35 million,
respectively, and are reflected in discontinued operations throughout the
Corporation's financial statements. Earnings and net assets of the residential
mortgage banking business are shown separately on one line in the income
statement and balance sheet, respectively, for all periods presented.
INVESTMENT IN DISCONTINUED OPERATIONS
-----------------------
December 31 - in millions 2000 1999
========================================================================
Loans held for sale ...................... $3,003 $2,321
Securities available for sale ............ 3,016 1,651
Loans, net of unrealized income .......... 739 373
Goodwill and other
amortizable assets .................... 1,925 1,611
All other assets ......................... 1,168 434
- ------------------------------------------------------------------------
Total assets .......................... 9,851 6,390
========================================================================
Deposits ................................. 1,150 866
Borrowed funds ........................... 7,601 5,118
Other liabilities ........................ 744 143
- ------------------------------------------------------------------------
Total liabilities ..................... 9,495 6,127
========================================================================
Net assets ............................ $356 $263
========================================================================
The notional and fair value of financial derivatives used for residential
mortgage banking risk management were $15.2 billion and $124 million,
respectively, at December 31, 2000. The comparable amounts at December 31, 1999
were $9.3 billion and $28 million, respectively. The weighted-average maturity
of financial derivatives used for residential mortgage banking risk management
was 2 years and 2 months at December 31, 2000.
NOTE 3 SALE OF SUBSIDIARY STOCK
PNC recognizes as income the gain from the sale of stock by its subsidiaries.
The gain is the difference between PNC's basis in the stock and the proceeds per
share received. PNC provides applicable taxes on the gain.
In October 1999, BlackRock, Inc. ("BlackRock"), a majority-owned investment
management subsidiary of the Corporation, issued nine million shares of class A
common stock at $14.00 per share in an initial public offering ("IPO"). Prior to
the IPO, PNC and BlackRock's management owned approximately 82% and 18%,
respectively, of BlackRock's outstanding common stock. Proceeds from the sale
were approximately $115 million and resulted in PNC recording a pretax gain in
the amount of $64 million or $59 million after tax. As of December 31, 2000, PNC
owned approximately 70% of BlackRock.
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<PAGE> 38
NOTE 4 CASH FLOWS
For the statement of cash flows, cash and cash equivalents are defined as cash
and due from banks.
The following table sets forth information pertaining to acquisitions and
divestitures that affect cash flows:
Year ended December 31 ------------------------------
In millions 2000 1999 1998
====================================================================
Assets acquired (divested) ......... $4 $(2,062) $1,007
Liabilities acquired (divested) .... 4 (208) (322)
Cash paid .......................... 31 1,407 1,184
Cash and due from
banks received .................. 1 3,261 153
====================================================================
NOTE 5 TRADING ACTIVITIES
Most of PNC's trading activities are designed to provide capital markets
services to customers and not to position the Corporation's portfolio for gains
from market movements. PNC participates in derivatives and foreign exchange
trading as well as "market making" in equity securities as an accommodation to
customers. PNC also engages in trading activities as part of risk management
strategies.
Net trading income in 2000, 1999 and 1998 totaled $91 million, $73 million
and $26 million, respectively, and was included in noninterest income as
follows:
Year ended December 31 -----------------------------
In millions 2000 1999 1998
=================================================================
Corporate services ................. $7
Other income
Market making ................... 42 $48 $3
Derivatives trading ............. 20 8 11
Foreign exchange ................ 22 17 12
- -----------------------------------------------------------------
Net trading income .............. $91 $73 $26
=================================================================
NOTE 6 SECURITIES AVAILABLE FOR SALE
<TABLE>
<CAPTION>
--------------------------------------------------------------
Unrealized
Amortized ----------------------------- Fair
In millions Cost Gains Losses Value
=============================================================================================================================
<S> <C> <C> <C> <C>
DECEMBER 31, 2000
Debt securities
U.S. Treasury and government agencies .................... $313 $1 $(1) $313
Mortgage-backed .......................................... 4,037 13 (48) 4,002
Asset-backed ............................................. 902 1 (10) 893
State and municipal ...................................... 94 2 96
Other debt ............................................... 73 1 (1) 73
- -----------------------------------------------------------------------------------------------------------------------------
Total debt securities .................................. 5,419 18 (60) 5,377
Corporate stocks and other .................................. 537 2 (14) 525
- -----------------------------------------------------------------------------------------------------------------------------
Total securities available for sale ...................... $5,956 $20 $(74) $5,902
=============================================================================================================================
December 31, 1999
Debt securities
U.S. Treasury and government agencies .................... $411 $(11) $400
Mortgage-backed .......................................... 3,918 $2 (151) 3,769
Asset-backed ............................................. 1,051 (24) 1,027
State and municipal ...................................... 134 2 (5) 131
Other debt ............................................... 40 (1) 39
- -----------------------------------------------------------------------------------------------------------------------------
Total debt securities .................................. 5,554 4 (192) 5,366
Corporate stocks and other .................................. 590 9 (5) 594
- -----------------------------------------------------------------------------------------------------------------------------
Total securities available for sale ...................... $6,144 $13 $(197) $5,960
=============================================================================================================================
December 31, 1998
Debt securities
U.S. Treasury and government agencies .................... $152 $2 $(2) $152
Mortgage-backed .......................................... 2,942 5 (11) 2,936
Asset-backed ............................................. 709 1 (2) 708
State and municipal ...................................... 122 6 128
Other debt ............................................... 33 (2) 31
- -----------------------------------------------------------------------------------------------------------------------------
Total debt securities .................................. 3,958 14 (17) 3,955
Corporate stocks and other .................................. 542 10 (35) 517
- -----------------------------------------------------------------------------------------------------------------------------
Total securities available for sale ...................... $4,500 $24 $(52) $4,472
=============================================================================================================================
</TABLE>
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<PAGE> 39
The expected weighted-average life of securities available for sale was 4 years
and 5 months at December 31, 2000 compared with 4 years and 7 months at year-end
1999 and 2 years and 8 months at year-end 1998.
At December 31, 2000, the securities available for sale balance included a
net unrealized loss of $54 million that represented the difference between fair
value and amortized cost. The comparable amounts at December 31, 1999 and 1998
were net unrealized losses of $184 million and $28 million, respectively. Net
unrealized gains and losses in the securities available for sale portfolio are
included in accumulated other comprehensive income or loss, net of tax.
Net securities gains, associated with the disposition of securities
available for sale, were $20 million in 2000, $22 million in 1999 and $16
million in 1998. Reflected in the 1999 net securities gains was a $41 million
gain from the sale of Concord EFS, Inc. ("Concord") stock that was partially
offset by a $28 million write-down of an equity investment. Net securities gains
of $9 million in 2000 and $3 million in 1999 related to commercial mortgage
banking activities were included in corporate services revenue.
Information relating to security sales is set forth in the following
table:
-----------------------------------------
Year ended December 31 Gross Gross Net
In millions Proceeds Gains Losses Gains Taxes
==================================================================
2000 ................... $8,427 $37 $8 $29 $10
1999 ................... 7,573 69 44 25 9
1998 ................... 9,646 20 4 16 6
==================================================================
The carrying value of securities pledged to secure public and trust deposits,
repurchase agreements and for other purposes was $3.8 billion at December 31,
2000.
The following table presents the amortized cost, fair value and weighted-average
yield of debt securities at December 31, 2000, by remaining contractual
maturity.
CONTRACTUAL MATURITY OF DEBT SECURITIES
<TABLE>
<CAPTION>
December 31, 2000 Within 1 to 5 to After 10
In millions 1 Year 5 Years 10 Years Years Total
=======================================================================================
<S> <C> <C> <C> <C> <C>
U.S. Treasury and
government agencies ... $87 $101 $115 $10 $313
Mortgage-backed ......... 3 2 241 3,791 4,037
Asset-backed ............ 7 135 760 902
State and
municipal ............. 3 14 42 35 94
Other debt .............. 3 35 18 17 73
- ---------------------------------------------------------------------------------------
Total ................. $96 $159 $551 $4,613 $5,419
=======================================================================================
Fair value .............. $106 $156 $544 $4,571 $5,377
Weighted-average
yield ................. 5.88% 5.54% 6.41% 6.26% 6.25%
=======================================================================================
</TABLE>
Based on current interest rates and expected prepayment speeds, the total
weighted-average expected maturity of mortgage-backed and asset-backed
securities was 4 years and 5 months and 3 years and 9 months, respectively, at
December 31, 2000. Weighted-average yields are based on historical cost with
effective yields weighted for the contractual maturity of each security.
NOTE 7 LOANS AND COMMITMENTS TO EXTEND CREDIT
Loans outstanding were as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------
December 31 - in millions 2000 1999 1998 1997 1996
========================================================================================================================
<S> <C> <C> <C> <C> <C>
Consumer ......................................... $9,133 $9,348 $10,980 $11,205 $12,092
Credit card ...................................... 2,958 3,830 2,776
Residential mortgage ............................. 13,264 12,506 12,253 12,776 12,696
Commercial ....................................... 21,207 21,468 25,177 19,988 18,588
Commercial real estate ........................... 2,583 2,730 3,449 3,974 4,098
Lease financing .................................. 4,845 3,663 2,978 2,224 1,641
Other ............................................ 568 682 392 650 285
- ------------------------------------------------------------------------------------------------------------------------
Total loans ................................... 51,600 50,397 58,187 54,647 52,176
Unearned income ............................... (999) (724) (554) (412) (385)
- ------------------------------------------------------------------------------------------------------------------------
Total loans, net of unearned income ........... $50,601 $49,673 $57,633 $54,235 $51,791
========================================================================================================================
</TABLE>
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<PAGE> 40
Loan outstandings and related unfunded commitments are concentrated in PNC's
primary geographic markets. At December 31, 2000, no specific industry
concentration exceeded 6.5% of total outstandings and unfunded commitments.
NET UNFUNDED COMMITMENTS (a)
--------------------
December 31 - in millions 2000 1999
============================================================
Consumer ....................... $4,414 $4,603
Commercial ..................... 24,253 23,251
Commercial real estate ......... 1,039 740
Lease financing ................ 123 136
Other .......................... 173 1,513
- ------------------------------------------------------------
Total ....................... $30,002 $30,243
============================================================
(a) Excludes unfunded commitments related to loans designated for exit.
Commitments to extend credit represent arrangements to lend funds subject to
specified contractual conditions. Commercial commitments are reported net of
participations, assignments and syndications, primarily to financial
institutions, totaling $7.2 billion at December 31, 2000 and 1999. Commitments
generally have fixed expiration dates, may require payment of a fee, and contain
termination clauses in the event the customer's credit quality deteriorates.
Based on the Corporation's historical experience, most commitments expire
unfunded, and therefore cash requirements are substantially less than the total
commitment.
Net outstanding letters of credit totaled $4.0 billion and $4.6 billion at
December 31, 2000 and 1999, respectively, 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. Such instruments are
typically issued to support industrial revenue bonds, commercial paper, and
bid-or-performance related contracts. At year-end 2000, the largest industry
concentration within standby letters of credit was for educational services,
which accounted for approximately 8% of the total. Maturities for standby
letters of credit ranged from 2001 to 2011.
Unfunded commitments and letters of credit related to loans designated for
exit in 1999 were $1.7 billion at December 31, 2000 and $4.8 billion at December
31, 1999.
At December 31, 2000, $8.0 billion of loans were pledged to secure
borrowings and for other purposes.
Certain directors and executive officers of the Corporation and its
subsidiaries, as well as certain affiliated companies of these directors and
officers, were customers of and had loans with subsidiary banks in the ordinary
course of business. All such loans were on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with other customers and did not involve more than a
normal risk of collectibility. The aggregate dollar amounts of these loans were
$29 million and $27 million at December 31, 2000 and 1999, respectively. During
2000, new loans of $16 million were funded and repayments totaled $14
million.
NOTE 8 NONPERFORMING ASSETS
The following table sets forth nonperforming assets and related information:
<TABLE>
<CAPTION>
---------------------------------------------------------
December 31 - dollars in millions 2000 1999 1998 1997 1996
=============================================================================================================
<S> <C> <C> <C> <C> <C>
Nonaccrual loans .............................. $323 $291 $286 $270 $343
Troubled debt restructured loans .............. 2
- -------------------------------------------------------------------------------------------------------------
Total nonperforming loans .................. 323 291 286 270 345
- -------------------------------------------------------------------------------------------------------------
Foreclosed and other assets ................... 49 34 33 52 106
- -------------------------------------------------------------------------------------------------------------
Total nonperforming assets (a) ............. $372 $325 $319 $322 $451
=============================================================================================================
Nonperforming loans to total loans ............ .64% .59% .50% .50% .67%
Nonperforming assets to total loans, loans
held for sale and foreclosed assets ........ .71 .61 .55 .59 .87
Nonperforming assets to total assets .......... .53 .47 .45 .45 .63
=============================================================================================================
Interest on nonperforming loans
Computed on original terms ................. $42 $28 $25 $31 $34
Recognized ................................. 10 11 6 6 10
=============================================================================================================
Past due loans
Accruing loans past due 90 days or more .... $113 $86 $263 $287 $242
As a percentage of total loans ............. .22% .17% .46% .53% .47%
=============================================================================================================
</TABLE>
(a) The above table excludes $18 million and $13 million of equity management
assets at December 31, 2000 and 1999, respectively, that are carried at
estimated fair value.
71 |
<PAGE> 41
NOTE 9 ALLOWANCE FOR CREDIT LOSSES
Changes in the allowance for credit losses were as follows:
-------------------------
In millions 2000 1999 1998
============================================================
January 1 ..................... $674 $753 $972
Charge-offs ................... (186) (216) (524)
Recoveries .................... 51 55 77
- ------------------------------------------------------------
Net charge-offs ............ (135) (161) (447)
Provision for credit losses ... 136 163 225
Sale of credit card business .. (81)
Acquisitions .................. 3
- ------------------------------------------------------------
December 31 ................ $675 $674 $753
============================================================
Impaired loans totaling $316 million and $241 million at December 31, 2000 and
1999, respectively, had a corresponding specific allowance for credit losses of
$76 million and $60 million. The average balance of impaired loans was $277
million in 2000, $243 million in 1999, and $223 million in 1998. There was no
interest income recognized on impaired loans in 2000 and 1999. Interest income
recognized on impaired loans in 1998 was $1 million.
NOTE 10 PREMISES, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Premises, equipment and leasehold improvements, stated at cost less accumulated
depreciation and amortization, were as follows:
----------------------
December 31 - in millions 2000 1999
============================================================
Land ............................. $86 $83
Buildings ........................ 456 427
Equipment ........................ 1,373 1,338
Leasehold improvements ........... 190 208
- ------------------------------------------------------------
Total ......................... 2,105 2,056
Accumulated depreciation and
amortization .................. (1,069) (1,154)
- ------------------------------------------------------------
Net book value ................ $1,036 $902
============================================================
Depreciation and amortization expense on premises, equipment and leasehold
improvements totaled $149 million in 2000, $204 million in 1999 and $149 million
in 1998.
Certain facilities and equipment are leased under agreements expiring at
various dates through the year 2071. Substantially all such leases are accounted
for as operating leases. Rental expense on such leases amounted to $148 million
in 2000, $132 million in 1999 and $101 million in 1998.
At December 31, 2000 and 1999, required minimum annual rentals due on
noncancelable leases having terms in excess of one year aggregated $684 million
and $749 million, respectively. Minimum annual rentals for each of the years
2001 through 2005 are $106 million, $97 million, $89 million, $77 million and
$66 million, respectively.
During 1999, PNC made the decision to sell various branches and office
buildings. Buildings that were designated for sale, but not sold during 1999 are
classified as held for sale. Initial write-downs were recorded in noninterest
expense and generally reflected the difference between book value and appraised
value less selling costs. Write-downs totaled $35 million and subsequent net
gains from disposals totaled $8 million in 1999.
NOTE 11 GOODWILL AND OTHER AMORTIZABLE ASSETS
Goodwill and other amortizable assets, net of amortization, consisted of the
following:
-----------------------
December 31 - in millions 2000 1999
============================================================
Goodwill ........................ $2,155 $2,222
Customer-related intangibles .... 157 165
Commercial mortgage
servicing rights ............. 156 125
- ------------------------------------------------------------
Total ........................ $2,468 $2,512
============================================================
Amortization of goodwill and other amortizable assets was as follows:
----------------------------
Year ended December 31 - in millions 2000 1999 1998
===================================================================
Goodwill .......................... $116 $80 $67
Purchased credit cards ............ 6 36
Commercial mortgage
servicing rights ............... 18 20 12
Other ............................. (6) 6 7
- -------------------------------------------------------------------
Total .......................... $128 $112 $122
===================================================================
NOTE 12 SECURITIZATIONS
During 2000, the Corporation securitized commercial mortgage loans totaling $865
million and recorded a pretax gain of $13 million. The Corporation retained
servicing rights in the securitized loans, all of which were sold and removed
from the balance sheet as a part of the securitization, and recorded servicing
rights of $7 million. The servicing rights were valued based on expected future
cash flows considering a 10% discount rate and an 8% prepayment rate on
mortgages with a weighted-average life of 10 years. Cash received from
securitization trusts totaled $877 million.
| 72
<PAGE> 42
The Corporation also retained interest-only strips related to residential
mortgage loans and student loans totaling $16 million and $46 million,
respectively, at December 31, 2000. The loans associated with these retained
interests were sold and removed from the Corporation's balance sheet at
securitization.
NOTE 13 DEPOSITS
The aggregate amount of time deposits with a denomination greater than $100,000
was $5.8 billion and $6.8 billion at December 31, 2000 and 1999, respectively.
Remaining contractual maturities of time deposits for the years 2001 through
2005 and thereafter are $14.5 billion, $1.1 billion, $270 million, $261 million
and $849 million, respectively.
NOTE 14 BORROWED FUNDS
Bank notes have interest rates ranging from 5.93% to 6.97% with approximately
one-third maturing in 2001. Senior and subordinated notes consisted of the
following:
December 31, 2000 -----------------------------------------------
Dollars in millions Outstanding Stated Rate Maturity
======================================================================
Senior ................ $597 6.95% - 7.00% 2002-2004
Subordinated
Nonconvertible ..... 2,407 6.13 - 9.88 2001-2009
------
Total .............. $3,004
======================================================================
Borrowed funds have scheduled repayments for the years 2001 through 2005 and
thereafter of $5.3 billion, $1.8 billion, $1.8 billion, $0.5 billion and $2.3
billion, respectively.
Excluded from continuing operations are Federal Home Loan Bank obligations
of $4.4 billion at December 31, 2000. These obligations have maturities ranging
from 2001 to 2018 and interest rates ranging from 1.00% to 7.91%.
NOTE 15 CAPITAL SECURITIES OF SUBSIDIARY TRUSTS
Mandatorily Redeemable Capital Securities of Subsidiary Trusts ("Capital
Securities") include nonvoting preferred beneficial interests in the assets of
PNC Institutional Capital Trust A, Trust B and Trust C. Trust A, formed in
December 1996, holds $350 million of 7.95% junior subordinated debentures, due
December 15, 2026, and redeemable after December 15, 2006, at a declining
redemption price ranging from 103.975% to par on or after December 15, 2016.
Trust B, formed in May 1997, holds $300 million of 8.315% junior
subordinated debentures due May 15, 2027, and redeemable after May 15, 2007, at
a declining redemption price ranging from 104.1575% to par on or after May 15,
2017. Trust C, formed in June 1998, holds $200 million of junior subordinated
debentures due June 1, 2028, bearing interest at a floating rate per annum equal
to 3-month LIBOR plus 57 basis points. The rate in effect at December 31, 2000
was 7.31%. Trust C Capital Securities are redeemable on or after June 1, 2008 at
par. Cash distributions on the Capital Securities are made to the extent
interest on the debentures is received by the Trusts. In the event of certain
changes or amendments to regulatory requirements or federal tax rules, the
Capital Securities are redeemable in whole.
Trust A is a wholly-owned finance subsidiary of PNC Bank, N.A. and Trust B
and Trust C are wholly-owned finance subsidiaries of the Corporation.
Distributions on the preferred beneficial interests in the assets of Trust A,
Trust B and Trust C are fully and unconditionally guaranteed by their respective
parent companies.
NOTE 16 SHAREHOLDERS' EQUITY
Information related to preferred stock is as follows:
------------------------------------------
Liquidation Preferred Shares
December 31 Value per Share --------------------
Shares in thousands 2000 1999
=================================================================
Authorized
$1 par value ......... 17,224 17,300
Issued and outstanding
Series A ............. $40 11 12
Series B ............. 40 3 3
Series C ............. 20 229 255
Series D ............. 20 318 367
Series F ............. 50 6,000 6,000
- -----------------------------------------------------------------
Total ................ 6,561 6,637
=================================================================
Series A through D are cumulative and, except for Series B, are redeemable at
the option of the Corporation. Annual dividends on Series A, B and D preferred
stock total $1.80 per share and on Series C preferred stock total $1.60 per
share. Holders of Series A through D preferred stock are entitled to a number of
votes equal to the number of full shares of common stock into which such
preferred stock is convertible. Series A through D preferred stock have the
following conversion privileges: (i) one share of Series A or Series B is
convertible into eight shares of common stock; and (ii) 2.4 shares of Series C
or Series D are convertible into four shares of common stock.
73 |
<PAGE> 43
The Series F preferred stock is nonconvertible and nonvoting, except in
limited circumstances. Noncumulative dividends are payable quarterly through
September 30, 2001, at a rate of 6.05% and, thereafter, indexed to certain
market indices at rates not less than 6.55% or greater than 12.55%. The Series F
preferred stock is redeemable until September 29, 2001, in the event of certain
amendments to the Internal Revenue Code, at a declining redemption price from
$51.50 to $50.50 per share. After September 29, 2001, the Series F preferred
stock may be redeemed at $50 per share.
During 2000, the Board of Directors adopted a shareholders rights plan
providing for issuance of share purchase rights. If a person or group becomes
beneficial owner of 10% or more of PNC's common stock, all holders of the
rights, other than such person or group, may purchase PNC common stock or
equivalent preferred stock at half of market value.
The Corporation has a dividend reinvestment and stock purchase plan.
Holders of preferred stock and common stock may participate in the plan, which
provides that additional shares of common stock may be purchased at market value
with reinvested dividends and voluntary cash payments. Common shares purchased
pursuant to this plan were: 649,334 shares in 2000, 567,266 shares in 1999 and
596,179 shares in 1998.
At December 31, 2000, the Corporation had reserved approximately 10.9
million common shares to be issued in connection with certain stock plans and
the conversion of certain debt and equity securities.
NOTE 17 REGULATORY MATTERS
The Corporation is subject to the regulations of certain federal and state
agencies and undergoes periodic examinations by such regulatory authorities.
Neither the Corporation nor any of its subsidiaries is subject to written
regulatory agreements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Corporation must meet specific capital guidelines that
involve quantitative measures of assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting practices.
Failure to meet minimum capital requirements can initiate certain mandatory and
possibly additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on PNC's financial condition and results of
operations. The Corporation's capital amounts and classification are also
subject to qualitative judgments by regulatory agencies about components, risk
weightings and other factors.
The following table sets forth regulatory capital ratios for PNC and its
only significant bank subsidiary, PNC Bank, N.A.:
REGULATORY CAPITAL
---------------------------------------------
Amount Ratios
December 31 ---------------------------------------------
Dollars in millions 2000 1999 (a) 2000 1999 (a)
======================================================================
Risk-based capital
Tier I
PNC .............. $5,367 $4,731 8.60% 7.05%
PNC Bank, N.A. 5,055 4,746 8.74 7.69
Total
PNC .............. 7,845 7,438 12.57 11.08
PNC Bank, N.A. 7,012 6,815 12.12 11.04
Leverage
PNC .............. 5,367 4,731 8.03 6.61
PNC Bank, N.A. 5,055 4,746 8.20 7.13
===================================================================
(a) Includes discontinued operations
The access to and cost of funding new business initiatives including
acquisitions, the ability to pay dividends, deposit insurance costs, and the
level and nature of regulatory oversight depend, in large part, on a financial
institution's capital strength. The minimum regulatory capital ratios are 4% for
Tier I risk-based, 8% for total risk-based and 3% for leverage. However,
regulators may require higher capital levels when particular circumstances
warrant. To qualify as well capitalized, regulators require banks to maintain
capital ratios of at least 6% for Tier I risk-based, 10% for total risk-based
and 5% for leverage. At December 31, 2000, the Corporation and each bank
subsidiary met the well capitalized capital ratio requirements.
Dividends that may be paid by subsidiary banks to the parent company are
subject to certain legal limitations and also may be impacted by capital needs,
regulatory requirements, corporate policies, contractual restrictions and other
factors. Without regulatory approval, the amount available for payment of
dividends by all subsidiary banks was $634 million at December 31, 2000.
Under federal law, bank subsidiaries generally may not extend credit to the
parent company or its nonbank subsidiaries on terms and under circumstances that
are not substantially the same as comparable extensions of credit to
nonaffiliates. No extension of credit may be made to the parent company or a
nonbank subsidiary which is in excess of 10% of the capital stock and surplus of
such bank subsidiary or in excess of 20% of the capital and surplus of such bank
subsidiary as to aggregate extensions of credit to the parent company and its
subsidiaries. In certain circumstances, federal regulatory authorities may
impose more
| 74
<PAGE> 44
restrictive limitations. Such extensions of credit, with limited exceptions,
must be fully collateralized. The maximum amount available under statutory
limitations for transfer from subsidiary banks to the parent company in the form
of loans and dividends approximated 18% of consolidated net assets at December
31, 2000.
Federal Reserve Board regulations require depository institutions to
maintain cash reserves with the Federal Reserve Bank. During 2000, subsidiary
banks maintained reserves which averaged $113 million.
NOTE 18 FINANCIAL DERIVATIVES
-------------------------------------------------
Positive Negative
Notional Fair Notional Fair
In millions Value Value Value Value
============================================================================
December 31, 2000
Interest rate
Swaps ................. $5,173 $113 $1,814 $(12)
Caps .................. 308 4
Floors ................ 3,000 1 238 (2)
- ----------------------------------------------------------------------------
Total interest rate
risk management ..... 8,481 118 2,052 (14)
Commercial mortgage
banking risk
management ............ 121 4 265 (14)
Forward contracts ........ 347
Credit default swaps ..... 4,391 (2)
- ----------------------------------------------------------------------------
Total ................. $8,949 $122 $6,708 $(30)
============================================================================
December 31, 1999
Interest rate
Swaps ................. $3,666 $46 $5,402 $(108)
Caps .................. 474 12
Floors ................ 3,000 1 311 (1)
- ----------------------------------------------------------------------------
Total interest rate
risk management ..... 7,140 59 5,713 (109)
Commercial mortgage
banking risk
management ............ 643 51
Forward contracts ........ 681
Credit default swaps ..... 60 4,255 (4)
- ----------------------------------------------------------------------------
Total ................. $8,524 $110 $9,968 $(113)
============================================================================
The Corporation uses a variety of off-balance-sheet financial derivatives as
part of the overall risk management process and to manage interest rate, market
and credit risk inherent in the Corporation's business activities. Financial
derivatives involve, to varying degrees, interest rate and credit risk in excess
of the amount recognized on the balance sheet but less than the notional amount
of the contract. For interest rate swaps and purchased interest rate caps and
floors, only periodic cash payments and, with respect to such caps and floors,
premiums are exchanged. Therefore, cash requirements and exposure to credit risk
are significantly less than the notional value. The Corporation manages these
risks as part of its asset and liability management process and through credit
policies and procedures. The Corporation seeks to minimize the credit risk by
entering into transactions with only a select number of high-quality
institutions, establishing credit limits, requiring bilateral-netting
agreements, and, in certain instances, segregated collateral.
The Corporation uses interest rate swaps and purchased caps and floors to
modify the interest rate characteristics of designated interest-bearing assets
or liabilities from fixed to variable, variable to fixed, or one variable index
to another. At December 31, 2000, $7.0 billion of interest rate swaps, caps and
floors were designated to loans. At December 31, 2000, $135 million of financial
derivatives were designated to securities available for sale. During 2000,
derivative contracts modified the average effective yield on interest-earning
assets from 7.93% to 7.85%. At December 31, 2000, $3.5 billion of interest rate
swaps were designated to interest-bearing liabilities. During 2000, derivative
contracts had no impact on the average rate on interest-bearing liabilities of
5.01%.
PNC also uses interest rate swaps to manage interest rate risk associated
with its commercial mortgage banking activities.
Forward contracts are used to manage risk positions associated with student
lending activities. Substantially all forward contracts mature within 90 days of
origination. Forward contracts are traded in over-the-counter markets and do not
have standardized terms. In the event the counterparty is unable to meet its
contractual obligations, the Corporation may be exposed to selling or purchasing
student loans at prevailing market prices. Unrealized gains or losses are
considered in the lower of cost or market valuation of loans held for sale.
Credit default swaps are used to mitigate credit risk and lower the
required regulatory capital associated with commercial lending activities.
At December 31, 2000 and 1999, the Corporation's exposure to credit losses
with respect to financial derivatives was not material.
75 |
<PAGE> 45
OTHER DERIVATIVES
The following schedule sets forth information relating to positions with
customer-related and other derivatives:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
AT December 31, 2000 2000 At December 31, 1999 1999
-------------------------------------- -----------------------------------------
Positive Negative Net Average Positive Negative Net Average
Notional Fair Fair Asset Fair Notional Fair Fair Asset Fair
In millions Value Value Value (Liability) Value Value Value Value (Liability) Value
=================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Customer-related
Interest rate
Swaps ................. $13,567 $120 $(127) $(7) $(1) $17,103 $110 $(116) $(6) $(13)
Caps/floors
Sold ................ 5,145 (17) (17) (23) 3,440 (25) (25) (20)
Purchased ........... 3,914 15 15 21 3,337 22 22 18
Foreign exchange ........ 6,108 79 (82) (3) 7 3,310 47 (36) 11 7
Other ................... 2,544 59 (59) 4 2,161 22 (9) 13 3
- ---------------------------------------------------------------------------------------------------------------------------------
Total customer-related .. 31,278 273 (285) (12) 8 29,351 201 (186) 15 (5)
Other ...................... 1,207 13 (1) 12 8 1,238 6 6 4
- ---------------------------------------------------------------------------------------------------------------------------------
Total other derivatives $32,485 $286 $(286) $16 $30,589 $207 $(186) $21 $(1)
=================================================================================================================================
</TABLE>
NOTE 19 EMPLOYEE BENEFIT PLANS
PENSION AND POSTRETIREMENT PLANS
The Corporation has a noncontributory, qualified defined benefit pension plan
covering most employees. Retirement benefits are derived from a cash balance
formula based upon compensation levels, age and length of service. Pension
contributions are based on an actuarially determined amount necessary to fund
total benefits payable to plan participants.
The Corporation also maintains nonqualified supplemental retirement plans
for certain employees. All retirement benefits provided under these plans are
unfunded and any payments to plan participants are made by the Corporation. The
Corporation also provides certain health care and life insurance benefits for
retired employees ("postretirement benefits") through various plans.
A reconciliation of the changes in the benefit obligation for qualified and
nonqualified pension plans and postretirement benefit plans as well as the
change in plan assets for the qualified pension plan is as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------
Qualified and Postretirement
Nonqualified Pensions Benefits
-------------------------------------------------------
December 31 - in millions 2000 1999 2000 1999
========================================================================================================================
<S> <C> <C> <C> <C>
Benefit obligation at beginning of year ....................... $840 $866 $198 $187
Service cost .................................................. 32 24 2 2
Interest cost ................................................. 65 60 14 12
Actuarial loss (gain) ......................................... 7 (39) 7 13
Settlements ................................................... (20)
Participant contributions ..................................... 4 3
Benefits paid ................................................. (68) (71) (22) (19)
- ------------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year .......................... $856 $840 $203 $198
========================================================================================================================
Fair value of plan assets at beginning of year ................ $939 $758
Actual (loss) return on plan assets ........................... (29) 147
Employer contribution ......................................... 130 105
Settlements ................................................... (20)
Benefits paid ................................................. (68) (71)
- --------------------------------------------------------------------------------------------
Fair value of plan assets at end of year ................... $952 $939
============================================================================================
Funded status ................................................. $96 $99 $(203) $(198)
Unrecognized net actuarial loss (gain) ........................ 65 (60) 38 30
Unrecognized prior service credit ............................. (5) (6) (63) (69)
Unrecognized net transition asset ............................. (4)
- ------------------------------------------------------------------------------------------------------------------------
Net amount recognized on the balance sheet ................. $156 $29 $(228) $(237)
========================================================================================================================
Prepaid pension cost .......................................... $156 $29
Additional minimum liability .................................. (18) (22)
Intangible asset .............................................. 2 3
Accumulated other comprehensive loss .......................... 16 19
- -------------------------------------------------------------------------------------------
Net amount recognized on the balance sheet ................. $156 $29
===========================================================================================
</TABLE>
| 76
<PAGE> 46
The accrued pension benefit liability above includes $34 million and $46
million for the nonqualified plans at December 31, 2000 and 1999, respectively.
The accumulated benefit obligation for these plans was $53 million and $68
million at December 31, 2000 and 1999, respectively.
Plan assets primarily consist of listed common stocks, U.S. government and
agency securities and collective funds. Plan assets are managed by BlackRock and
do not include common stock of the Corporation.
The health care cost trend rate declines until it stabilizes at 5.00%
beginning in 2005. A one-percentage-point change in assumed health care cost
trend rates would have the following effects:
---------------------------
Year ended December 31, 2000 - in millions Increase Decrease
========================================================================
Effect on total service
and interest cost ................ $1 $(1)
Effect on postretirement
benefit obligation ............... 10 (9)
========================================================================
The components of net periodic pension and postretirement benefit cost were as
follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------
Qualified and Nonqualified Pensions Postretirement Benefits
-------------------------------------------------------------------
Year ended December 31 - in millions 2000 1999 1998 2000 1999 1998
==================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Service cost ................................. $32 $24 $28 $2 $2 $2
Interest cost ................................ 65 58 58 14 12 14
Expected return on plan assets ............... (93) (75) (71)
Transition amount amortization ............... (4) (5) (5)
Special termination benefits ................. 10
Amortization of prior service cost ........... (1) (1) 1 (6) (6) (6)
Recognized net actuarial loss ................ 2 1
Losses due to settlements .................... 7
- ------------------------------------------------------------------------------------------------------------------
Net periodic cost $6 $3 $22 $10 $8 $10
==================================================================================================================
</TABLE>
Weighted-average assumptions were as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------
Qualified and Nonqualified Pensions Postretirement Benefits
-------------------------------------------------------------------
Year ended December 31 2000 1999 1998 2000 1999 1998
==================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Discount rate ................................ 7.50% 7.75% 6.75% 7.50% 7.75% 6.75%
Rate of compensation increase ................ 4.50 4.50 4.50
Expected return on plan assets ............... 9.50 9.50 9.50
Expected health care cost trend rate
Medical pre-65 ............................ 7.00 7.00 5.45
Medical post-65 ........................... 8.00 8.00 5.45
Dental .................................... 7.00 7.00 5.25
==================================================================================================================
</TABLE>
INCENTIVE SAVINGS PLAN
The Corporation sponsors an incentive savings plan that covers substantially all
employees. Under this plan, employee contributions up to 6% of biweekly
compensation, as defined by the plan are matched, subject to Internal Revenue
Code limitations. Contributions to the plan are matched primarily by shares of
PNC common stock held by the Corporation's employee stock ownership plan
("ESOP").
The Corporation makes annual contributions to the ESOP that are at least
equal to the debt service requirements on the ESOP's borrowings less dividends
received by the ESOP. All dividends received by the ESOP are used to pay debt
service. Dividends used for debt service totaled $9 million in 2000, 1999 and
1998. To satisfy additional debt service requirements, PNC contributed $9
million in 1999 and $7 million in 1998.
As the ESOP's borrowings are repaid, shares are allocated to employees who
made contributions during the year based on the proportion of annual debt
service to total debt service. The Corporation includes all ESOP shares as
common shares outstanding in the earnings per share computation. Components of
ESOP shares are:
As of or for the year ended ------------------------
December 31 - in thousands 2000 1999
============================================================
Shares
Unallocated ...................... 364 712
Allocated ........................ 4,316 4,251
Released for allocation .......... 348 652
Retired .......................... (530) (587)
- ------------------------------------------------------------
Total ......................... 4,498 5,028
============================================================
77 |
<PAGE> 47
Compensation expense related to the portion of contributions matched with ESOP
shares is determined based on the number of ESOP shares allocated. Compensation
expense related to these plans was $30 million, $17 million and $4 million for
2000, 1999 and 1998, respectively.
NOTE 20 STOCK-BASED COMPENSATION PLANS
The Corporation has a senior executive long-term incentive award plan
("Incentive Plan") that provides for the granting of incentive stock options,
nonqualified options, stock appreciation rights, performance units and incentive
shares. In any given year, the number of shares of common stock available for
grant under the Incentive Plan may range from 1.5% to 3% of total issued shares
of common stock determined at the end of the preceding calendar year.
STOCK OPTIONS
Options are granted at exercise prices not less than the market value of common
stock on the date of grant. Options granted in 2000 and 1999 become exercisable
in installments after the grant date. Options granted prior to 1999 are mainly
exercisable twelve months after the grant date. Payment of the option price may
be in cash or shares of common stock at market value on the exercise date. A
summary of stock option activity follows:
-----------------------------------------------
Per Option
---------------------------------
Weighted-
Average
Shares in thousands Exercise Price Exercise Price Shares
========================================================================
January 1, 1998 ....... $11.38 - $43.75 $32.25 8,791
Granted ............ 43.66 - 66.00 55.17 3,449
Exercised .......... 11.38 - 43.75 31.26 (2,449)
Terminated ......... 43.75 - 54.72 52.35 (225)
----------
December 31, 1998 ..... 11.38 - 66.00 40.30 9,566
Granted ............ 50.47 - 76.00 51.68 3,612
Exercised .......... 11.38 - 54.72 33.89 (1,856)
Terminated ......... 21.75 - 59.31 51.68 (247)
----------
December 31, 1999 ..... 11.38 - 76.00 44.83 11,075
Granted ............ 42.19 - 66.22 44.20 4,171
Exercised .......... 11.38 - 59.31 37.77 (2,952)
Terminated ......... 31.13 - 61.75 48.10 (464)
----------
December 31, 2000 ..... 21.63 - 76.00 46.24 11,830
========================================================================
At December 31, 2000, the weighted-average remaining contractual life of
outstanding options was 7 years and 7 months and options for 5,834,898 shares of
common stock were exercisable at a weighted-average price of $45.96 per share.
The grant-date fair value of options granted in 2000 was $9.86 per option.
Options for 82,000 shares of common stock were granted in 1999 with an exercise
price in excess of the market value on the date of grant. There were no options
granted in excess of market value in 2000. Shares of common stock available for
the granting of options under the Incentive Plan and the predecessor plans were
10,584,683 at December 31, 2000, 1999 and 1998.
INCENTIVE SHARE AWARDS
In 1998, incentive share awards potentially representing 362,250 shares of
common stock were granted to certain senior executives pursuant to the Incentive
Plan. Issuance of restricted shares pursuant to these incentive awards is
subject to the market price of PNC's common stock equaling or exceeding
specified levels for defined periods. The restricted period ends two years after
the issue date. During the restricted period, the recipient receives dividends
and can vote the shares. If the recipient leaves the Corporation before the end
of the restricted period, the shares will be forfeited. At December 31, 2000,
the incentive share awards granted in 1998 had not met the specified levels
required for issuance of restricted stock. In 2000, incentive share awards
potentially representing 606,000 shares of common stock were granted to certain
senior executives pursuant to the Incentive Plan. Of this amount, the grant of
105,000 shares is subject to shareholder approval. One-half of any shares of
restricted stock issued pursuant to these awards will vest after 3 years and
one-half vest after year 4. Shares awarded, if any, under this grant will be
offset on a share-for-share basis by any shares received by the executive from
the 1998 grant. There were 66,000 incentive shares forfeited in 2000, no
forfeitures in 1999 and 12,000 incentive shares forfeited in 1998. In addition,
245,000 shares of restricted stock were granted to senior executives with a
3-year vesting period of which the grant of 60,000 shares is subject to
shareholder approval. Compensation expense recognized for incentive share awards
was $8 million, $12 million and $15 million in 2000, 1999 and 1998,
respectively.
EMPLOYEE STOCK PURCHASE PLAN
The Corporation's employee stock purchase plan ("ESPP") has approximately 3.0
million shares available for issuance. Persons who have been continuously
employed for at least one year are eligible to participate. Participants
purchase the Corporation's common stock at 85% of the lesser of fair market
value on the first or last day of each offering period. No charge to earnings is
recorded with respect to the ESPP. Shares issued pursuant to the ESPP were as
follows:
------------------------------------
Year ended December 31 Shares Price Per Share
=============================================================
2000 .................. 504,988 $42.82 and $45.53
1999 .................. 406,740 43.99 and 47.39
1998 .................. 315,097 43.83 and 48.34
=============================================================
| 78
<PAGE> 48
The following table sets forth pro forma income from continuing operations and
diluted earnings per share as if compensation expense was recognized for stock
options and the ESPP.
PRO FORMA NET INCOME AND EPS
-----------------------
Year ended December 31 Reported Pro forma
===================================================
Net income (in millions)
2000 ................... $1,214 $1,196
1999 ................... 1,202 1,194
1998 ................... 1,080 1,064
===================================================
Diluted earnings per share
2000 ................... $4.09 $4.02
1999 ................... 3.94 3.92
1998 ................... 3.49 3.43
===================================================
For purposes of computing pro forma results, PNC estimated the fair value of
stock options and ESPP shares using the Black-Scholes option pricing model.
The model requires the use of numerous assumptions, many of which are
highly subjective in nature. Therefore, the pro forma results are estimates of
results of operations as if compensation expense had been recognized for all
stock-based compensation plans and are not indicative of the impact on future
periods. The following assumptions were used in the option pricing model for
purposes of estimating pro forma results. The dividend yield represents average
yields over the previous three-year period. Volatility is measured using the
fluctuation in quarter-end closing stock prices over a five-year period.
----------------------------------
Year ended December 31 2000 1999 1998
===================================================================
Risk-free interest rate ...... 6.6% 5.2% 5.5%
Dividend yield ............... 3.1 3.6 4.4
Volatility ................... 21.8 22.1 19.9
Expected life ................ 5 yrs. 6 yrs. 6 yrs.
===================================================================
NOTE 21 INCOME TAXES
The components of income taxes were as follows:
Year ended December 31 -----------------------------
In millions 2000 1999 1998
============================================================
Current
Federal .................. $226 $454 $307
State .................... 32 35 57
- ------------------------------------------------------------
Total current .......... 258 489 364
============================================================
Deferred
Federal .................. 363 102 204
State .................... 13 (5) 3
- ------------------------------------------------------------
Total deferred ......... 376 97 207
============================================================
Total .................... $634 $586 $571
============================================================
Significant components of deferred tax assets and liabilities are as follows:
----------------------
December 31 - in millions 2000 1999
============================================================
Deferred tax assets
Allowance for credit losses ....... $250 $247
Compensation and benefits ......... 85 128
Net unrealized securities losses .. 19 58
Other ............................. 104 158
- ------------------------------------------------------------
Total deferred tax assets ....... 458 591
============================================================
Deferred tax liabilities
Leasing ........................... 824 548
Depreciation ...................... 37 29
Other ............................. 102 90
- ------------------------------------------------------------
Total deferred tax liabilities .. 963 667
============================================================
Net deferred tax liability ........ $505 $76
============================================================
A reconciliation between the statutory and effective tax rates follows:
--------------------------
Year ended December 31 2000 1999 1998
============================================================
Statutory tax rate .......... 35.0% 35.0% 35.0%
Increases (decreases)
resulting from
State taxes .............. 1.6 1.1 2.3
Tax-exempt interest ...... (.6) (.7) (1.0)
Goodwill ................. .9 .9 .9
Other .................... (2.6) (3.5) (2.6)
- ------------------------------------------------------------
Effective tax rate ....... 34.3% 32.8% 34.6%
============================================================
79 |
<PAGE> 49
NOTE 22 SEGMENT REPORTING
PNC operates seven major businesses engaged in community banking, corporate
banking, real estate finance, asset-based lending, wealth management, asset
management and global fund services: Community Banking, Corporate Banking, PNC
Real Estate Finance, PNC Business Credit, PNC Advisors, BlackRock and PFPC.
Business results are presented based on PNC's management accounting
practices and the Corporation's management structure. There is no comprehensive,
authoritative body of guidance for management accounting equivalent to generally
accepted accounting principles; therefore, PNC's business results are not
necessarily comparable with similar information for any other financial services
institution. Financial results are presented, to the extent practicable, as if
each business operated on a stand-alone basis.
The presentation of business results was changed to reflect the
Corporation's operating structure during 2000. Middle market and equipment
leasing activities (previously included in Community Banking) are reported in
Corporate Banking. In addition, PNC Real Estate Finance and PNC Business Credit
are reported separately within PNC Secured Finance. Regional real estate lending
activities (previously included in Community Banking) are reported in PNC Real
Estate Finance. Business financial results for 2000, 1999 and 1998 are presented
consistent with this structure.
The management accounting process uses various balance sheet and income
statement assignments and transfers to measure performance of the businesses.
Methodologies change from time to time as management accounting practices are
enhanced and businesses change. Securities or borrowings and related net
interest income are assigned based on the net asset or liability position of
each business. Capital is assigned based on management's assessment of inherent
risks and equity levels at independent companies providing similar products and
services. The allowance for credit losses is allocated to the businesses based
on 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, divested and exited
businesses, equity management activities, minority interests, residual asset and
liability management activities, eliminations and unassigned items, the impact
of which is reflected in the "Other" category.
BUSINESS SEGMENT PRODUCTS AND SERVICES
Community Banking provides deposit, branch-based brokerage, electronic banking
and credit products and services to retail customers as well as credit, treasury
management and capital markets products and services to small businesses
primarily within PNC's geographic region.
Corporate Banking provides credit, equipment leasing, treasury management
and capital markets products and services to large and mid-sized corporations,
institutions and government entities primarily within PNC's geographic region.
PNC Real Estate Finance provides credit, capital markets, treasury
management, commercial mortgage loan servicing and other products and services
to developers, owners and investors in commercial real estate.
PNC Business Credit provides asset-based lending, capital markets and
treasury management products and services to middle market customers on a
national basis. PNC Business Credit's 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 $204 billion of assets under management at December
31, 2000. BlackRock manages assets on behalf of institutions and individuals
through a variety of fixed income, liquidity, equity and alternative investment
separate accounts and mutual funds, including its flagship fund families,
BlackRock Funds and BlackRock Provident Institutional Funds. In addition,
BlackRock provides risk management and technology services to a growing number
of institutional investors under the BlackRock Solutions name.
Providing a wide range of global fund services to the investment management
industry, 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. As an extension of its domestic services, PFPC also provides
customized processing services to the international marketplace through its
Dublin, Ireland and Luxembourg operations.
| 80
<PAGE> 50
RESULTS OF BUSINESSES
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
PNC
Real PNC
Year ended December 31 Community Corporate Estate Business PNC Black- Con-
In millions Banking Banking Finance Credit Advisors Rock PFPC Other solidated
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
2000
INCOME STATEMENT
Net interest income (a) ........ $1,414 $562 $115 $99 $136 $7 $(46) $(105) $2,182
Noninterest income ............. 619 277 105 20 656 477 656 81 2,891
- -----------------------------------------------------------------------------------------------------------------------------------
Total revenue ............... 2,033 839 220 119 792 484 610 (24) 5,073
Provision for credit losses .... 45 79 (7) 12 5 2 136
Depreciation and amortization .. 85 13 20 2 14 20 49 56 259
Other noninterest expense ...... 986 371 119 28 497 314 483 14 2,812
- -----------------------------------------------------------------------------------------------------------------------------------
Pretax earnings ............. 917 376 88 77 276 150 78 (96) 1,866
Income taxes ................... 327 132 6 28 103 63 31 (38) 652
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings .................... $590 $244 $82 $49 $173 $87 $47 $(58) $1,214
===================================================================================================================================
Inter-segment revenue .......... $3 $5 $13 $84 $(105)
===================================================================================================================================
AVERAGE ASSETS ................. $38,958 $16,382 $5,506 $2,271 $3,500 $537 $1,578 $(241) $68,491
===================================================================================================================================
1999
INCOME STATEMENT
Net interest income (a) ........ $1,418 $481 $112 $71 $130 $(8) $6 $156 $2,366
Noninterest income ............. 550 264 100 11 608 381 251 285 2,450
- -----------------------------------------------------------------------------------------------------------------------------------
Total revenue ............... 1,968 745 212 82 738 373 257 441 4,816
Provision for credit losses .... 61 16 (5) 11 7 73 163
Depreciation and amortization .. 88 14 20 2 14 18 10 130 296
Other noninterest expense ...... 969 346 106 23 480 252 175 196 2,547
- -----------------------------------------------------------------------------------------------------------------------------------
Pretax earnings ............. 850 369 91 46 237 103 72 42 1,810
Income taxes ................... 307 123 17 17 90 44 27 (17) 608
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings .................... $543 $246 $74 $29 $147 $59 $45 $59 $1,202
===================================================================================================================================
Inter-segment revenue .......... $5 $2 $(1) $8 $84 $(98)
===================================================================================================================================
AVERAGE ASSETS ................. $37,502 $15,587 $5,554 $1,759 $3,353 $448 $308 $3,403 $67,914
===================================================================================================================================
1998
INCOME STATEMENT
Net interest income (a) ........ $1,391 $416 $114 $55 $121 $(11) $8 $420 $2,514
Noninterest income ............. 605 211 47 7 368 339 183 326 2,086
- -----------------------------------------------------------------------------------------------------------------------------------
Total revenue ............... 1,996 627 161 62 489 328 191 746 4,600
Provision for credit losses .... 81 84 (5) 3 1 61 225
Depreciation and amortization .. 98 13 15 2 6 13 6 106 259
Other noninterest expense ...... 1,036 306 84 17 290 247 125 334 2,439
- -----------------------------------------------------------------------------------------------------------------------------------
Pretax earnings ............. 781 224 67 40 192 68 60 245 1,677
Income taxes ................... 293 81 15 15 73 32 22 66 597
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings .................... $488 $143 $52 $25 $119 $36 $38 $179 $1,080
===================================================================================================================================
Inter-segment revenue .......... $6 $1 $1 $6 $(14)
===================================================================================================================================
AVERAGE ASSETS ................. $36,942 $14,329 $5,306 $1,380 $2,731 $441 $229 $7,918 $69,276
===================================================================================================================================
</TABLE>
(a) Taxable-equivalent basis
Gains in 1999 from the sales of the credit card business, an equity interest in
Electronic Payment Services, Inc., the BlackRock IPO, Concord stock and branches
totaling $422 million are included in the "Other" category. Also in 1999,
valuation adjustments associated with exiting certain non-strategic lending
businesses totaling $195 million, costs related to efficiency initiatives of $98
million, a contribution to the PNC Foundation of $30 million, the write-down of
an equity investment of $28 million and expense associated with the buyout of
PNC's mall ATM representative of $12 million are included in the "Other"
category.
The results of the credit card business through the first quarter of 1999,
the corporate trust and escrow business in 1998, differences between management
accounting practices and generally accepted accounting principles, divested and
exited businesses, equity management activities, minority interests, residual
asset and liability management activities, eliminations and unassigned items
comprise the remainder of the "Other" category.
81 |
<PAGE> 51
NOTE 23 EARNINGS PER SHARE
The following table sets forth basic and diluted earnings per share
calculations.
<TABLE>
<CAPTION>
------------------------------------------
Year ended December 31 - in millions, except share and per share data 2000 1999 1998
=======================================================================================================================
<S> <C> <C> <C>
CALCULATION OF BASIC EARNINGS PER COMMON SHARE
Income from continuing operations ..................................... $1,214 $1,202 $1,080
Less: Preferred dividends declared .................................... 19 19 19
- -----------------------------------------------------------------------------------------------------------------------
Income from continuing operations applicable to basic earnings
per common share ................................................. $1,195 $1,183 $1,061
- -----------------------------------------------------------------------------------------------------------------------
Basic weighted-average common shares outstanding (in thousands) ....... 289,958 296,886 300,761
- -----------------------------------------------------------------------------------------------------------------------
Basic Earnings Per Common Share from Continuing Operations ......... $4.12 $3.98 $3.53
=======================================================================================================================
Income from discontinued operations applicable to basic earnings
per common share ................................................... $65 $62 $35
- -----------------------------------------------------------------------------------------------------------------------
Basic weighted-average common shares outstanding (in thousands) ....... 289,958 296,886 300,761
- -----------------------------------------------------------------------------------------------------------------------
Basic Earnings Per Common Share from Discontinued Operations ....... $.23 $.21 $.11
=======================================================================================================================
Net income ............................................................ $1,279 $1,264 $1,115
Less: Preferred dividends declared .................................... 19 19 19
- -----------------------------------------------------------------------------------------------------------------------
Net income applicable to basic earnings per common share ........... $1,260 $1,245 $1,096
- -----------------------------------------------------------------------------------------------------------------------
Basic weighted-average common shares outstanding (in thousands) ....... 289,958 296,886 300,761
- -----------------------------------------------------------------------------------------------------------------------
Basic Earnings Per Common Share .................................... $4.35 $4.19 $3.64
=======================================================================================================================
CALCULATION OF DILUTED EARNINGS PER COMMON SHARE
Income from continuing operations ..................................... $1,214 $1,202 $1,080
Less: Dividends declared on nonconvertible preferred stock Series F ... 18 18 17
- -----------------------------------------------------------------------------------------------------------------------
Income from continuing operations applicable to diluted earnings
per common share ................................................. $1,196 $1,184 $1,063
- -----------------------------------------------------------------------------------------------------------------------
Basic weighted-average common shares outstanding (in thousands) ....... 289,958 296,886 300,761
Weighted-average common shares to be issued using
average market price and assuming:
Conversion of preferred stock Series A and B ....................... 118 131 148
Conversion of preferred stock Series C and D ....................... 986 1,072 1,145
Conversion of debentures ........................................... 20 24 761
Exercise of stock options .......................................... 1,531 1,529 1,846
Incentive share awards ............................................. 173 383 486
- -----------------------------------------------------------------------------------------------------------------------
Diluted weighted-average common shares outstanding (in thousands) ..... 292,786 300,025 305,147
- -----------------------------------------------------------------------------------------------------------------------
Diluted Earnings Per Common Share from Continuing Operations ....... $4.09 $3.94 $3.49
=======================================================================================================================
Income from discontinued operations applicable to diluted earnings
per common share ................................................... $65 $62 $35
- -----------------------------------------------------------------------------------------------------------------------
Diluted weighted-average common shares outstanding (in thousands) ..... 292,786 300,025 305,147
- -----------------------------------------------------------------------------------------------------------------------
Diluted Earnings Per Common Share from Discontinued Operations ..... $.22 $.21 $.11
=======================================================================================================================
Net income ............................................................ $1,279 $1,264 $1,115
Less: Dividends declared on nonconvertible preferred stock Series F ... 18 18 17
- -----------------------------------------------------------------------------------------------------------------------
Net income applicable to diluted earnings per common share ......... $1,261 $1,246 $1,098
- -----------------------------------------------------------------------------------------------------------------------
Diluted weighted-average common shares outstanding (in thousands) ..... 292,786 300,025 305,147
- -----------------------------------------------------------------------------------------------------------------------
Diluted Earnings Per Common Share .................................. $4.31 $4.15 $3.60
=======================================================================================================================
</TABLE>
82 |
<PAGE> 52
NOTE 24 COMPREHENSIVE INCOME
The Corporation's other comprehensive income consists of unrealized gains or
losses on securities available for sale and minimum pension liability
adjustments. The income effects allocated to each component of other
comprehensive income (loss) are as follows:
-----------------------------------------
Year ended December 31 Pretax Tax Benefit After-tax
In millions Amount (Expense) Amount
=============================================================================
2000
Unrealized securities gains ..... $127 $(41) $86
Less: Reclassification
adjustment for losses
realized in net income ....... (3) 1 (2)
- -----------------------------------------------------------------------------
Net unrealized
securities gains ........... 130 (42) 88
Minimum pension
liability adjustment ......... 2 (1) 1
- -----------------------------------------------------------------------------
Other comprehensive
income from
continuing operations ...... $132 $(43) $89
=============================================================================
1999
Unrealized securities losses .... $(184) $63 $(121)
Less: Reclassification
adjustment for losses
realized in net income ....... (28) 10 (18)
- -----------------------------------------------------------------------------
Net unrealized
securities losses .......... (156) 53 (103)
Minimum pension
liability adjustment ......... (8) 3 (5)
- -----------------------------------------------------------------------------
Other comprehensive
loss from
continuing operations ...... $(164) $56 $(108)
=============================================================================
1998
Unrealized securities losses .... $(12) $4 $(8)
Less: Reclassification
adjustment for losses
realized in net income ....... (15) 5 (10)
- -----------------------------------------------------------------------------
Net unrealized
securities gains ........... 3 (1) 2
Minimum pension
liability adjustment ......... (11) 4 (7)
- -----------------------------------------------------------------------------
Other comprehensive
loss from continuing
operations ................. $(8) $3 $(5)
=============================================================================
The accumulated balances related to each component of other comprehensive loss
are as follows:
------------------
December 31 - in millions 2000 1999
=============================================================
Net unrealized securities losses ......... $(32) $(120)
Minimum pension liability adjustment ..... (11) (12)
- -------------------------------------------------------------
Accumulated other comprehensive
loss from continuing operations ..... $(43) $(132)
=============================================================
NOTE 25 LITIGATION
The Corporation and persons to whom the Corporation may have indemnification
obligations, in the normal course of business, are subject to various pending
and threatened lawsuits in which claims for monetary damages are asserted.
Management, after consultation with legal counsel, does not at the present time
anticipate the ultimate aggregate liability, if any, arising out of such
lawsuits will have a material adverse effect on the Corporation's financial
condition. At the present time, management is not in a position to determine
whether any such pending or threatened litigation will have a material adverse
effect on the Corporation's results of operations in any future reporting
period.
NOTE 26 FAIR VALUE OF FINANCIAL INSTRUMENTS
<TABLE>
<CAPTION>
----------------------------------------------------
2000 1999
----------------------------------------------------
Carrying Fair Carrying Fair
December 31 - in millions Amount Value Amount Value
==================================================================================
<S> <C> <C> <C> <C>
ASSETS
Cash and
short-term assets ..... $5,041 $5,041 $4,465 $4,465
Securities available
for sale .............. 5,902 5,902 5,960 5,960
Loans held for sale ...... 1,655 1,655 3,477 3,477
Net loans
(excludes leases) ..... 46,066 46,872 46,041 46,398
Commercial mortgage
servicing rights ...... 156 267 125 171
LIABILITIES
Demand, savings
and money
market deposits ....... 30,686 30,686 27,823 27,823
Time deposits ............ 16,978 17,101 17,979 17,890
Borrowed funds ........... 11,822 12,043 14,389 14,442
OFF-BALANCE-SHEET
Unfunded loan
commitments ........... (11) (11) (5) (5)
Letters of credit ........ (10) (10) (9) (9)
Financial derivatives
Interest rate risk
management .......... 63 104 75 (50)
Commercial mortgage
banking risk
management .......... (2) (10) 51
Credit-related
activities .......... (2) (4)
Customer/other
derivatives ......... 21 21
==================================================================================
</TABLE>
83 |
<PAGE> 53
Real and personal property, lease financing, loan customer relationships,
deposit customer intangibles, retail branch networks, fee-based businesses, such
as asset management and brokerage, trademarks and brand names are excluded from
the amounts set forth in the previous table. Accordingly, the aggregate fair
value amounts presented do not represent the underlying value of the
Corporation.
Fair value is defined as the estimated amount at which a financial
instrument could be exchanged in a current transaction between willing parties,
or other than in a forced or liquidation sale. However, it is not management's
intention to immediately dispose of a significant portion of such financial
instruments, and unrealized gains or losses should not be interpreted as a
forecast of future earnings and cash flows. The derived fair values are
subjective in nature, involve uncertainties and significant judgment and,
therefore, cannot be determined with precision. Changes in assumptions could
significantly impact the derived fair value estimates.
The following methods and assumptions were used in estimating fair value
amounts for financial instruments.
GENERAL
For short-term financial instruments realizable in three months or less, the
carrying amount reported in the consolidated balance sheet approximates fair
value. Unless otherwise stated, the rates used in discounted cash flow analyses
are based on market yield curves.
CASH AND SHORT-TERM ASSETS
The carrying amounts reported in the consolidated balance sheet for cash and
short-term investments approximate fair values primarily due to their short-term
nature. For purposes of this disclosure only, short-term assets include due from
banks, interest-earning deposits with banks, federal funds sold and resale
agreements, trading securities, customer's acceptance liability and accrued
interest receivable.
SECURITIES AVAILABLE FOR SALE
The fair value of securities available for sale is based on quoted market
prices, where available. If quoted market prices are not available, fair value
is estimated using the quoted market prices of comparable instruments.
NET LOANS AND LOANS HELD FOR SALE
Fair values are estimated based on the discounted value of expected net cash
flows incorporating assumptions about prepayment rates, credit losses and
servicing fees and costs. For revolving home equity loans, this fair value does
not include any amount for new loans or the related fees that will be generated
from the existing customer relationships. In the case of nonaccrual loans,
scheduled cash flows exclude interest payments. The carrying value of loans held
for sale approximates fair value.
COMMERCIAL MORTGAGE SERVICING RIGHTS
The fair value of commercial mortgage servicing rights is estimated based on the
present value of future cash flows.
DEPOSITS
The carrying amounts of noninterest-bearing demand and interest-bearing money
market and savings deposits approximate fair values. For time deposits, which
include foreign deposits, fair values are estimated based on the discounted
value of expected net cash flows taking into account current interest rates.
BORROWED FUNDS
The carrying amounts of federal funds purchased, commercial paper, acceptances
outstanding and accrued interest payable are considered to be their fair value
because of their short-term nature. For all other borrowed funds, fair values
are estimated based on the discounted value of expected net cash flows taking
into account current interest rates.
UNFUNDED LOAN COMMITMENTS AND LETTERS OF CREDIT
Fair values for commitments to extend credit and letters of credit are estimated
based on the amount of deferred fees and the creditworthiness of the
counterparties.
FINANCIAL AND OTHER DERIVATIVES
The fair value of derivatives is estimated based on the discounted value of the
expected net cash flows. These fair values represent the estimated amounts the
Corporation would receive or pay to terminate the contracts, taking into account
current interest rates.
NOTE 27 UNUSED LINE OF CREDIT
At December 31, 2000, the Corporation maintained a line of credit in the amount
of $500 million, none of which was drawn. This line is available for general
corporate purposes and expires in 2003.
| 84
<PAGE> 54
NOTE 28 PARENT COMPANY
Summarized financial information of the parent company is as follows:
STATEMENT OF INCOME
<TABLE>
<CAPTION>
------------------------------
Year ended December 31 - in millions 2000 1999 1998
========================================================================
<S> <C> <C> <C>
OPERATING REVENUE
Dividends from:
Bank subsidiaries .............. $690 $1,139 $774
Nonbank subsidiaries ........... 55 80 21
Interest income ................... 9 9 5
Noninterest income ................ 1 4 1
- ------------------------------------------------------------------------
Total operating revenue ........ 755 1,232 801
========================================================================
OPERATING EXPENSE
Interest expense .................. 54 86 92
Other expense ..................... (6) 52 7
- ------------------------------------------------------------------------
Total operating expense ........ 48 138 99
========================================================================
Income before income
taxes and equity in
undistributed net
income of subsidiaries ......... 707 1,094 702
Income tax benefits ............... (21) (47) (35)
- ------------------------------------------------------------------------
Income before equity in
undistributed net
income of subsidiaries ....... 728 1,141 737
Bank subsidiaries .............. 386 (7) 312
Nonbank subsidiaries ........... 165 130 66
- ------------------------------------------------------------------------
Net income ..................... $1,279 $1,264 $1,115
========================================================================
</TABLE>
BALANCE SHEET
<TABLE>
<CAPTION>
--------------------
December 31 - in millions 2000 1999
============================================================
<S> <C> <C>
ASSETS
Cash and due from banks ........... $1
Short-term investments
with subsidiary bank ........... $16
Securities available for sale ..... 53
Investments in:
Bank subsidiaries .............. 5,640 6,016
Nonbank subsidiaries ........... 1,656 734
Other assets ...................... 160 154
- ------------------------------------------------------------
Total assets ................... $7,510 $6,920
============================================================
LIABILITIES
Borrowed funds .................... $100 $100
Nonbank affiliate borrowings ...... 522 613
Accrued expenses and
other liabilities .............. 232 261
- ------------------------------------------------------------
Total liabilities .............. 854 974
============================================================
SHAREHOLDERS' EQUITY .............. 6,656 5,946
- ------------------------------------------------------------
Total liabilities and
shareholders' equity ......... $7,510 $6,920
============================================================
</TABLE>
Borrowed funds are scheduled for repayment in 2001. Commercial paper and all
other debt issued by PNC Funding Corp., a wholly-owned finance subsidiary, is
fully and unconditionally guaranteed by the parent company. In addition, in
connection with certain affiliates' mortgage servicing operations, the parent
company has committed to maintain such affiliates' net worth above minimum
requirements.
During 2000, 1999 and 1998, the parent company received net income tax
refunds of $36 million, $44 million and $42 million, respectively. Such refunds
represent the parent company's portion of consolidated income taxes. During
2000, 1999 and 1998, the parent company paid interest of $56 million, $96
million and $95 million, respectively.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
-----------------------------------
Year ended December 31 - in millions 2000 1999 1998
================================================================================
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income .......................... $1,279 $1,264 $1,115
Adjustments to reconcile net
income to net cash
provided by operating
activities:
Equity in undistributed
net earnings of
subsidiaries ............... (551) (123) (378)
Other ......................... (24) (14) 19
- --------------------------------------------------------------------------------
Net cash provided by
operating activities .......... 704 1,127 756
================================================================================
INVESTING ACTIVITIES
Net change in short-term
investments with
subsidiary bank .................. 16 (7)
Net capital returned
from (contributed to)
subsidiaries ..................... 258 631 (261)
Securities available for sale
Sales and maturities ............. 372 1,592 1,170
Purchases ........................ (425) (1,565) (1,129)
Cash paid in acquisitions ........... (2) (83)
Other ............................... (13) (17) (22)
- --------------------------------------------------------------------------------
Net cash provided (used)
by investing activities ....... 208 632 (325)
================================================================================
FINANCING ACTIVITIES
Borrowings from nonbank
subsidiary ....................... 314 687 297
Repayments on borrowings
from nonbank subsidiary .......... (440) (1,080) (14)
Acquisition of
treasury stock ................... (428) (803) (342)
Cash dividends paid
to shareholders .................. (546) (520) (495)
Issuance of stock ................... 189 141 123
Repayments on borrowings ............ (200)
Other ............................... 15
- --------------------------------------------------------------------------------
Net cash used by
financing activities .......... (911) (1,760) (431)
================================================================================
Increase (decrease) in cash
and due from banks ............... 1 (1)
Cash and due from banks
at beginning of year .......... $1 1
- --------------------------------------------------------------------------------
Cash and due from banks
at end of year ................ $1 $1
================================================================================
</TABLE>
85 |
<PAGE> 55
STATISTICAL INFORMATION
The PNC Financial Services Group, Inc.
SELECTED QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
2000 1999
Quarter ended - dollars in millions, ------------------------------------------------------------------------------------
except per share data Fourth Third Second First Fourth Third Second First
===========================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Interest income .................. $1,190 $1,201 $1,180 $1,161 $1,137 $1,125 $1,116 $1,205
Interest expense ................. 657 670 635 606 575 552 540 572
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income .............. 533 531 545 555 562 573 576 633
Provision for credit losses ...... 40 30 35 31 30 30 25 78
Noninterest income before net
securities gains (losses) ..... 719 693 728 731 647 569 547 665
Net securities gains (losses) .... 16 7 (3) (22) 2 42
Noninterest expense .............. 752 747 780 792 753 656 684 750
- ---------------------------------------------------------------------------------------------------------------------------
Income from continuing operations
before income taxes ........... 476 454 458 460 404 458 456 470
Income taxes ..................... 162 155 159 158 117 159 154 156
- ---------------------------------------------------------------------------------------------------------------------------
Income from continuing
operations .................... 314 299 299 302 287 299 302 314
- ---------------------------------------------------------------------------------------------------------------------------
Income from discontinued
operations .................... 20 23 16 6 17 21 13 11
- ---------------------------------------------------------------------------------------------------------------------------
Net income ....................... $334 $322 $315 $308 $304 $320 $315 $325
===========================================================================================================================
PER COMMON SHARE DATA
Book value ....................... $21.88 $21.01 $20.22 $19.68 $19.23 $18.90 $18.40 $18.78
Basic earnings
Continuing operations ......... 1.07 1.02 1.01 1.02 .96 1.00 1.00 1.02
Discontinued operations ....... .07 .08 .06 .02 .06 .07 .04 .04
Net income .................... 1.14 1.10 1.07 1.04 1.02 1.07 1.04 1.06
Diluted earnings
Continuing operations ......... 1.06 1.01 1.01 1.01 .95 .99 .99 1.01
Discontinued operations ....... .07 .08 .05 .02 .06 .07 .04 .04
Net income .................... 1.13 1.09 1.06 1.03 1.01 1.06 1.03 1.05
Diluted cash earnings (a)
Continuing operations ......... 1.16 1.11 1.10 1.11 1.03 1.05 1.06 1.07
Discontinued operations ....... .06 .08 .06 .02 .06 .07 .04 .04
Net income .................... 1.22 1.19 1.16 1.13 1.09 1.12 1.10 1.11
===========================================================================================================================
AVERAGE BALANCE SHEET
Assets ........................... $68,953 $69,098 $69,105 $68,756 $67,609 $67,054 $68,499 $70,334
Securities available for sale .... 5,928 6,179 6,009 6,128 6,351 6,386 6,495 5,086
Loans, net of unearned income .... 49,928 49,951 50,229 49,966 50,716 51,445 52,439 56,596
Deposits ......................... 38,660 37,671 37,183 36,555 35,363 35,820 35,530 36,161
Borrowed funds ................... 11,738 13,518 14,422 15,333 15,341 14,903 15,343 16,294
Shareholders' equity ............. 6,425 6,185 6,005 5,927 5,904 5,732 5,873 5,975
===========================================================================================================================
</TABLE>
(a) Excluding amortization of goodwill
| 86
<PAGE> 56
ANALYSIS OF YEAR-TO-YEAR CHANGES IN NET INTEREST INCOME
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------
2000/1999 1999/1998
---------------------------------------------------------------------------------
Increase/(Decrease) in Income/Expense Increase/(Decrease) in Income/Expense
Due to Changes in: Due to Changes in:
Taxable-equivalent basis - in millions Volume Rate Total Volume Rate Total
==================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
Loans held for sale .......................... $90 $10 $100 $71 $2 $73
Securities available for sale
U.S. Treasury, government agencies
and corporations ........................ (12) 8 (4) (93) (7) (100)
Other debt ................................ 19 10 29 96 (2) 94
Other ..................................... (7) 5 (2) 8 (2) 6
-------- ---------
Total securities available for sale ..... (1) 24 23 (3) 3
Loans, net of unearned income
Consumer .................................. (96) 43 (53) (64) (32) (96)
Credit card ............................... (100) (100) (471) 33 (438)
Residential mortgage ...................... 25 16 41 (12) (29) (41)
Commercial ................................ (112) 159 47 25 (27) (2)
Commercial real estate .................... (58) 33 (25) 7 (19) (12)
Lease financing ........................... 48 5 53 38 1 39
Other ..................................... 10 5 15 25 1 26
-------- ---------
Total loans, net of unearned income ..... (221) 199 (22) (228) (296) (524)
Other ........................................ 14 30 44 7 (1) 6
-------- ---------
Total interest-earning assets ............. (108) 253 $145 (138) (307) $(445)
==================================================================================================================================
INTEREST-BEARING LIABILITIES
Interest-bearing deposits
Demand and money market ................... 56 109 $165 78 (24) $54
Savings ................................... (6) 3 (3) (4) (8) (12)
Retail certificates of deposit ............ 22 96 118 (61) (57) (118)
Other time ................................ (56) 11 (45) (15) (3) (18)
Deposits in foreign offices ............... 36 13 49 (4) (4) (8)
-------- ---------
Total interest-bearing deposits ......... 63 221 284 37 (139) (102)
Borrowed funds
Federal funds purchased ................... 27 24 51 (45) (10) (55)
Repurchase agreements ..................... 8 6 14 (8) (3) (11)
Bank notes and senior debt ................ (119) 93 (26) (116) (32) (148)
Federal Home Loan Bank borrowings ......... (49) 12 (37) 49 (4) 45
Other borrowed funds ...................... 7 11 18 (26) (14) (40)
Subordinated debt ......................... 26 (1) 25 19 (5) 14
-------- ---------
Total borrowed funds .................... (103) 148 45 (140) (55) (195)
-------- ---------
Total interest-bearing liabilities ........ (5) 334 $329 (74) (223) $(297)
-------- ---------
Change in net interest income ............. (53) (131) $(184) (69) (79) $(148)
==================================================================================================================================
</TABLE>
Changes attributable to rate/volume are prorated into rate and volume
components.
87 |
<PAGE> 57
AVERAGE CONSOLIDATED BALANCE SHEET AND NET INTEREST ANALYSIS
<TABLE>
<CAPTION>
---------------------------------------
2000
---------------------------------------
Average
Dollars in millions Average Yields/
Taxable-equivalent basis Balances Interest Rates
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Interest-earning assets
Loans held for sale........................................ $2,507 $204 8.14%
Securities available for sale
U.S. Treasury and government agencies
and corporations..................................... 1,760 104 5.91
Other debt............................................. 3,723 245 6.58
Other.................................................. 578 40 6.92
- -----------------------------------------------------------------------------------------
Total securities available for sale.................. 6,061 389 6.42
Loans, net of unearned income
Consumer............................................... 9,177 791 8.62
Credit card............................................
Residential mortgage................................... 12,599 900 7.14
Commercial ............................................ 21,685 1,839 8.48
Commercial real estate................................. 2,685 240 8.94
Lease financing........................................ 3,222 235 7.29
Other.................................................. 650 55 8.46
- -----------------------------------------------------------------------------------------
Total loans, net of unearned income.................. 50,018 4,060 8.12
Other...................................................... 1,289 97 7.53
- -----------------------------------------------------------------------------------------
Total interest-earning
assets/interest income................................. 59,875 4,750 7.93
Noninterest-earning assets
Investment in discontinued operations...................... 487
Allowance for credit losses................................ (683)
Cash and due from banks.................................... 2,718
Other assets............................................... 6,581
- --------------------------------------------------------------------------
Total assets............................................... $68,978
==========================================================================
LIABILITIES, CAPITAL SECURITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities
Interest-bearing deposits
Demand and money market................................ $18,735 658 3.51
Savings................................................ 2,050 36 1.76
Retail certificates of deposit......................... 14,642 826 5.64
Other time............................................. 621 40 6.44
Deposits in foreign offices............................ 1,473 93 6.31
- -----------------------------------------------------------------------------------------
Total interest-bearing deposits...................... 37,521 1,653 4.41
Borrowed funds
Federal funds purchased................................ 2,139 135 6.31
Repurchase agreements.................................. 754 45 5.97
Bank notes and senior debt............................. 6,532 431 6.60
Federal Home Loan Bank borrowings...................... 1,113 68 6.11
Subordinated debt...................................... 2,406 179 7.44
Other borrowed funds................................... 802 57 7.11
- -----------------------------------------------------------------------------------------
Total borrowed funds................................. 13,746 915 6.66
- -----------------------------------------------------------------------------------------
Total interest-bearing
liabilities/interest expense........................... 51,267 2,568 5.01
Noninterest-bearing liabilities and shareholders' equity
Demand and other noninterest-bearing deposits.............. 8,151
Accrued expenses and other liabilities..................... 2,575
Mandatorily redeemable capital securities
of subsidiary trusts................................... 848
Shareholders' equity....................................... 6,137
- --------------------------------------------------------------------------
Total liabilities, capital securities and
shareholders' equity................................... $68,978
========================================================================================================
Interest rate spread........................................... 2.92
Impact of noninterest-bearing sources ..................... .72
- --------------------------------------------------------------------------------------------------------
Net interest income/margin................................. $2,182 3.64%
========================================================================================================
</TABLE>
Nonaccrual loans are included in loans, net of unearned income. The impact of
financial derivatives used in interest rate risk management is included in the
interest income/expense and average yields/rates of the related assets and
liabilities. Average balances of securities available for sale are based on
amortized historical cost (excluding SFAS No. 115 Adjustments to Fair Value).
Loan fees for each of the years ended December 31, 2000, 1999, 1998, 1997
and 1996 were $115 million, $120 million, $107 million, $89 million and $93
million, respectively.
| 88
<PAGE> 58
<TABLE>
<CAPTION>
- ----------------------------- ----------------------------- ----------------------------- -------------------------------
1999 1998 1997 1996
- ----------------------------- ----------------------------- ----------------------------- -------------------------------
Average Average Average Average
Average Yields/ Average Yields/ Average Yields/ Average Yields/
Balances Interest Rates Balances Interest Rates Balances Interest Rates Balances Interest Rates
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$1,392 $104 7.47% $436 $31 7.11% $24 $2 8.33% $163 $10 6.13%
1,970 108 5.48 3,665 208 5.68 5,643 336 5.95 10,059 611 6.07
3,441 216 6.28 1,913 122 6.38 2,094 139 6.62 2,719 184 6.78
673 42 6.24 551 36 6.53 579 43 7.45 606 48 7.91
- ------------------- ------------------- ------------------- -------------------
6,084 366 6.02 6,129 366 5.97 8,316 518 6.23 13,384 843 6.30
10,310 844 8.19 11,073 940 8.49 11,291 958 8.48 12,192 1,028 8.43
672 100 14.88 3,849 538 13.98 3,558 459 12.92 1,165 163 13.94
12,258 859 7.01 12,421 900 7.25 13,097 976 7.45 11,690 873 7.47
23,082 1,792 7.76 22,768 1,794 7.88 19,014 1,494 7.86 17,727 1,388 7.83
3,362 265 7.88 3,279 277 8.45 4,068 359 8.82 4,186 373 8.92
2,564 182 7.10 2,028 143 7.05 1,587 112 7.06 1,116 75 6.72
532 40 7.52 195 14 7.18 284 18 6.34 681 44 6.46
- ------------------- ------------------- ------------------- -------------------
52,780 4,082 7.73 55,613 4,606 8.28 52,899 4,376 8.27 48,757 3,944 8.09
1,045 53 5.07 899 47 5.23 843 45 5.34 865 50 5.78
- ------------------- ------------------- ------------------- -------------------
61,301 4,605 7.51 63,077 5,050 8.01 62,082 4,941 7.96 63,169 4,847 7.67
449 348 168 99
(695) (863) (1,077) (1,197)
2,082 2,211 2,935 3,154
5,226 4,851 4,127 3,763
- -------- -------- -------- --------
$68,363 $69,624 $68,235 $68,988
======== ======== ======== ========
$16,921 493 2.91 $14,285 439 3.07 $13,079 391 2.99 $12,254 332 2.71
2,390 39 1.63 2,620 51 1.95 2,852 57 1.97 3,445 69 2.02
14,220 708 4.98 15,420 826 5.36 15,959 859 5.38 16,636 884 5.31
1,515 85 5.61 1,786 103 5.77 1,482 89 6.01 1,671 97 5.80
872 44 5.05 935 52 5.56 1,094 61 5.58 846 46 5.44
- ------------------- ------------------- ------------------- -------------------
35,918 1,369 3.81 35,046 1,471 4.20 34,466 1,457 4.23 34,852 1,428 4.10
1,662 84 5.05 2,526 139 5.50 2,834 159 5.61 3,157 171 5.41
621 31 4.99 791 42 5.31 587 32 5.45 1,893 104 5.49
8,517 457 5.37 10,657 605 5.68 9,130 523 5.72 8,139 454 5.57
1,929 105 5.44 1,026 60 5.85 1,051 67 6.37 1,062 42 3.95
2,051 154 7.51 1,799 140 7.78 1,514 119 7.87 1,358 108 7.98
686 39 5.69 1,109 79 7.12 1,759 110 6.25 1,573 106 6.74
- ------------------- ------------------- ------------------- -------------------
15,466 870 5.63 17,908 1,065 5.95 16,875 1,010 5.99 17,182 985 5.73
- ------------------- ------------------- ------------------- -------------------
51,384 2,239 4.36 52,954 2,536 4.79 51,341 2,467 4.81 52,034 2,413 4.64
8,234 8,848 9,465 9,647
2,027 1,479 1,414 1,460
848 762 537 19
5,870 5,581 5,478 5,828
- -------- -------- -------- --------
$68,363 $69,624 $68,235 $68,988
==================================================================================================================================
3.15 3.22 3.15 3.03
. .71 .77 .83 .82
- ----------------------------------------------------------------------------------------------------------------------------------
$2,366 3.86% $2,514 3.99% $2,474 3.98% $2,434 3.85%
==================================================================================================================================
</TABLE>
89 |
<PAGE> 59
ALLOWANCE FOR CREDIT LOSSES
SUMMARY OF LOAN LOSS EXPERIENCE
<TABLE>
<CAPTION>
----------------------------------------------------------
Year ended December 31 - dollars in millions 2000 1999 1998 1997 1996
===========================================================================================================================
<S> <C> <C> <C> <C> <C>
Allowance at beginning of year .......................... $674 $753 $972 $1,166 $1,259
Charge-offs
Consumer ............................................. 46 63 83 104 100
Credit card .......................................... 60 297 208 66
Residential mortgage ................................. 8 8 7 9 9
Commercial ........................................... 121 72 122 48 52
Commercial real estate
Commercial mortgage ............................... 2 1 6 8 10
Real estate project ............................... 1 3 2 4 8
Lease financing ...................................... 8 9 7 4 2
- ---------------------------------------------------------------------------------------------------------------------------
Total charge-offs ................................. 186 216 524 385 247
===========================================================================================================================
Recoveries
Consumer ............................................. 22 25 34 36 34
Credit card .......................................... 2 17 25 7
Residential mortgage ................................. 2 1 1 1 2
Commercial ........................................... 21 22 20 38 28
Commercial real estate
Commercial mortgage ............................... 3 1 2 10 6
Real estate project ............................... 1 3 1 2 4
Lease financing ...................................... 2 1 2 1
Other ................................................ 1 1
- ---------------------------------------------------------------------------------------------------------------------------
Total recoveries .................................. 51 55 77 113 83
===========================================================================================================================
Net charge-offs ................................ 135 161 447 272 164
Provision for credit losses ............................. 136 163 225 70
(Divestitures)/acquisitions ............................. (81) 3 8 71
- ---------------------------------------------------------------------------------------------------------------------------
Allowance at end of year ............................. $675 $674 $753 $972 $1,166
===========================================================================================================================
Allowance as a percent of period-end
Loans ................................................ 1.33% 1.36% 1.31% 1.79% 2.25%
Nonperforming loans .................................. 208.98 231.62 263.29 360.00 337.97
As a percent of average loans
Net charge-offs ...................................... .27 .31 .80 .51 .34
Provision for credit losses .......................... .27 .31 .40 .13
Allowance for credit losses .......................... 1.35 1.28 1.35 1.84 2.39
Allowance as a multiple of net charge-offs .............. 5.00x 4.19x 1.68x 3.57x 7.11x
===========================================================================================================================
</TABLE>
The following table presents the allocation of allowance for credit losses and
the categories of loans as a percentage of total loans. For purposes of this
presentation, the unallocated portion of the allowance for credit losses has
been assigned to loan categories based on the relative specific and pool
allocation amounts.
ALLOCATION OF ALLOWANCE FOR CREDIT LOSSES
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
--------------------------------------------------------------------------------------------------------------
December 31 Loans to Loans to Loans to Loans to Loans to
Dollars in millions Allowance Total Loans Allowance Total Loans Allowance Total Loans Allowance Total Loans Allowance Total Loans
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Consumer ............. $51 18.0% $58 18.8% $74 19.0% $107 20.7% $139 23.3%
Credit card .......... 136 5.1 258 7.0 141 5.4
Residential mortgage . 10 26.2 10 25.2 8 21.3 42 23.6 80 24.5
Commercial ........... 536 41.9 510 43.2 446 43.7 406 36.9 606 35.9
Commercial real estate 53 5.1 64 5.5 59 6.0 141 7.3 173 7.9
Other ................ 25 8.8 32 7.3 30 4.9 18 4.5 27 3.0
- ------------------------------------------------------------------------------------------------------------------------------------
Total ............. $675 100.0% $674 100.0% $753 100.0% $972 100.0% $1,166 100.0%
====================================================================================================================================
</TABLE>
| 90
<PAGE> 60
SHORT-TERM BORROWINGS
Federal funds purchased include overnight borrowings and term federal funds,
which are payable on demand. Repurchase agreements generally have maturities of
18 months or less. Presented below are total bank notes of the Corporation, of
which approximately one-third mature in 2001. Other short-term borrowings
primarily consist of U.S. Treasury, tax and loan borrowings, which are payable
on demand and commercial paper, which is issued in maturities not to exceed nine
months. At December 31, 2000, 1999 and 1998, $3.4 billion, $3.1 billion and $3.4
billion, respectively, notional value of interest rate swaps were designated to
borrowed funds. The effect of these swaps is included in the rates set forth in
the table.
SHORT-TERM BORROWINGS
<TABLE>
<CAPTION>
------------------------------------------------------------
2000 1999 1998
------------------------------------------------------------
Dollars in millions Amount Rate Amount Rate Amount Rate
=======================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Federal funds purchased
Year-end balance ............................... $1,445 4.89% $1,281 4.05% $390 5.17%
Average during year ............................ 2,139 6.31 1,662 5.05 2,526 5.50
Maximum month-end balance during year .......... 2,778 2,671 3,139
Repurchase agreements
Year-end balance ............................... 607 5.77 402 4.77 477 3.47
Average during year ............................ 754 5.97 621 4.99 791 5.31
Maximum month-end balance during year .......... 864 725 1,682
Bank notes
Year-end balance ............................... 5,512 6.74 6,354 6.25 10,234 5.32
Average during year ............................ 5,934 6.55 8,224 5.29 10,505 5.65
Maximum month-end balance during year .......... 6,527 9,775 12,008
Other
Year-end balance ............................... 632 6.31 956 5.64 513 4.16
Average during year ............................ 784 6.87 654 6.00 1,047 5.84
Maximum month-end balance during year .......... 1,368 1,192 2,069
=======================================================================================================================
</TABLE>
LOAN MATURITIES AND INTEREST SENSITIVITY
<TABLE>
<CAPTION>
-----------------------------------------------
December 31, 2000 1 Year 1 Through After 5 Gross
In millions or Less 5 Years Years Loans
=========================================================================
<S> <C> <C> <C> <C>
Commercial ............ $8,271 $10,397 $2,539 $21,207
Real estate project ... 957 826 127 1,910
- -------------------------------------------------------------------------
Total ............... $9,228 $11,223 $2,666 $23,117
- -------------------------------------------------------------------------
Loans with
Predetermined rate .. $1,021 $1,354 $736 $3,111
Floating rate ....... 8,207 9,869 1,930 20,006
- -------------------------------------------------------------------------
Total ............... $9,228 $11,223 $2,666 $23,117
=========================================================================
</TABLE>
At December 31, 2000, $7.0 billion notional value of interest rate swaps, caps
and floors designated to commercial and commercial real estate loans altered the
interest rate characteristics of such loans, the impact of which is not
reflected in the above table.
TIME DEPOSITS OF $100,000 OR MORE
Time deposits in foreign offices totaled $2.2 billion at December 31, 2000,
substantially all of which are in denominations of $100,000 or more. The
following table sets forth maturities of domestic time deposits of $100,000 or
more:
<TABLE>
<CAPTION>
---------------
Certificates
December 31, 2000 - in millions of Deposit
===========================================================
<S> <C>
Three months or less .................... $1,202
Over three through six months ........... 783
Over six through twelve months .......... 785
Over twelve months ...................... 786
- -----------------------------------------------------------
Total ................................. $3,556
===========================================================
</TABLE>
91 |
<PAGE> 61
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. At the close of business on February 9,
2001, there were 57,065 common shareholders of record.
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 Lynn Fox
Evans, Director of Financial Reporting, at corporate headquarters, by calling
(412) 762-1553 or via e-mail at financial.reporting@pnc.com.
INQUIRIES
For financial services call 1-888-PNC-2265. Individual shareholders should
contact Shareholder Relations at (800) 982-7652.
Analysts and institutional investors should contact William H. Callihan,
Vice President, Investor Relations, at (412) 762-8257 or via e-mail at
investor.relations@pnc.com.
News media representatives and others seeking general information should
contact R. Jeep Bryant, Director of Corporate Communications, at (412) 762-8221
or via e-mail at corporate.communications@pnc.com.
TRUST PROXY VOTING
Reports of 2000 nonroutine proxy voting by the trust divisions of The PNC
Financial Services Group, Inc. are available by writing to Thomas R. Moore, Vice
President and Corporate Secretary, at corporate headquarters.
ANNUAL SHAREHOLDERS MEETING
All shareholders are invited to attend The PNC Financial Services Group, Inc.
annual meeting on Tuesday, April 24, 2001, at 11 a.m., Eastern Daylight Time, at
PNC Firstside Center, 500 First Avenue, Pittsburgh, Pennsylvania.
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.
<TABLE>
<CAPTION>
------------------------------------------
Cash
Dividends
High Low Close Declared
===================================================================
2000 Quarter
- -------------------------------------------------------------------
<S> <C> <C> <C> <C>
First ........... $48.500 $36.000 $45.063 $.45
Second .......... 57.500 41.000 46.875 .45
Third ........... 66.375 47.625 65.000 .45
Fourth .......... 75.000 56.375 73.063 .48
- -------------------------------------------------------------------
Total ........ $1.83
===================================================================
1999 Quarter
- -------------------------------------------------------------------
First ........... $59.750 $47.000 $55.563 $.41
Second .......... 60.125 54.375 57.625 .41
Third ........... 58.063 49.688 52.688 .41
Fourth .......... 62.000 43.000 44.500 .45
- -------------------------------------------------------------------
Total ........ $1.68
===================================================================
</TABLE>
DIVIDEND POLICY
Holders of The PNC Financial Services Group, Inc. common stock are entitled to
receive dividends when declared by the Board of Directors out of funds legally
available. The Board presently intends to continue the policy of paying
quarterly cash dividends. However, future dividends will depend on earnings, the
financial condition of The PNC Financial Services Group, Inc. and other factors
including applicable government regulations and policies and contractual
restrictions.
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
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-21
<SEQUENCE>6
<FILENAME>j8606301ex21.txt
<DESCRIPTION>SCHEDULE OF CERTAIN SUBSIDIARIES
<TEXT>
<PAGE> 1
EXHIBIT 21
THE PNC FINANCIAL SERVICES GROUP, INC.
SCHEDULE OF CERTAIN SUBSIDIARIES
(AS OF JANUARY 31, 2001)
<TABLE>
<CAPTION>
STATE OR OTHER JURISDICTION OF
NAME INCORPORATION OR ORGANIZATION
- --------------------------------------------------------------------------- -----------------------------------------------------
<S> <C>
PNC Bancorp, Inc. Delaware
PNC Advisors, National Association United States
PNC Bank, Delaware (1) Delaware
PNC Bank, National Association (1) United States
PNC Bank Capital Securities, LLC Delaware
PNC Commercial Management, Inc. Delaware
BlackRock, Inc. (1) Delaware
PNC Leasing, LLC Delaware
PNC Capital Leasing, LLC Delaware
PNC Holding, LLC Delaware
PFPC Worldwide Inc. Delaware
PNC Funding Corp (1) Pennsylvania
PNC Investment Corp. (1) Delaware
</TABLE>
(1) The names of the subsidiaries of the indicated entities are omitted
because such subsidiaries, considered in the aggregate as a single
subsidiary, would not constitute a significant subsidiary.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23
<SEQUENCE>7
<FILENAME>j8606301ex23.txt
<DESCRIPTION>CONSENT OF INDEPENDENT AUDITORS
<TEXT>
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference, in the Registration Statements
listed below, of our report dated January 31, 2001, with respect to the
consolidated financial statements of The PNC Financial Services Group, Inc. and
subsidiaries incorporated by reference in this Annual Report on Form 10-K of The
PNC Financial Services Group, Inc. (the "Corporation") for the year ended
December 31, 2000.
Form S-3 relating to the Corporation's Dividend Reinvestment and Stock Purchase
Plan (No. 333-19003)
Form S-8 relating to the PNC Bank Corp. Supplemental Incentive Savings Plan and
PNC Bank Corp. and Affiliates Deferred Compensation Plan (No. 333-18069)
Form S-8 relating to the PNC Retirement Savings Plan (No. 333-03901)
Form S-8 relating to the Corporation's 1997 Long-Term Incentive Award Plan (No.
333-53806)
Form S-8 relating to the Corporation's 1997 Long-Term Incentive Award Plan (No.
33-54960)
Form S-8 relating to the 1987 Senior Executive Long-Term Award Plan of PNC Bank
Corp. (as amended, the PNC Bank Corp. 1992 Long-Term Incentive Award Plan) (No.
33-28828)
Form S-8 relating to the Corporation's Incentive Savings Plan (No. 33-25140)
Form S-8 relating to the Stock Option Plan of PNC Bank Corp. (No. 2-92181)
Form S-8 relating to the Corporation's Employee Stock Purchase Plan (No.
333-25867)
Form S-3 relating to the shelf registration of capital securities of PNC Capital
Trust C, PNC Capital Trust D, PNC Capital Trust E and PNC Capital Trust F,
unconditionally guaranteed, to the extent described therein, by PNC Bank Corp.
(No. 333-50651, 333-50651-01, 333-50651-02, 333-50651-03, and 333-50651-04)
Form S-3 relating to the shelf registration of debt securities of PNC Funding
Corp, unconditionally guaranteed by the Corporation, and/or common stock and/or
preferred stock and/or depositary shares of the Corporation (No. 333-88479)
Pittsburgh, Pennsylvania
March 12, 2001
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-24
<SEQUENCE>8
<FILENAME>j8606301ex24.txt
<DESCRIPTION>POWER OF ATTORNEY
<TEXT>
<PAGE> 1
POWER OF ATTORNEY EXHIBIT 24
THE PNC FINANCIAL SERVICES GROUP, INC.
ANNUAL REPORT ON FORM 10-K FOR YEAR ENDED DECEMBER 31, 2000
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned Directors and/or
Officers of The PNC Financial Services Group, Inc. (the "Corporation"), a
Pennsylvania corporation, hereby names, constitutes and appoints Walter E.
Gregg, Jr., Thomas R. Moore and Karen M. Barrett, or each of them, with full
power of substitution, such person's true and lawful attorney-in-fact and agent
to execute in such person's name, place and stead, in any and all capacities,
the Corporation's Annual Report on Form 10-K for the year ended December 31,
2000.
And such persons hereby ratify and confirm all acts that any said attorney or
attorney-in-fact, or any substitute, shall lawfully do or cause to be done by
virtue hereof.
Witness the due execution hereof by the following persons in the capacities
indicated as of this 9th day of March, 2001.
Name/Signature Capacity
- -------------- --------
/s/ James E. Rohr Director and President
- ------------------------------------ and Chief Executive Officer
James E. Rohr
/s/ Thomas H. O'Brien Chairman and Director
- ------------------------------------
Thomas H. O'Brien
/s/ Paul W. Chellgren Director
- ------------------------------------
Paul W. Chellgren
/s/ Robert N. Clay Director
- ------------------------------------
Robert N. Clay
/s/ George A. Davidson, Jr. Director
- ------------------------------------
George A. Davidson, Jr.
/s/ David F. Girard-diCarlo Director
- ------------------------------------
David F. Girard-diCarlo
/s/ Walter E. Gregg, Jr. Vice Chairman and Director
- ------------------------------------
Walter E. Gregg, Jr.
<PAGE> 2
/s/ Robert L. Haunschild Chief Financial Officer
- ------------------------------------
Robert L. Haunschild
/s/ William R. Johnson Director
- ------------------------------------
William R. Johnson
/s/ Bruce C. Lindsay Director
- ------------------------------------
Bruce C. Lindsay
/s/ W. Craig McClelland Director
- ------------------------------------
W. Craig McClelland
/s/ Samuel R. Patterson Controller
- ------------------------------------
Samuel R. Patterson
/s/ Jane G. Pepper Director
- ------------------------------------
Jane G. Pepper
/s/ Jackson H. Randolph Director
- ------------------------------------
Jackson H. Randolph
/s/ Roderic H. Ross Director
- ------------------------------------
Roderic H. Ross
/s/ Lorene K. Steffes Director
- ------------------------------------
Lorene K. Steffes
/s/ Thomas J. Usher Director
- ------------------------------------
Thomas J. Usher
/s/ Milton A. Washington Director
- ------------------------------------
Milton A. Washington
/s/ Helge H. Wehmeier Director
- ------------------------------------
Helge H. Wehmeier
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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