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<SEC-DOCUMENT>0000950128-02-000329.txt : 20020415
<SEC-HEADER>0000950128-02-000329.hdr.sgml : 20020415
ACCESSION NUMBER: 0000950128-02-000329
CONFORMED SUBMISSION TYPE: 10-K405
PUBLIC DOCUMENT COUNT: 9
CONFORMED PERIOD OF REPORT: 20011231
FILED AS OF DATE: 20020329
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: 1934 Act
SEC FILE NUMBER: 033-35026
FILM NUMBER: 02595069
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 /PA/
DATE OF NAME CHANGE: 19930412
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K405
<SEQUENCE>1
<FILENAME>j9348001e10-k405.txt
<DESCRIPTION>FORM 10-K
<TEXT>
<PAGE>
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, 2001
COMMISSION FILE NUMBER 1-9718
THE PNC FINANCIAL SERVICES GROUP, INC.
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-1435979
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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:
-----------------------------------------------------------
<TABLE>
<S> <C>
$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
</TABLE>
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 $15.5 billion at February 28, 2002.
There is no non-voting common equity of the registrant outstanding.
Number of shares of registrant's common stock outstanding at February 28, 2002:
283,182,441
DOCUMENTS INCORPORATED BY REFERENCE
Portions of The PNC Financial Services Group, Inc. 2001 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. filed pursuant to Regulation 14A for the annual meeting of shareholders to
be held on April 23, 2002 ("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 Items 306(c), 306(d) and 402(a)(8) and (9) of
Regulation S-K.
<PAGE>
TABLE OF CONTENTS
PART I Page
--------
Item 1 Business 3
Item 2 Properties 8
Item 3 Legal Proceedings 8
Item 4 Submission of Matters to a Vote of Security
Holders 9
Executive Officers of the Registrant 9
PART II
Item 5 Market for Registrant's Common Equity and
Related Stockholder Matters 9
Item 6 Selected Financial Data 9
Item 7 Management's Discussion and Analysis of
Financial Condition and Results of
Operations 9
Item 7A Quantitative and Qualitative Disclosures
About Market Risk 10
Item 8 Financial Statements and Supplementary Data 10
Item 9 Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure 10
PART III
Item 10 Directors and Executive Officers of the
Registrant 10
Item 11 Executive Compensation 10
Item 12 Security Ownership of Certain Beneficial
Owners and Management 10
Item 13 Certain Relationships and Related
Transactions 11
PART IV
Item 14 Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 11
SIGNATURES 12
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 the outlook or expectations for earnings,
revenues, asset quality, share repurchases and other future financial or
business performance, strategies, and expectations. This Annual Report on Form
10-K ("Form 10-K") also includes forward-looking statements. Forward-looking
statements are typically identified by words or phrases such as "believe,"
"feel," "expect," "anticipate," "intend," "outlook," "estimate," "forecast,"
"position," "poised," "target," "mission," "assume," "achievable," "potential,"
"strategy," "goal," "objective," "plan," "aspiration," "outcome," "continue,"
"remain," "maintain," "seek," "strive," "trend" and variations of such words and
similar expressions, or future or conditional verbs such as "will," "would,"
"should," "could," "might," "can," "may" or similar expressions.
The Corporation cautions that forward-looking statements are subject to numerous
assumptions, risks and uncertainties, which change over time. Actual results
could differ materially from those anticipated in forward-looking statements and
future results could differ materially from historical performance.
Forward-looking statements speak only as of the date they are made, and the
Corporation assumes no duty to update forward-looking statements.
In addition to factors mentioned elsewhere in this report, the following
factors, among others, could cause actual results to differ materially from
forward-looking statements or historical performance:
(1) adjustments to recorded results of the sale of the residential mortgage
banking business after disputes over certain closing date adjustments have
been resolved;
(2) changes in political, economic or industry conditions, the interest rate
environment or financial and capital markets, which could result in: a
deterioration in credit quality and increased credit losses; an adverse
effect on the allowance for credit losses; a reduction in demand for credit
or fee-based products and services, net interest income, value of assets
under management and assets serviced, value of venture capital investments
and of other debt and equity investments, value of loans held for sale or
value of other on-balance-sheet and off-balance-sheet assets; or changes in
the availability and terms of funding necessary to meet PNC's liquidity
needs;
(3) relative investment performance of assets under management;
(4) the introduction, withdrawal, success and timing of business initiatives
and strategies, decisions regarding further reductions in balance sheet
leverage, the timing and pricing of any sales of loans held for sale, and
PNC's inability to realize cost savings or revenue enhancements, implement
integration plans and other consequences of mergers, acquisitions,
restructurings and divestitures;
(5) customer borrowing, repayment, investment and deposit practices and their
acceptance of PNC's products and services;
(6) the impact of increased competition;
(7) the means PNC chooses to redeploy available capital, including the extent
and timing of any share repurchases and investments in PNC businesses;
(8) the inability to manage risks inherent in PNC's business;
(9) the unfavorable resolution of legal proceedings or government inquiries;
(10) the denial of insurance coverage for claims made by PNC;
(11) an increase in the number of customer or counterparty delinquencies,
bankruptcies or defaults that could result in, among other things,
increased credit and asset quality risk, a higher loan loss provision and
reduced profitability;
(12) the impact, extent and timing of technological changes, the adequacy of
intellectual property protection and costs associated with obtaining rights
in intellectual property claimed by others;
2
<PAGE>
(13) actions of the Federal Reserve Board, legislative and regulatory reforms,
and regulatory, supervisory or enforcement actions of government agencies;
and
(14) terrorist activities, including the September 11th terrorist attacks, which
may adversely affect the general economy, financial and capital markets,
specific industries, and PNC. The Corporation cannot predict the severity
or duration of effects stemming from such activities or any actions taken
in connection with them.
Some of the above factors are described in more detail in the "2002 Operating
Environment" and "Risk Factors" sections of the "Financial Review" included on
pages 30 and 43 through 47, respectively, of the Annual Report to Shareholders,
which are incorporated herein by reference, and factors relating to credit risk,
interest rate risk, liquidity risk, trading activities, financial and other
derivatives and "off-balance-sheet" activities are discussed in the "Risk
Management" section of the "Financial Review" included on pages 47 through 57 of
the Annual Report to Shareholders, which is incorporated herein by reference.
Other factors are described elsewhere in this report.
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 ("GLB 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 businesses engaged in regional community
banking, corporate banking, real estate finance, asset-based lending, wealth
management, asset management and global fund services. The Corporation provides
certain products and services nationally and others in PNC's primary geographic
markets in Pennsylvania, New Jersey, Delaware, Ohio and Kentucky. The
Corporation also provides certain banking, asset management and global fund
services internationally. At December 31, 2001, the Corporation's consolidated
total assets, deposits and shareholders' equity were $69.6 billion, $47.3
billion and $5.8 billion, respectively.
In the context of this Business Overview, further information is contained in
"Note 2 Discontinued Operations," "Note 3 Restatements" and "Note 4 Fourth
Quarter Actions" of the "Notes To Consolidated Financial Statements" included on
pages 72 and 73 of the Annual Report to Shareholders and incorporated herein by
reference. Financial and other information by segment is included in "Note 26
Segment Reporting" of the "Notes To Consolidated Financial Statements" included
on pages 88 and 89 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 2001, is set forth under the captions
"Overview" and "Review of Businesses" in the "Financial Review" included on
pages 28 through 38 of the Annual Report to Shareholders and incorporated
herein by reference.
SUBSIDIARIES The corporate legal structure currently consists of two subsidiary
banks and over 70 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, 2001, 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:
Pages of
Annual
Report to
Shareholders
- ----------------------------------------------------------------
Average Consolidated Balance Sheet and Net Interest
Analysis 96-97
Analysis of Year-to-Year Changes in Net Interest
Income 95
Book Values of Securities 42 and 74
Maturities and Weighted-Average Yield of Securities 75
Loan Types 41 and 75
Loan Maturities and Interest Sensitivity 99
Nonaccrual, Past Due and Restructured Loans 49 and 76
Potential Problem Loans and Loans Held for Sale 49
Summary of Loan Loss Experience 48 and 98
Allocation of Allowance for Credit Losses 48 and 98
Average Amount and Average Rate Paid on Deposits 39 and 96-97
Time Deposits of $100,000 or More 79 and 99
Selected Consolidated Financial Data 26-27
Short-Term Borrowings 99
RISK FACTORS & MANAGEMENT The Corporation is subject to a number of risk factors
including, among others: business and economic conditions; the successful
execution of the Corporation's strategic repositioning; changes in the
underlying factors, assumptions and estimates inherent in the Corporation's
critical accounting policies and judgments; compliance with applicable standards
established by supervisory and regulatory bodies; the impact of the two
restatements of the Corporation's 2001 consolidated results announced in early
2002; monetary and other policies; competition; disintermediation; and risk
relating to asset management performance, fund servicing, acquisitions, and
terrorist activities. 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
3
<PAGE>
associated with trading activities, financial and other derivatives and
"off-balance-sheet" activities. PNC has risk management processes designed to
provide for risk identification, measurement and monitoring.
Risk factors are described in more detail in the "Risk Factors" section of the
"Financial Review" included on pages 43 through 47 of the Annual Report to
Shareholders, which is incorporated herein by reference. The Corporation's risk
management processes are described in more detail in the "Risk Management"
section of the "Financial Review" included on pages 47 through 57 of the Annual
Report to Shareholders, which is incorporated herein by reference.
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.
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 50 and 51 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 19 Regulatory Matters" of the "Notes To Consolidated Financial Statements"
included on pages 80 and 81 of the Annual Report to Shareholders, which is
incorporated herein by reference. These regulations cover, among others,
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. The rules
governing the regulation of financial services institutions and their holding
companies are very detailed and technical. Accordingly, the following 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.
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 others, 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, 2001, both of the Corporation's bank subsidiaries, PNC Bank, N.A.,
and PNC Bank, Delaware, were rated "outstanding" with respect to CRA.
The 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.
The Corporation 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
4
<PAGE>
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 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 revenue and cash flow. PNC
Bank, N.A. was not permitted to pay dividends to the parent company as of
December 31, 2001 without prior approval from banking regulators as a result of
the repositioning charges taken in 2001 and prior dividends. Under these
limitations, PNC Bank, N.A.'s capacity to pay dividends without prior regulatory
approval can be restored through retention of earnings. Management expects PNC
Bank, N.A.'s dividend capacity relative to such legal limitations to be restored
during 2002 from retained earnings. The parent company currently has available
funds to pay dividends at current rates through 2002. 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 19
Regulatory Matters" of the "Notes To Consolidated Financial Statements" included
on pages 80 and 81 of the Annual Report to Shareholders, which is incorporated
herein by reference.
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.
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 information from its consolidated
financial statements, 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 under both methods 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.
As a regulated financial services firm, the Corporation's relationships and good
standing with its regulators are of fundamental importance to the continuation
and growth of the Corporation's businesses. The Federal Reserve Board, OCC,
Securities and Exchange Commission ("SEC"), and other domestic and foreign
regulators have broad enforcement powers, and powers to approve, deny, or refuse
to act upon applications or notices of the Corporation or its subsidiaries to
conduct new activities, acquire or divest businesses or assets or reconfigure
existing operations. The Corporation and its subsidiaries are subject to
examination by various regulators which results in examination reports and
ratings (which are not publicly available) that can impact the conduct and
growth of the Corporation's businesses. These examinations consider not only
compliance with applicable laws and regulations, but also capital levels, asset
quality and risk, management ability and performance, earnings, liabilities, and
various other factors. The ratings are largely at the discretion of the
regulator and involve many qualitative judgments that are not as a practical
matter subject to review or appeal. An examination downgrade by any of the
Corporation's regulators potentially can result in significant limitations on
the activities and growth of the Corporation and its subsidiaries.
For example, as subsidiaries of a financial holding company under the GLB Act,
the nonbank subsidiaries of the Corporation are allowed to conduct new financial
activities or acquire non-bank financial companies with after-the-fact notice to
the Federal Reserve Board. In addition, the Corporation's nonbank subsidiaries
(and financial subsidiaries of the Corporation's subsidiary banks) are now
permitted to engage in certain activities that were not permitted for banks and
bank holding companies prior to enactment of the GLB Act, and to engage in
certain activities that previously were
5
<PAGE>
permitted, all on less restrictive terms. Among other activities, the
Corporation currently relies on its status as a financial holding company to
conduct mutual fund distribution activities, merchant banking activities and
underwriting and dealing activities.
To continue to qualify for financial holding company status, the Corporation's
subsidiary banks must maintain "well capitalized" capital ratios, examination
ratings of "1" or "2," and certain other criteria that are incorporated into the
definition of "well managed" under the Bank Holding Company Act and Federal
Reserve Board rules. If the Corporation were no longer to qualify for this
status, it could not continue to enjoy the after-the-fact notice process for new
nonbanking activities and non-banking acquisitions, and would be required
promptly to enter into an agreement with the Federal Reserve Board providing a
plan for the Corporation's subsidiary bank(s) to meet the "well capitalized" and
"well managed" criteria. The Federal Reserve Board would have the authority to
limit the activities of the Corporation. Failure to satisfy the criteria within
a six-month period could result in a requirement that the Corporation conform
its existing nonbanking activities to activities that were permissible prior to
the enactment of the GLB Act. If a subsidiary bank of the Corporation failed to
maintain a "satisfactory" or better rating under the CRA, the Corporation could
not commence new activities or make new investments in reliance on the GLB Act.
In addition, if the Corporation's subsidiary banks were no longer "well
capitalized" and "well managed" within the meaning of the Bank Holding Company
Act and Federal Reserve Board rules (which take into consideration capital
ratios, examination ratings and other factors), the expedited processing of
non-bank applications for new activities and acquisitions under the pre-GLB Act
processes would not be available to the Corporation, and the Corporation would
be required to file applications with, and wait for a decision from, the Federal
Reserve Board. Moreover, examination ratings of "3" or lower, lower capital
ratios than peer group institutions, regulatory concerns regarding management,
controls, assets, operations or other factors, or simply poor relations with
regulatory staff, can all potentially result in practical limitations on the
ability of a bank or bank holding company to engage in new activities, grow,
acquire new businesses, repurchase its stock or pay dividends, or continue to
conduct existing activities.
Certain subsidiaries of the Corporation's BlackRock, Inc. subsidiary have
qualified as "financial subsidiaries," described above, of PNC Bank, N.A. If a
subsidiary bank of the Corporation were to fail to meet the "well capitalized"
or "well managed" and related criteria, PNC Bank, N.A. must enter into an
agreement with the OCC to correct the condition. The OCC would have the
authority to limit the activities of the bank. If the condition were not
corrected within six months or within any additional time granted by the OCC,
PNC Bank, N.A. could be required to conform its activities to the permitted
activities of an operating subsidiary of a national bank (which generally are
limited to activities in which a national bank could engage directly). In
addition, if the bank or any insured depository institution affiliate receives a
less than satisfactory CRA examination rating, PNC Bank, N.A. would not be
permitted to engage in any new activities or to make new investments in reliance
on the financial subsidiary authority. For additional information about the
regulation of BlackRock, see discussion under "Regulation" in BlackRock, Inc.'s
2001 Annual Report on Form 10-K that may be obtained electronically at the SEC's
home page at www.sec.gov.
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 than 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, 2001, both 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 pages 42 and 43 of the Annual
Report to Shareholders, which is incorporated herein by reference.
Regulatory matters could also increase the cost of FDIC deposit insurance
premiums to an insured bank. Both of the Corporation's subsidiary banks are
insured by the FDIC and subject to premium assessments. Since 1996, the FDIC has
not assessed banks for insurance premiums for most deposits, due to the
favorable ratio of the assets in the FDIC's deposit insurance funds to the
aggregate level of insured deposits outstanding. This has resulted in
significant cost savings to all insured banks. Recent costs to the FDIC in
resolving several large bank and savings institution receiverships, however,
have caused this ratio to decline to the point that the FDIC may be required in
the near future to once again begin to assess deposit insurance premiums against
insured banks. Deposit insurance premiums are assessed as a percentage of the
deposits of the insured institution. If the FDIC assesses premiums, it would
impose a significant cost to all insured banks, including the Corporation's
subsidiary banks, reducing the net spread between deposit and other bank funding
costs and the earnings from assets and services of the bank, and thus the net
income of the bank. When they are charged, FDIC deposit insurance premiums are
"risk based" with higher fee percentages being charged to banks that have lower
capital
6
<PAGE>
ratios or higher risk profiles. These risk profiles may take into account
weaknesses that are found by the primary banking regulator through its
examination and supervision of the bank. A negative evaluation by the FDIC or
a bank's primary federal banking regulator, as a result, can increase the
costs to a bank during those periods in which the FDIC assesses deposit
insurance premiums and result in an aggregate cost of deposit funds higher
than that of competing banks in a lower risk category.
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 requirements imposed by
the Federal Reserve Board and other federal and state agencies. The
Corporation's registered broker-dealer subsidiaries are regulated by the 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 of the Corporation's subsidiaries are registered with the SEC as
investment advisers and, therefore, are subject to the requirements of the
Investment Advisers Act of 1940 and the SEC's regulations thereunder. The
principal purpose of the regulations applicable to investment advisers is the
protection of clients and the securities markets, rather than the protection of
creditors and stockholders of investment advisers. The regulations applicable to
investment advisers cover all aspects of the investment advisory business,
including limitations on the ability of investment advisers to charge
performance-based or non-refundable fees to clients, record-keeping and
reporting requirements, disclosure requirements, limitations on principal
transactions between an adviser or its affiliates and advisory clients, as well
as general anti-fraud prohibitions.
The Corporation's investment advisory subsidiaries also may be subject to
certain state securities laws and regulations. In addition, the Corporation's
investment adviser subsidiaries provide advisory services to mutual funds and,
therefore, are subject to the requirements of the Investment Company Act of 1940
and the SEC's regulations thereunder.
Additional legislation, changes in rules promulgated by the SEC, other federal
and state regulatory authorities and self-regulatory organizations, or changes
in the interpretation or enforcement of existing laws and rules may directly
affect the method of operation and profitability of investment advisers. The
profitability of investment advisers could also be affected by rules and
regulations which impact the business and financial communities in general,
including changes to the laws governing taxation, antitrust regulation and
electronic commerce.
Under various provisions of the federal securities laws (including in particular
those applicable to broker-dealers, investment advisers and registered
investment companies and their service providers), a determination by a court or
regulatory agency that certain violations have occurred at a company or its
affiliates can result in a limitation of permitted activities, disqualification
to continue to conduct certain activities and an inability to rely on certain
favorable exemptions. Certain types of infractions and violations can also
affect a public company in its timing and ability expeditiously to issue new
securities into the capital markets. In addition, expansion of activities of a
broker-dealer generally requires approval of the New York Stock Exchange and/or
National Association of Securities Dealers, Inc., and regulators may take into
account a variety of considerations in acting upon such applications, including
internal controls, capital, management experience and quality, and supervisory
concerns.
The staffs of the SEC and the Federal Reserve Board have informed the
Corporation that they are conducting inquiries with respect to the transactions
with subsidiaries of a third party financial institution described in "Note 3
Restatements" of the "Notes To Consolidated Financial Statements" included on
pages 72 and 73 of the Annual Report to Shareholders and incorporated herein by
reference. PNC is cooperating with these inquiries. PNC cannot predict whether
these inquiries, regulatory examinations or other regulatory activities will
result in any of the adverse effects described above.
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 and internationally 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
7
<PAGE>
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 investment management firms, large banks and
other financial institutions, brokerage firms, mutual fund complexes, 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 24,500 in
2001, and were approximately 24,200 in December 2001.
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 12 Premises, Equipment and Leasehold Improvements" of the "Notes To
Consolidated Financial Statements" included on page 77 of the Annual Report to
Shareholders, which is incorporated herein by reference.
ITEM 3 - LEGAL PROCEEDINGS
Several putative class action complaints were filed during 2002 in the United
States District Court of the Western District of Pennsylvania against the
Corporation, its Chairman, President and Chief Executive Officer, its Chief
Financial Officer and the independent auditors of the Corporation's 2001
consolidated financial statements alleging violations of federal securities laws
related to disclosures regarding 2001 financial results, the transactions
described in "Note 3 Restatements" of the "Notes To Consolidated Financial
Statements" included on pages 72 and 73 of the Annual Report to Shareholders,
which is incorporated herein by reference, and related matters, and seeking
unquantified damages on behalf of putative classes of persons who purchased the
Corporation's common stock, attorneys' fees and other expenses. Certain of the
complaints also name the Corporation's former Chairman, its Vice Chairman,
and/or an Executive Vice President as additional defendants. Management believes
there are substantial defenses to the lawsuits and intends to defend them
vigorously. The impact of the final disposition of these lawsuits cannot be
assessed at this time.
In January 2001, PNC sold its residential mortgage banking business. Certain
closing date purchase price adjustments aggregating approximately $300 million
pre-tax are currently in dispute between the parties. The Corporation has
established a receivable of approximately $140 million to reflect additional
purchase price it believes is due from the buyer. The buyer has taken the
position that the purchase price it has already paid should be reduced by
approximately $160 million. The Corporation has established specific reserves
related to a portion of its recorded receivable. The purchase agreement requires
that an independent public accounting firm determine the final adjustments. The
buyer also has filed a February 2002 lawsuit against the Corporation in the
Superior Court of the State of California for the County of Los Angeles alleging
various state law claims relating to the adjustments and seeking compensatory
damages with respect to certain of the disputed matters that the Corporation
believes are covered by the process provided in the purchase agreement,
unquantified punitive damages and declaratory and other relief. The Corporation
has filed a motion in the litigation to compel a determination of all issues
pursuant to the process provided in the purchase agreement and to stay the
litigation pending that determination. Management intends to assert the
Corporation's positions vigorously. Management believes that, net of available
reserves, an adverse outcome, expected to be recorded in discontinued
operations, could be material to net income in the period in which recorded, but
that the final disposition of this matter will not be material to the
Corporation's financial position.
The Corporation, in the normal course of business, is subject to various other
pending and threatened lawsuits in which claims for monetary damages are
asserted. Management does not anticipate that the ultimate aggregate liability,
if any, arising out of such other lawsuits will have a material adverse effect
on the Corporation's financial position.
At the present time, management is not in a position to determine whether any
pending or threatened litigation will have a material adverse effect on the
Corporation's results of operations in any future reporting period.
The staffs of the SEC and the Federal Reserve Board have informed PNC that they
are conducting inquiries with respect to the transactions with subsidiaries of a
third party financial institution described in "Note 3 Restatements" of the
"Notes To Consolidated Financial Statements" included on pages 72 and 73 of the
Annual Report to Shareholders, which is
8
<PAGE>
incorporated herein by reference. PNC is cooperating with these inquiries.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None during the fourth quarter of 2001.
EXECUTIVE OFFICERS OF THE REGISTRANT Information concerning each executive
officer of the Corporation as of March 8, 2002 is set forth below. Each
executive officer held the position or positions indicated or another executive
position with the same entity or one of its affiliates for the past five years.
<TABLE>
<CAPTION>
Positions with Year
Name Age Corporation Employed(1)
- -------------------------------------------------------------------
<S> <C> <C> <C>
James E. Rohr 53 Chairman, President and 1972
Chief Executive Officer (2)
Walter E. Gregg, Jr. 60 Vice Chairman (2) 1974
Joseph C. Guyaux 51 Group Executive, Regional 1972
Community Banking
Michael J. Hannon 45 Chief Credit Policy 1982
Officer
Robert L. Haunschild 52 Chief Financial Officer 1990
Ralph S. Michael III 47 Group Executive, PNC 1979
Advisors and PNC
Capital Markets
Samuel R. Patterson 43 Controller 1986
Helen P. Pudlin 52 General Counsel 1989
Timothy G. Shack 51 Group Executive and Chief 1976
Information Officer
Thomas K. Whitford 46 Group Executive, 1983
Strategic Planning
- -------------------------------------------------------------------
</TABLE>
(1) Where applicable, refers to year first employed by predecessor company.
(2) Also serves as a Director of the Corporation.
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, 2002,
there were 54,385 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 pay dividends to the parent
company). PNC Bank, N.A. was not permitted to pay dividends to the parent
company as of December 31, 2001 without prior approval from banking regulators
as a result of the repositioning charges taken in 2001 and prior dividends.
Under these limitations, PNC Bank, N.A.'s capacity to pay dividends without
prior regulatory approval can be restored through retention of earnings.
Management expects PNC Bank, N.A.'s dividend capacity relative to such legal
limitations to be restored during 2002 from retained earnings. The parent
company currently has available funds to pay dividends at current rates through
2002.
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" included on pages 51 and 52
of the Annual Report to Shareholders, and in "Note 19 Regulatory Matters" of the
"Notes To Consolidated Financial Statements" included on pages 80 and 81 of the
Annual Report to Shareholders, each of which is incorporated herein by
reference.
Additional information relating to the common stock is set forth under the
caption "Common Stock Price/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 pages 26 and 27 of the Annual Report to
Shareholders and under the caption "Average Consolidated Balance Sheet and Net
Interest Analysis" in the "Statistical Information" on pages 96 and 97 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 26 through 60
of the Annual Report to Shareholders is incorporated herein by reference.
9
<PAGE>
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
The information set forth in the "Risk Management" section in the "Financial
Review" and in "Note 2 Discontinued Operations" on pages 47 through 57 and 72,
respectively, of the Annual Report To Shareholders is incorporated herein by
reference.
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 61, 62 through 65, 66 through 93, and 94,
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
In addition to serving as the independent auditor of the Corporation's 2001
consolidated financial statements, Ernst & Young LLP executes the Corporation's
internal audit program under the direction of PNC's corporate audit staff. Ernst
& Young LLP also provides various tax and nonattest and advisory services to the
Corporation.
Under rule amendments regarding auditor independence adopted by the SEC,
beginning August 5, 2002, independent accountants will no longer be permitted to
provide audit clients with certain non-audit services. Accordingly, PNC has
decided to have separate internal and independent audit providers commencing
with fiscal 2002. Ernst & Young LLP has acted as independent auditor with
respect to the Corporation's 2001 financial statements and will continue to
provide various internal audit, tax, and nonattest and advisory services to the
Corporation. PNC has engaged Deloitte & Touche LLP as the Corporation's
principal accountants to audit the Corporation's 2002 consolidated financial
statements. These actions were recommended by the Audit Committee and approved
by the Corporation's Board of Directors on December 18, 2001. Ernst & Young
LLP's role as the Corporation's independent auditor will cease upon the filing
of this Form 10-K.
Ernst & Young LLP's reports on the Corporation's financial statements for the
past two fiscal years did not contain an adverse opinion or a disclaimer of
opinion and were not qualified or modified as to uncertainty, audit scope or
accounting principles. During the two most recent fiscal years and any
subsequent interim period preceding the date of this Form 10-K, (i) there were
no disagreements with Ernst & Young LLP on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedure,
which disagreements, if not resolved to the satisfaction of Ernst & Young LLP,
would have caused Ernst & Young LLP to make a reference to the subject matter of
the disagreement in connection with its reports in the financial statements for
such years, and (ii) there were no reportable events as defined in Item 304 of
Regulation S-K.
The Corporation has provided Ernst & Young LLP with a copy of the disclosure in
this Item 9 and has requested that Ernst & Young LLP furnish the Corporation
with a letter to update the letter previously provided pursuant to Item
304(a)(3) of Regulation S-K, which was included as Exhibit 16 to the
Corporation's Form 8-K dated December 18, 2001. The updated letter is included
as Exhibit 16 to this Form 10-K.
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 filed for the annual meeting of shareholders to be held on
April 23, 2002 and is incorporated herein by reference.
Information regarding compliance with Section 16(a) of the Securities Exchange
Act of 1934 is set forth under the caption "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Proxy Statement filed for the annual meeting of
shareholders to be held on April 23, 2002 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 information set forth under the caption "Personnel and
Compensation Committee Report," in the Proxy Statement filed for the annual
meeting of shareholders to be held on April 23, 2002 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 captions "Security
Ownership of Directors, Nominees and Executive Officers" and "Security Ownership
of Certain Beneficial Owners" under the heading "Security Ownership of
Directors, Nominees and Executive Officers" in the Proxy Statement filed for the
annual meeting of shareholders to be held on April 23, 2002 and is incorporated
herein by reference.
10
<PAGE>
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is set forth under the captions
"Transactions Involving Directors, Nominees and Executive Officers" and "Legal
Proceedings" in the Proxy Statement filed for the annual meeting of shareholders
to be held on April 23, 2002 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.
Pages of
Annual
Report to
Financial Statements Shareholders
- ----------------------------------------------------------------
Report of Ernst & Young LLP, Independent Auditors 61
Consolidated Statement of Income for the three
years ended December 31, 2001 62
Consolidated Balance Sheet as of December 31, 2001
and 2000 63
Consolidated Statement of Shareholders' Equity
for the three years ended December 31, 2001 64
Consolidated Statement of Cash Flows for the
three years ended December 31, 2001 65
Notes To Consolidated Financial Statements 66-93
Selected Quarterly Financial Data 94
- ----------------------------------------------------------------
No financial statement schedules are being filed.
REPORTS ON FORM 8-K The following reports on Form 8-K were filed during the
quarter ended December 31, 2001.
Form 8-K dated October 29, 2001, reporting on entering into an underwriting
agreement with respect to the public offering of $600,000,000 of Floating Rate
Senior Notes due 2004 and $400,000,000 of 5.75% Senior Notes due 2006
(collectively, the "Notes") and the form of the Notes and the related
Guarantees.
Form 8-K dated December 18, 2001, reporting on a change in the Corporation's
certifying accountant in connection with rule amendments regarding auditor
independence adopted by the SEC that will become effective August 5, 2002.
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.
11
<PAGE>
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
Chief Financial Officer
March 29, 2002
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 29, 2002.
<Table>
<Caption>
Signature Capacities
- ---------------------------------------------------- ----------------------------------------------------
<S> <C>
/s/ James E. Rohr Chairman, President and Chief Executive Officer
- ---------------------------------------------------- (Principal Executive Officer)
James E. Rohr
/s/ Robert L. Haunschild 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; Lorene K. Steffes; Dennis F. Strigl;
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>
12
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description Method of Filing +
- ------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
3.1 Articles of Incorporation of the Corporation, as amended and Incorporated herein by reference to Exhibit
restated as of April 24, 2001. 3.1 of the Corporation's Quarterly Report on
Form 10-Q for the quarter ended March 31, 2001.
3.2 By-Laws of the Corporation, as amended and restated. Incorporated herein by reference to Exhibit 4.2
to Post-Effective Amendment No. 1 to the
Corporation's Registration Statement No.
333-65042 on Form S-8 filed on December 6, 2001.
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, 2001.
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, 2001.
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, 2001.
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, 2001.
4.6 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, 2001.
4.7 Rights Agreement between the Corporation and Chase Manhattan Bank Incorporated herein by reference to Exhibit 1
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
amended as of January 1, 1999. 10.1 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
January 1, 1999. 10.2 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
January 1, 1999. 10.3 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
as of January 1, 1999. 10.4 of the Corporation's 1999 Form 10-K. *
</TABLE>
E-1
<PAGE>
<TABLE>
<C> <S> <C>
10.5 The Corporation's 1997 Long-Term Incentive Award Plan, as amended. Filed herewith. *
10.6 The Corporation's 1996 Executive Incentive Award Plan, as amended. Incorporated herein by reference to Exhibit
10.6 of the Corporation's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2001. *
10.7 PNC Bank Corp. and Affiliates Deferred Compensation Plan, as Incorporated herein by reference to Exhibit
amended as of January 1, 1999. 10.11 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. Incorporated herein by reference to Exhibit
10.9 of the Corporation's Annual Report on Form
10-K for the year ended December 31, 2000. *
10.10 Forms of Second Amendment to Change in Control Severance Incorporated herein by reference to Exhibit
Agreements. 10.15 of the Corporation's Quarterly Report
on Form 10-Q for the quarter ended September
30, 2001.*
10.11 1992 Director Share Incentive Plan. Incorporated herein by reference to Exhibit
10.13 of the Corporation's 1999 Form 10-K. *
10.12 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. *
10.13 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. *
10.14 Amended and Restated Trust Agreement between the Corporation, as Incorporated herein by reference to Exhibit
Settlor, and Hershey Trust Company, as successor Trustee to 10.18 of the Corporation's 1996 Form 10-K. *
NationsBank, N.A., Trustee.
10.15 Consulting arrangement between the Corporation and Thomas H. Incorporated herein by reference to Exhibit
O'Brien. 10.17 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, 2001. 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.
16 Letter from Ernst & Young LLP pursuant to Item 304(a)(3) of Filed herewith.
Regulation S-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.
99 The Corporation's Employee Stock Purchase Plan, as amended. Incorporated herein by reference to Exhibit 99
of the Corporation's Quarterly Report on Form
10-Q for the quarter ended September 30, 2001.
- -----------------------------------------------------------------------------------------------------------------------------
</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-10.5
<SEQUENCE>3
<FILENAME>j9348001ex10-5.txt
<DESCRIPTION>1997LONG-TERM INCENTIVE AWARD PLAN
<TEXT>
<PAGE>
Exhibit 10.5
THE PNC FINANCIAL SERVICES GROUP, INC.
1997 LONG-TERM INCENTIVE AWARD PLAN
(As amended and restated effective January 3, 2002)
1. DEFINITIONS
In this Plan, except where the context otherwise indicates, the
following definitions apply.
1.1. "Agreement" means a written agreement implementing a grant of an
Option, Right or Performance Unit or an award of Incentive Shares.
1.2. "Board" means the Board of Directors of the Corporation.
1.3. "Code" means the Internal Revenue Code of 1986, as amended, and
the rules and regulations promulgated thereunder.
1.4. "Committee" means (a) in the case of grants and awards to Eligible
Persons other than Directors ("Employee Awards"), the Board's Personnel and
Compensation Committee, or such other committee appointed by the Board to
administer Employee Awards, all of the members of which shall be "non-employee
directors" as defined in Rule 16b-3 (b)(3)(i) under the Exchange Act or any
similar successor rule and "outside directors" as defined in Treas. Reg. Section
1.162-27(e)(3) or any similar successor regulation and (b) in the case of grants
and awards to Directors, the Board's Committee on Corporate Governance, unless
otherwise determined by the Board.
1.5. "Common Stock" means the common stock of the Corporation.
1.6. "Corporation" means The PNC Financial Services Group, Inc.
1.7. "Date of Exercise" means the date on which the Corporation
receives notice of the exercise of an Option, Right or Performance Unit in
accordance with the terms of Article 9.
1.8. "Date of Grant" means the date on which an Option, Right or
Performance Unit is granted or Incentive Shares are awarded by the Committee or
such later date as may be specified by the Committee in authorizing the grant or
award.
1.9. "Director" means any member of the Board who is not also an
employee of the Corporation or any Subsidiary.
1.10. "Eligible Person" means a Senior Executive or Director.
1.11. "Exchange Act" means the Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder.
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1.12. "Fair Market Value" of a Share means the amount equal to the fair
market value of a Share as determined pursuant to a reasonable method adopted by
the Committee in good faith for such purpose.
1.13. "Grantee" means an Eligible Person to whom Incentive Shares have
been awarded pursuant to Article 12.
1.14. "Incentive Shares" means Shares awarded pursuant to the
provisions of Article 12.
1.15. "Incentive Stock Option" means an Option granted under the Plan
that qualifies as an incentive stock option under Section 422 of the Code and
that the Corporation designates as such in the Agreement granting the Option.
1.16. "Nonstatutory Stock Option" means an Option granted under the
Plan that is not an Incentive Stock Option.
1.17. "Option" means an option to purchase Shares granted under the
Plan in accordance with the terms of Article 6.
1.18. "Option Period" means the period during which an Option may be
exercised.
1.19. "Option Price" means the price per Share at which an Option may
be exercised. The Option Price shall be determined by the Committee, but, unless
otherwise determined by the Committee pursuant to Section 3.7, in no event shall
the Option Price be less than the Fair Market Value per Share determined as of
the Date of Grant.
1.20. "Optionee" means an Eligible Person to whom an Option, Right or
Performance Unit has been granted.
1.21. "Performance Period" means the period or periods during which
each performance criterion of a Performance Unit will be measured against the
performance standards established by the Committee and specified in the
Agreement relating thereto.
1.22. "Performance Unit" means a performance unit granted under the
Plan in accordance with the terms of Article 8.
1.23. "Performance Unit Exercise Period" means the period during which
a Performance Unit may be exercised.
1.24. "Plan" means The PNC Financial Services Group, Inc. 1997
Long-Term Incentive Award Plan, as amended from time to time.
1.25. "Related Option" means an Option granted in connection with a
specified Right or Performance Unit.
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1.26. "Related Performance Unit" means a Performance Unit granted in
connection with a specified Option.
1.27. "Related Right" means a Right granted in connection with a
specified Option.
1.28. "Right" means a stock appreciation right granted under the Plan
in accordance with the terms of Article 7.
1.29. "Right Period" means the period during which a Right may be
exercised.
1.30. "Senior Executive" means any officer or key employee of the
Corporation or a Subsidiary who is designated as a "Senior Executive" pursuant
to Section 3.1.
1.31. "Share" means a share of authorized but unissued Common Stock or
a reacquired share of Common Stock.
1.32. "Subsidiary" means a corporation at least 80% of the total
combined voting power of all classes of stock of which is owned by the
Corporation, either directly or through one or more other Subsidiaries, except
that with respect to Nonstatutory Stock Options, Rights, Performance Units and
Incentive Shares granted or awarded after March 27, 2000, such term shall mean a
corporation, bank, partnership, business trust, limited liability company or
other form of business organization which is a consolidated subsidiary of the
Corporation under generally accepted accounting principles.
2. PURPOSE
The Plan is intended to assist in attracting, retaining, and motivating
Eligible Persons of outstanding ability and to promote the identification of
their interests with those of the shareholders of the Corporation.
3. ADMINISTRATION
The Plan shall be administered by the Committee or by the Chairman of
the Committee in the exercise of such authority as the Committee may delegate to
him or her from time to time, provided that Section 162(m)(4)(C) of the Code
does not require action by the Committee as a whole. In addition to any other
powers granted to the Committee, it shall have the following powers, subject to
the express provisions of the Plan:
3.1. to determine in its discretion, or to delegate to the Chairman of
the Board of the Corporation, with respect to officers or key employees of the
Corporation or a Subsidiary who are not executive officers for purposes of
Section 16 of the Exchange Act, the power to determine in his or her discretion,
the Eligible Persons to whom Options, Performance Units or Rights shall be
granted and to whom Incentive Shares shall be awarded, the number of Shares to
be subject to each Option, Right, Performance
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Unit grant, or Incentive Share award, and the terms upon which Options, Rights
or Performance Units may be acquired, exercised, or forfeited and the terms and
conditions of Incentive Share awards;
3.2. to determine all other terms and provisions of each Agreement,
which need not be identical;
3.3. without limiting the generality of the foregoing, to provide in
its discretion in an Agreement:
(i) for an agreement by the Optionee or Grantee to render
services to the Corporation or a Subsidiary upon such terms and
conditions as may be specified in the Agreement, provided that the
Committee shall not have the power under the Plan to commit the
Corporation or any Subsidiary to employ or otherwise retain any
Optionee or Grantee;
(ii) for restrictions on the transfer, sale or other
disposition of Shares issued to the Optionee upon the exercise of an
Option, Right or Performance Unit, or for conditions with respect to
the issuance of Incentive Shares;
(iii) for an agreement by the Optionee or Grantee to resell
to the Corporation, under specified conditions, Shares issued upon the
exercise of an Option, Right or Performance Unit or awarded as
Incentive Shares;
(iv) for the payment of the Option Price upon the exercise of
an Option otherwise than in cash, including without limitation by
delivery of Shares valued at Fair Market Value on the Date of Exercise
of the Option or a combination of cash and Shares; by means of any
attestation procedure approved or ratified by the Committee; or by
delivery of a properly executed exercise notice together with
irrevocable instructions to a broker to promptly deliver to the
Corporation the amount of sale or loan proceeds to pay the exercise
price;
(v) for the deferral of receipt of amounts that otherwise
would be distributed upon exercise of a Performance Unit, the terms and
conditions of any such deferral and any interest or dividend equivalent
or other payment that shall accrue with respect to deferred
distributions, subject to the provisions of Article 11;
(vi) for the forfeiture by any Optionee or Grantee of any
Option, Right, Performance Unit or Incentive Shares upon such terms and
conditions as the Committee may deem advisable from time to time; and
(vii) for the effect of a "change in control," as defined in
the Agreement, of the Corporation on the rights of an Optionee or
Grantee with respect to any Options, Rights, Performance Units or
Incentive Shares;
3.4. to construe and interpret the Agreements and the Plan;
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3.5. to require, whether or not provided for in the pertinent
Agreement, of any person exercising an Option, Right or Performance Unit or
acquiring Incentive Shares, at the time of such exercise or acquisition, the
making of any representations or agreements which the Committee may deem
necessary or advisable in order to comply with applicable securities, tax, or
other laws;
3.6. to provide for satisfaction of an Optionee's or Grantee's tax
liabilities arising in connection with the Plan through, without limitation,
retention by the Corporation of shares of Common Stock otherwise issuable on the
exercise of a Nonstatutory Stock Option, Right or Performance Unit or pursuant
to an award of Incentive Shares or through delivery of Common Stock to the
Corporation by the Optionee or Grantee under such terms and conditions as the
Committee deems appropriate, including but not limited to any attestation
procedure approved or ratified by the Committee;
3.7. to provide with respect to any Option (other than a Reload Option,
as hereinafter defined) granted under the Plan on or after January 1, 1997,
that, if the Optionee, while an Eligible Person, exercises the Option or
satisfies any related tax withholding obligation in whole or in part by
surrendering already-owned shares of Common Stock, the Optionee will, subject to
this Section 3.7 and such other terms and conditions as may be imposed by the
Committee, receive an additional option ("Reload Option"). The Reload Option
will be to purchase, at Fair Market Value as of the date the original Option was
exercised, a number of shares of Common Stock equal to the number of whole
shares surrendered by the Optionee to exercise the original Option or to satisfy
any related tax withholding obligation. The Reload Option will be exercisable
only between its Date of Grant and the date of the expiration of the original
Option. A Reload Option shall be subject to such additional terms and conditions
as the Committee shall approve, which terms may provide that the Committee may
cancel the Optionee's right to receive the Reload Option and that the Reload
Option will be granted only if the Committee has not canceled such right prior
to the exercise of the original Option.
3.8. to make all other determinations and take all other actions
necessary or advisable for the administration of the Plan; and
3.9. to delegate to officers or managers of the Corporation or any
Subsidiary the authority to perform administrative functions under the Plan with
respect to grants and awards to Eligible Persons other than Directors, provided
that Section 162(m)(4)(C) of the Code does not require action by the Committee
as a whole with respect to such function.
Any determinations or actions made or taken by the Committee pursuant
to this Article shall be binding and final.
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4. ELIGIBILITY
Options, Rights, Performance Units and Incentive Shares may be granted
or awarded only to Eligible Persons; provided, however, that Directors shall not
be granted Incentive Stock Options.
5. STOCK SUBJECT TO THE PLAN
5.1. The maximum number of Shares that may be issued or as to which
grants or awards may be made under the Plan (excluding Shares issued pursuant to
grants or awards made prior to February 20, 1997) shall not exceed the sum of
(i) 10,141,853 Shares plus (ii) as of January 1 of each calendar year commencing
with 1998 an additional number of Shares (which shall be cumulative from year to
year) equal to one and one-half percent (1.5%) of the total issued shares of
Common Stock (including reacquired Shares) at the end of the immediately
preceding calendar year. Notwithstanding the foregoing, in no event shall more
than three percent (3%) of the total issued shares of Common Stock (including
reacquired Shares) at the end of the immediately preceding calendar year be
cumulatively available for grants and awards made in any calendar year. The
maximum number of Shares as to which grants or awards may be made under the Plan
to one Senior Executive with respect to one calendar year shall be 1,000,000
(250,000 for calendar years 1997 through 1999). Notwithstanding the foregoing,
(a) grants of Incentive Stock Options may not be made with respect to more than
1,000,000 Shares during any calendar year, and (b) Incentive Share awards may
not be granted during any calendar year with respect to more than twenty percent
(20%) of the maximum number of Shares available for grants and awards made
during such calendar year. The limitation provided in the first sentence of this
Section 5.1 is hereinafter called the "Cumulative Limitation;" the limitation
provided in the second sentence is hereinafter called the "Annual Limitation;"
the limitation provided in the third sentence is hereinafter called the
"Individual Limitation;" the limitation provided in clause (a) of the fourth
sentence is hereinafter called the "ISO Limitation;" and the limitation provided
in clause (b) of the fourth sentence is hereinafter called the "Incentive Share
Limitation." For purposes of the Individual Limitation, to the extent consistent
with the requirements of the performance-based compensation exception under
Section 162(m) of the Code, a Reload Option (a) shall be deemed to have been
granted at the same time as, and as a part of, the original Option in respect of
which the Reload Option is granted and (b) shall not be deemed to increase the
number of Shares covered by such original Option.
5.2. If an Option, Right or Performance Unit expires or terminates for
any reason (other than termination by virtue of the exercise of a Related
Option, Related Right or Related Performance Unit, as the case may be) without
having been fully exercised, or if Shares covered by an Incentive Share award
are not issued or are forfeited Shares which had been subject to the Agreement
relating thereto shall for purposes of the Cumulative Limitation (and if granted
or awarded in the same calendar year, then also for purposes of the Annual
Limitation, the ISO Limitation, and the Incentive Share
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Limitation) again become available for the grant of other Options, Rights and
Performance Units or for the award of additional Incentive Shares.
5.3. The Shares issued upon the exercise of a Right or Performance Unit
(or if cash is payable in connection with such exercise, that number of Shares
having a Fair Market Value equal to the cash payable upon such exercise), shall
be charged against the number of Shares issuable under the Plan and shall not
become available for the grant of other Options, Rights and Performance Units or
for the award of Incentive Shares. If the Right referred to in the preceding
sentence is a Related Right, or if the Performance Unit referred to in the
preceding sentence is a Related Performance Unit, the Shares subject to the
Related Option, to the extent not charged against the number of Shares subject
to the Plan in accordance with this Section 5.3, shall for purposes of the
Cumulative Limitation (and if granted in the same calendar year, then also for
purposes of the Annual Limitation) again become available for the grant of other
Options, Rights or Performance Units or for the award of additional Incentive
Shares.
6. OPTIONS
6.1. The Committee is hereby authorized to grant Incentive Stock
Options and Nonstatutory Stock Options to Senior Executives and to grant
Nonstatutory Stock Options to Directors, provided that the number of Options
granted to a Senior Executive during a calendar year shall not exceed the
Individual Limitation when aggregated with other grants or awards made to that
Senior Executive during that calendar year.
6.2. All Agreements granting Options shall contain a statement that the
Option is intended to be either (i) a Nonstatutory Stock Option or (ii) an
Incentive Stock Option.
6.3. The Option Period shall be determined by the Committee and
specifically set forth in the Agreement, provided that an Option shall not be
exercisable until the expiration of at least six months from the Date of Grant
(except that this limitation need not apply in the event of the death or
disability of the Optionee or as otherwise permitted by the Agreement upon a
change in control of the Corporation) or after ten years from the Date of Grant.
6.4. All Incentive Stock Options granted under the Plan shall comply
with the provisions of the Code governing incentive stock options and with all
other applicable rules and regulations.
6.5. All other terms of Options granted under the Plan shall be
determined by the Committee in its sole discretion.
7. RIGHTS
7.1. The Committee is hereby authorized to grant Rights to Eligible
Persons, provided that the number of Rights granted to a Senior Executive during
a calendar year
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shall not exceed the Individual Limitation when aggregated with other grants or
awards made to that Senior Executive during that calendar year.
7.2. A Right may be granted under the Plan:
(i) in connection with, and at the same time as, the grant of
an Option to an Eligible Person;
(ii) by amendment of an outstanding Nonstatutory Stock Option
granted under the Plan to an Eligible Person; or
(iii) independently of any Option granted under the Plan.
A Right granted under clause (i) or (ii) of the preceding sentence is a
Related Right. A Related Right may, in the Committee's discretion, apply to all
or a portion of the Shares subject to the Related Option.
7.3. A Right may be exercised in whole or in part as provided in the
Agreement, and, subject to the provisions of the Agreement, entitles its
Optionee to receive, without any payment to the Corporation (other than required
tax withholding amounts), either cash or that number of Shares (equal to the
highest whole number of Shares), or a combination thereof, in an amount or
having a Fair Market Value determined as of the Date of Exercise not to exceed
the number of Shares subject to the portion of the Right exercised multiplied by
an amount equal to the excess of the Fair Market Value per Share on the Date of
Exercise of the Right over either (i) the Fair Market Value per Share on the
Date of Grant of the Right or the base price determined by the Committee
pursuant to Section 3.7 if the Right is not a Related Right, or (ii) the Option
Price as provided in the Related Option if the Right is a Related Right.
7.4. The Right Period shall be determined by the Committee and
specifically set forth in the Agreement, provided, however:
(i) a Right may not be exercised until the expiration of at
least six months from the Date of Grant (except that this limitation
need not apply in the event of the death or disability of the Optionee
or as otherwise permitted by the Agreement upon a change in control of
the Corporation);
(ii) a Right will expire no later than the earlier of (A) ten
years from the Date of Grant, or (B) in the case of a Related Right,
the expiration of the Related Option; and
(iii) a Right that is a Related Right may be exercised only
when and to the extent the Related Option is exercisable.
7.5. The exercise, in whole or in part, of a Related Right shall cause
a reduction in the number of Shares subject to the Related Option equal to the
number of Shares with respect to which the Related Right is exercised.
Similarly, the exercise, in
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whole or in part, of a Related Option shall cause a reduction in the number of
Shares subject to the Related Right equal to the number of Shares with respect
to which the Related Option is exercised.
8. PERFORMANCE UNITS
8.1. The Committee is hereby authorized to grant Performance Units to
Eligible Persons, provided that the number of Performance Units granted to a
Senior Executive during a calendar year shall not exceed the Individual
Limitation when aggregated with other grants or awards made to that Senior
Executive during that calendar year.
8.2. Performance Units may be granted under the Plan:
(i) in connection with, and at the same time as, the grant of
a Nonstatutory Stock Option to an Eligible Person;
(ii) by amendment of an outstanding Nonstatutory Stock Option
granted under the Plan to an Eligible Person; or
(iii) independently of any Option granted under the Plan.
A Performance Unit granted under Subparagraph (i) or (ii) of the
preceding sentence is a Related Performance Unit. A Related Performance Unit
may, in the Committee's discretion, apply to all or a portion of the Shares
subject to the Related Option. A Performance Unit may not be granted in
connection with, or by amendment to, an Incentive Stock Option.
8.3. A Performance Unit may be exercised in whole or in part as
provided in the Agreement, and, subject to the provisions of the Agreement,
entitles its Optionee to receive, without any payment to the Corporation (other
than required tax withholding amounts), cash, Shares or a combination of cash
and Shares, based upon the degree to which performance standards established by
the Committee and specified in the Agreement have been achieved. During the
Performance Period, such performance standards may be particular to an Eligible
Person or the department, branch, Subsidiary or other unit in which he works, or
may be based on the performance of the Corporation generally. The performance
standards may be based on earnings or earnings growth; return on assets, equity
or investment; regulatory compliance; satisfactory internal or external audits;
improvement of financial ratings; reduction of nonperforming loans; achievement
of balance sheet or income statement objectives; or any other objective goals
established by the Committee, and may be absolute in their terms or measured
against or in relationship to other companies comparably, similarly or otherwise
situated.
8.4. The Performance Unit Exercise Period shall be determined by the
Committee and specifically set forth in the Agreement; provided, however:
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(i) A Performance Unit may not be exercised until the
expiration of at least six months from the Date of Grant (except that
this limitation need not apply in the event of the death or disability
of the Optionee or as otherwise permitted by an Agreement upon a change
in control of the Corporation); and
(ii) a Performance Unit will expire no later than the earlier
of (A) ten years from the Date of Grant, or (B) in the case of a
Related Performance Unit, the expiration of the Related Option.
8.5. Each Agreement granting Performance Units shall specify the number
of Performance Units granted; provided, that the maximum number of Related
Performance Units may not exceed the maximum number of Shares subject to the
Related Option and the number of Performance Units may not exceed the maximum
number of Shares subject to the Related Option and the maximum value of a
Related Performance Unit may not exceed the Fair Market Value of a Share subject
to the Related Option.
8.6. The exercise, in whole or in part, of Related Performance Units
shall cause a reduction in the number of Shares subject to the Related Option
and the number of Performance Units in accordance with the terms of the
Agreement. Similarly, the exercise, in whole or in part, of a Related Option
shall cause a reduction in the number of Related Performance Units equal to the
number of Shares with respect to which the Related Option is exercised.
9. EXERCISE; PAYMENT OF WITHHOLDING TAXES
An Option, Right or Performance Unit may, subject to the provisions of
the Agreement under which it was granted, be exercised in whole or in part by
the delivery to the Corporation of written notice of the exercise, in such form
as the Committee may prescribe, accompanied, in the case of an Option, by full
payment for the Shares with respect to which the Option is exercised, and in the
case of an Option, Right or Performance Unit, full payment for related
withholding taxes, if any. The receipt of Incentive Shares shall be subject to
full payment by the Grantee of any withholding taxes then required to be paid.
10. NONTRANSFERABILITY
Except as the Committee may expressly provide otherwise in or with
respect to an Agreement, including any Agreement in effect as of February 20,
1997, Options, Rights and Performance Units granted under the Plan shall not be
transferable otherwise than by will or the laws of descent and distribution, and
an Option, Right or Performance Unit may be exercised during his or her lifetime
only by the Optionee or, in the event of his or her legal incapacity, by his or
her legal representative. A Related Right or Related Performance Unit is
transferable only when the Related Option is transferable and only with the
Related Option and under the same conditions. An Optionee may also designate a
beneficiary to exercise his or her Options after the Optionee's death, provided
that the
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Committee has first expressly approved the procedures and forms necessary to
effect such a designation.
11. DEFERRAL OF AWARDS
If an Optionee so elects in accordance with the terms of an Agreement,
the Optionee may defer any or all of the amount otherwise payable on the
exercise of Performance Units in accordance with the provisions of a deferred
compensation plan maintained by the Corporation or a Subsidiary, provided:
(i) that the Optionee makes such election by delivering to the
Corporation written notice of such election, in such form as the
Committee may from time to time prescribe, prior to the beginning of
the Performance Period;
(ii) that such election shall be irrevocable until at least
six months after termination of the Optionee's employment; and
(iii) that such deferred payment shall be made in accordance
with the provisions of such deferred compensation plan.
12. INCENTIVE SHARE AWARDS
The Committee may, in its sole discretion, grant Incentive Share awards
to Eligible Persons, provided that the number of Incentive Share awards granted
to a Senior Executive during a calendar year shall not exceed the Individual
Limitation when aggregated with other grants or awards made to that Senior
Executive during that calendar year. Incentive Share awards shall entitle an
Eligible Person to receive Shares, to be issued at such times, subject to the
achievement of such performance standards or other goals, in recognition of such
performance or other achievements or for such other purposes, and on such other
terms and conditions, if any, as the Committee shall deem appropriate.
Performance standards may be based on earnings or earnings growth; return on
assets, equity or investment; regulatory compliance; satisfactory internal or
external audits; improvement of financial ratings; reduction of nonperforming
loans; achievement of balance sheet or income statement objectives; or any other
objective goals established by the Committee, and may be absolute in their terms
or measured against or in relationship to other companies comparably, similarly
or otherwise situated. The number of Incentive Share awards made to a Senior
Executive during a calendar year shall not exceed the Individual Limitation when
aggregated with other grants or awards made to that Senior Executive during that
calendar year.
13. CAPITAL ADJUSTMENTS
The number and class of Shares (or the Performance Unit equivalent)
subject to each outstanding Option, Right or Performance Unit or Incentive Share
award, the Option Price, and the aggregate number and class of Shares for which
grants or awards thereafter
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may be made, the Annual Limitation, the Individual Limitation, the ISO
Limitation, and the Incentive Share Limitation provided for in Section 5.1,
shall be subject to such adjustment, if any, as the Committee in its sole
discretion deems appropriate to reflect such events as stock dividends, stock
splits, recapitalizations, mergers, consolidations or reorganizations of or by
the Corporation.
14. TERMINATION OR AMENDMENT
The Board or the Committee may amend, alter or terminate this Plan in
any respect, at any time; provided, however, that, after this Plan has been
approved by the Shareholders of the Corporation, no amendment, alteration or
termination of this Plan shall be made by the Board or the Committee without
approval of (i) the Corporation's shareholders to the extent shareholder
approval of the amendment is required by applicable law or regulations or the
requirements of the principal exchange or interdealer quotation system on which
the Common Stock is listed or quoted, and (ii) each affected Optionee if such
amendment, alteration or termination would adversely affect his or her rights or
obligations under any grant or award made prior to the date of such amendment,
alteration or termination.
15. MODIFICATION, EXTENSION AND RENEWAL OF OPTIONS, RIGHTS AND
PERFORMANCE UNITS
Subject to the terms and conditions and within the limitations of the
Plan, the Committee may modify, extend or renew outstanding Options, Rights and
Performance Units, or accept the surrender of outstanding options, rights and
performance units (to the extent not theretofore exercised) granted under the
Plan or under any other plan of the Corporation, a Subsidiary or a company or
similar entity acquired by the Corporation or a Subsidiary, and authorize the
granting of new Options, Rights and Performance Units pursuant to the Plan in
substitution therefor (to the extent not theretofore exercised), and the
substituted Options, Rights and Performance Units may specify a longer term than
the surrendered Options, Rights and Performance Units or have any other
provisions that are authorized by the Plan; provided, however, that the
substituted Options, Rights and Performance Units may not specify a lower
exercise price than the surrendered options, rights and performance units.
Subject to the terms and conditions and within the limitations of the Plan, the
Committee may modify the terms of any outstanding Agreement providing for awards
of Incentive Shares. Notwithstanding the foregoing, however, no modification of
an Option, Right or Performance Unit granted under the Plan, or an award of
Incentive Shares, shall (i) without the consent of the Optionee or Grantee,
adversely affect the rights or obligations of the Optionee or Grantee or (ii)
reduce the exercise price or base price of an Option, Right or Performance Unit.
16. EFFECTIVENESS OF THE PLAN AND AMENDMENTS
The effective date of the Plan was December 17, 1987. The effective
date of any amendment to the Plan will be the date specified by the Board or
Committee, as
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applicable. Any amendments to the Plan requiring shareholder approval pursuant
to Article 14 are subject to approval by vote of the shareholders of the
Corporation within 12 months after their adoption by the Board or the Committee.
Subject to that approval, any such amendments are effective on the date on which
they are adopted by the Board. Options, Rights, Performance Units or Incentive
Shares may be granted or awarded prior to shareholder approval of amendments,
but each Option, Right, Performance Unit or Incentive Share grant or award
requiring such amendments shall be subject to the approval of the amendments by
the shareholders. The date on which any Option, Right, Performance Unit or
Incentive Shares granted or awarded prior to shareholder approval of the
amendment shall be the Date of Grant for all purposes of the Plan as if the
Option, Right, Performance Unit or Incentive Shares had not been subject to
approval. No Option, Right or Performance Unit granted subject to shareholder
approval of an amendment may be exercised prior to such shareholder approval,
and any Incentive Share award subject to shareholder approval of an amendment
and any dividends payable thereon are subject to forfeiture if such shareholder
approval is not obtained.
17. TERM OF THE PLAN
Unless sooner terminated by the Board or the Committee pursuant to
Article 14, the Plan shall terminate on February 20, 2007, and no Options,
Rights, Performance Units or Incentive Share awards may be granted or awarded
after termination. The termination shall not affect the validity of any Option,
Right, Performance Unit or Incentive Share awards outstanding on the date of
termination.
18. INDEMNIFICATION OF COMMITTEE
In addition to such other rights of indemnification as they may have as
directors or as members of the Committee, the members of the Committee shall be
indemnified by the Corporation against the reasonable expenses, including
attorneys' fees, actually and reasonably incurred in connection with the defense
of any action, suit or proceeding, or in connection with any appeal therein, to
which they or any of them may be a party by reason of any action taken or
failure to act under or in connection with the Plan or any Option, Right,
Performance Unit or Incentive Shares granted or awarded hereunder, and against
all amounts reasonably paid by them in settlement thereof or paid by them in
satisfaction of a judgment in any such action, suit or proceeding, if such
members acted in good faith and in a manner which they believed to be in, and
not opposed to, the best interests of the Corporation.
19. COMPLIANCE WITH SECTION 162(m) OF THE CODE
To the extent that any provision of the Plan or an Agreement, or any
action of the Committee, may result in the application of Section 162(m)(1) of
the Code to compensation payable to a Grantee or Optionee, such provision or
action shall be deemed to be null and void, to the extent permitted by law and
deemed advisable by the Committee. The Committee shall have the authority to
override the application of this
- 13 -
<PAGE>
Article by an action duly approved or ratified by the Committee and reflected in
the Committee's records.
20. GENERAL PROVISIONS
20.1. The establishment of the Plan shall not confer upon any Eligible
Person any legal or equitable right against the Corporation, any Subsidiary or
the Committee, except as expressly provided in the Plan.
20.2. Neither the Plan nor any Agreement constitutes inducement or
consideration for the employment or retention of any Eligible Person, nor are
they a contract between the Corporation or any Subsidiary and any Eligible
Person. Participation in the Plan shall not give an Eligible Person any right to
be retained in the service of the Corporation or any Subsidiary.
20.3. The Corporation and its Subsidiaries may assume options,
warrants, or rights to purchase stock issued or granted by other corporations
whose stock or assets shall be acquired by the Corporation or its Subsidiaries,
or which shall be merged into or consolidated with the Corporation or its
Subsidiaries. Neither the adoption of this Plan, nor its submission to the
shareholders, shall be taken to impose any limitations on the powers of the
Corporation or its affiliates to issue, grant, or assume options, warrants, or
rights, otherwise than under this Plan, or to adopt other stock option or
restricted stock plans or to impose any requirement of shareholder approval upon
the same.
20.4. Except as the Committee may otherwise provide pursuant to Article
10, or as otherwise required by a deferral election pursuant to Article 11, the
interests of any Eligible Person under the Plan are not subject to the claims of
creditors and may not, in any way, be assigned, alienated or encumbered.
20.5. The Plan shall be governed, construed and administered in
accordance with the laws of the Commonwealth of Pennsylvania, and it is the
intention of the Corporation that Incentive Stock Options granted under the Plan
qualify as such under Section 422 of the Code.
- 14 -
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-12.1
<SEQUENCE>4
<FILENAME>j9348001ex12-1.txt
<DESCRIPTION>COMPUTATION OF RATIO OF EARNINGS
<TEXT>
<PAGE>
EXHIBIT 12.1
THE PNC FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS
TO FIXED CHARGES
<TABLE>
<CAPTION>
Year ended December 31
--------------------------------------------------------------
Dollars in millions 2001 2000 1999 1998 1997
- ----------------------------------------------------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
EARNINGS
Income from continuing operations before taxes $ 564 $1,848 $1,788 $1,651 $1,595
Fixed charges excluding interest on deposits 763 1,033 980 1,159 1,080
------ ------ ------ ------ ------
Subtotal 1,327 2,881 2,768 2,810 2,675
Interest on deposits 1,229 1,653 1,369 1,471 1,457
------ ------ ------ ------ ------
Total $2,556 $4,534 $4,137 $4,281 $4,132
====== ====== ====== ====== ======
FIXED CHARGES
Interest on borrowed funds $ 646 915 870 1,065 1,010
Interest component of rentals 53 50 44 33 26
Amortization of notes and debentures 1 1 1 1 1
Distributions on Mandatorily Redeemable
Capital Securities of Subsidiary Trusts 63 67 65 60 43
------ ------ ------ ------ ------
Subtotal 763 1,033 980 1,159 1,080
Interest on deposits 1,229 1,653 1,369 1,471 1,457
------ ------ ------ ------ ------
Total $1,992 $2,686 $2,349 $2,630 $2,537
====== ====== ====== ====== ======
RATIO OF EARNINGS TO FIXED CHARGES
Excluding interest on deposits 1.74 x 2.79 x 2.82 x 2.42 x 2.48 x
Including interest on deposits 1.28 1.69 1.76 1.63 1.63
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-12.2
<SEQUENCE>5
<FILENAME>j9348001ex12-2.txt
<DESCRIPTION>COMPUTATION OF RATIO OF EARNINGS
<TEXT>
<PAGE>
EXHIBIT 12.2
THE PNC FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS
TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
<TABLE>
<CAPTION>
Year ended December 31
--------------------------------------------------------------
Dollars in millions 2001 2000 1999 1998 1997
- ----------------------------------------------------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
EARNINGS
Income from continuing operations before taxes $564 $1,848 $1,788 $1,651 $1,595
Fixed charges and preferred stock dividends
excluding interest on deposits 783 1,063 1,010 1,188 1,110
------ ------ ------ ------ ------
Subtotal 1,347 2,911 2,798 2,839 2,705
Interest on deposits 1,229 1,653 1,369 1,471 1,457
------ ------ ------ ------ ------
Total $2,576 $4,564 $4,167 $4,310 $4,162
====== ====== ====== ====== ======
FIXED CHARGES
Interest on borrowed funds $646 $915 $870 $1,065 $1,010
Interest component of rentals 53 50 44 33 26
Amortization of notes and debentures 1 1 1 1 1
Distributions on Mandatorily Redeemable
Capital Securities of Subsidiary Trusts 63 67 65 60 43
Preferred stock dividend requirements 20 30 30 29 30
------ ------ ------ ------ ------
Subtotal 783 1,063 1,010 1,188 1,110
Interest on deposits 1,229 1,653 1,369 1,471 1,457
------ ------ ------ ------ ------
Total $2,012 $2,716 $2,379 $2,659 $2,567
====== ====== ====== ====== ======
RATIO OF EARNINGS TO FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
Excluding interest on deposits 1.72 x 2.74 x 2.77 x 2.39 x 2.44 x
Including interest on deposits 1.28 1.68 1.75 1.62 1.62
=================================================================================================================================
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-13
<SEQUENCE>6
<FILENAME>j9348001ex13.txt
<DESCRIPTION>ANNUAL REPORT TO SHAREHOLDERS
<TEXT>
<PAGE>
Exhibit 13
FINANCIALS
THE PNC FINANCIAL SERVICES GROUP, INC.
FINANCIAL REVIEW
26 Selected Consolidated Financial Data
28 Overview
31 Review Of Businesses
32 Regional Community Banking
33 Corporate Banking
34 PNC Real Estate Finance
35 PNC Business Credit
36 PNC Advisors
37 BlackRock
38 PFPC
39 Consolidated Statement Of Income Review
41 Consolidated Balance Sheet Review
43 Risk Factors
47 Risk Management
58 2000 Versus 1999
60 Forward-Looking Statements
REPORTS ON CONSOLIDATED FINANCIAL STATEMENTS
61 Management's Responsibility For Financial Reporting
61 Report Of Ernst & Young LLP, Independent Auditors
CONSOLIDATED FINANCIAL STATEMENTS
62 Consolidated Statement Of Income
63 Consolidated Balance Sheet
64 Consolidated Statement Of Shareholders' Equity
65 Consolidated Statement Of Cash Flows
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
66 NOTE 1 - Accounting Policies
72 NOTE 2 - Discontinued Operations
72 NOTE 3 - Restatements
73 NOTE 4 - Fourth Quarter Actions
73 NOTE 5 - Sale Of Subsidiary Stock
73 NOTE 6 - Cash Flows
73 NOTE 7 - Trading Activities
74 NOTE 8 - Securities
75 NOTE 9 - Loans And Commitments To Extend Credit
76 NOTE 10 - Nonperforming Assets
77 NOTE 11 - Allowance For Credit Losses
77 NOTE 12 - Premises, Equipment And Leasehold Improvements
77 NOTE 13 - Goodwill And Other Amortizable Assets
78 NOTE 14 - Securitizations
79 NOTE 15 - Deposits
79 NOTE 16 - Borrowed Funds
79 NOTE 17 - Capital Securities Of Subsidiary Trusts
80 NOTE 18 - Shareholders' Equity
80 NOTE 19 - Regulatory Matters
81 NOTE 20 - Financial Derivatives
82 NOTE 21 - Employee Benefit Plans
84 NOTE 22 - Stock-Based Compensation Plans
86 NOTE 23 - Income Taxes
86 NOTE 24 - Legal Proceedings
87 NOTE 25 - Earnings Per Share
88 NOTE 26 - Segment Reporting
90 NOTE 27 - Comprehensive Income
91 NOTE 28 - Fair Value Of Financial Instruments
92 NOTE 29 - Unused Line Of Credit
92 NOTE 30 - Subsequent Events
93 NOTE 31 - Parent Company
STATISTICAL INFORMATION
94 Selected Quarterly Financial Data
95 Analysis Of Year-To-Year Changes In Net Interest Income
96 Average Consolidated Balance Sheet And Net Interest Analysis
98 Summary Of Loan Loss Experience
98 Allocation Of Allowance For Credit Losses
99 Short-Term Borrowings
99 Loan Maturities And Interest Sensitivity
99 Time Deposits Of $100,000 Or More
25
<PAGE>
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 2001 2000 1999 1998 1997
======================================================================== =================================================
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Interest income $4,137 $4,732 $4,583 $5,024 $4,912
Interest expense 1,875 2,568 2,239 2,536 2,467
- ------------------------------------------------------------------------ -------------------------------------------------
Net interest income 2,262 2,164 2,344 2,488 2,445
Provision for credit losses 903 136 163 225 70
Noninterest income before net securities gains 2,412 2,871 2,428 2,070 1,583
Net securities gains 131 20 22 16 40
Noninterest expense 3,338 3,071 2,843 2,698 2,403
- ------------------------------------------------------------------------ -------------------------------------------------
Income from continuing operations before income taxes 564 1,848 1,788 1,651 1,595
Income taxes 187 634 586 571 557
- ------------------------------------------------------------------------ -------------------------------------------------
Income from continuing operations 377 1,214 1,202 1,080 1,038
Income from discontinued operations, net of tax 5 65 62 35 14
- ------------------------------------------------------------------------ -------------------------------------------------
Net income before cumulative effect of accounting change 382 1,279 1,264 1,115 1,052
Cumulative effect of accounting change, net of tax (5)
- ------------------------------------------------------------------------ -------------------------------------------------
Net income $377 $1,279 $1,264 $1,115 $1,052
======================================================================== =================================================
PER COMMON SHARE
Basic earnings
Continuing operations $1.27 $4.12 $3.98 $3.53 $3.29
Discontinued operations .02 .23 .21 .11 .04
- ------------------------------------------------------------------------ -------------------------------------------------
Before cumulative effect of accounting change 1.29 4.35 4.19 3.64 3.33
Cumulative effect of accounting change (.02)
- ------------------------------------------------------------------------ -------------------------------------------------
Net income $1.27 $4.35 $4.19 $3.64 $3.33
======================================================================== =================================================
Diluted earnings
Continuing operations $1.26 $4.09 $3.94 $3.49 $3.24
Discontinued operations .02 .22 .21 .11 .04
- ------------------------------------------------------------------------ -------------------------------------------------
Before cumulative effect of accounting change 1.28 4.31 4.15 3.60 3.28
Cumulative effect of accounting change (.02)
- ------------------------------------------------------------------------ -------------------------------------------------
Net income $1.26 $4.31 $4.15 $3.60 $3.28
======================================================================== =================================================
Book value (At December 31) $20.54 $21.88 $19.23 $18.86 $16.87
Cash dividends declared $1.92 $1.83 $1.68 $1.58 $1.50
======================================================================== =================================================
</TABLE>
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. Certain
prior-period amounts have been reclassified to conform with the current year
presentation. For information regarding certain business risks, see the Risk
Factors and Risk Management sections in this Financial Review. Also, see the
Forward-Looking Statements section in this Financial Review for certain other
factors that could cause actual results to differ materially from
forward-looking statements or historical performance.
26
<PAGE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------
At or Year ended December 31
----------------------------------------------------------------------
Dollars in millions 2001 2000 1999 1998 1997
======================================================================== ===================================================
<S> <C> <C> <C> <C> <C>
BALANCE SHEET HIGHLIGHTS
Assets $69,568 $69,844 $69,286 $70,754 $71,694
Earning assets 57,875 59,373 60,268 63,547 63,798
Loans, net of unearned income 37,974 50,601 49,673 57,633 54,235
Securities 13,908 5,902 5,960 4,472 8,040
Loans held for sale 4,189 1,655 3,477 467 18
Deposits 47,304 47,664 45,802 46,150 46,956
Borrowed funds 12,090 11,718 14,229 15,939 16,958
Shareholders' equity 5,823 6,656 5,946 6,043 5,384
Common shareholders' equity 5,813 6,344 5,633 5,729 5,069
- ------------------------------------------------------------------------ ---------------------------------------------------
SELECTED RATIOS
FROM CONTINUING OPERATIONS
Return on
Average common shareholders' equity 5.65% 20.52% 21.29% 20.14% 19.74%
Average assets .54 1.76 1.76 1.55 1.52
Net interest margin 3.84 3.64 3.86 3.99 3.98
Noninterest income to total revenue 52.7 57.0 50.9 45.4 39.6
Efficiency (a) 65.39 56.85 55.54 54.81 55.33
FROM NET INCOME
Return on
Average common shareholders' equity 5.65 21.63 22.41 20.81 20.01
Average assets .53 1.68 1.69 1.49 1.49
Net interest margin 3.81 3.37 3.68 3.85 3.94
Noninterest income to total revenue 52.8 59.3 52.8 47.0 41.3
Efficiency (a) 65.27 55.17 54.82 54.76 56.07
Loans to deposits 80 106 108 125 116
Dividend payout 151.65 42.06 40.22 43.43 45.39
Leverage (b) 6.8 8.0 6.6 7.3 7.3
Common shareholders' equity to assets 8.36 9.08 8.13 8.10 7.07
Average common shareholders' equity to average
assets 9.15 8.44 8.13 7.56 7.57
======================================================================== ===================================================
</TABLE>
(a) The efficiency ratio is noninterest expense divided by the sum of
taxable-equivalent net interest income and noninterest income.
Amortization, distributions on capital securities and mortgage banking risk
management activities are excluded for purposes of computing this ratio.
Excluding the impact of charges in 2001 related to strategic initiatives
and additions to reserves related to insured residual value exposures, the
efficiency ratios from continuing operations and from net income were
58.14% and 58.07%, respectively.
(b) Includes discontinued operations in the years 1997 through 1999.
27
<PAGE>
OVERVIEW
THE PNC FINANCIAL SERVICES GROUP, INC.
The Corporation is one of the largest diversified financial services companies
in the United States, operating businesses engaged in regional community
banking, corporate banking, real estate finance, asset-based lending, wealth
management, asset management and global fund services. The Corporation provides
certain products and services nationally and others in PNC's primary geographic
markets in Pennsylvania, New Jersey, Delaware, Ohio and Kentucky. The
Corporation also provides certain banking, asset management and global fund
services internationally.
The most significant events affecting PNC's financial results in 2001 were
the actions PNC took to reposition its banking businesses. The impact of these
and other actions resulted in charges totaling $1.181 billion or $768 million
after tax.
PNC continues to pursue strategies to build a more diverse and valuable
business mix designed to create shareholder value over time. PNC's focus is on
increasing the contribution from more highly-valued businesses such as asset
management and processing while reducing lending leverage and improving the
risk/return characteristics of traditional banking businesses. BlackRock and
PFPC continued to grow revenues at attractive rates and contributed an
increasing proportion of the Corporation's earnings. While PNC Advisors was
adversely impacted by weak equity market conditions in 2001, customer growth
continued with further investment in the sales and brokerage force.
PNC's goal is to derive a greater proportion of its revenue from less
volatile, fee-based products and services. Over the past three years, PNC has
reduced loans by $20 billion and unfunded loan commitments by $25 billion and
the loans to deposits ratio has improved from 121% at December 31, 1998 to 80%
at December 31, 2001. The term "loans" in this report excludes loans held for
sale and securities that represent interests in pools of loans.
STRATEGIC REPOSITIONING
PNC took several actions in 2001 to accelerate the strategic repositioning of
its lending businesses that began in 1998. Loans were reduced $12.6 billion from
year end 2000 primarily due to residential mortgage securitizations and runoff,
transfers to held for sale and the managed reduction of institutional loans. A
total of $12.0 billion of credit exposure (comprised of loans outstanding,
unfunded commitments and letters of credit) including $6.2 billion of
outstandings were designated for exit or sale during the year, of which $10.1
billion and $4.3 billion, respectively, related to the institutional lending
portfolio. The remaining credit exposure and outstandings related to PNC's
vehicle leasing business that it decided to discontinue.
Historically, vehicle leasing had provided appropriate returns at
reasonable risk with returns primarily dependent upon residual value insurance
protection. Recently, circumstances in the vehicle leasing industry have changed
as depressed market conditions combined with manufacturers' pricing incentives
have significantly dampened revenues and weakened the used car market. In
addition, residual value protection has become more difficult and significantly
more costly to obtain. Also, in the fourth quarter of 2001 one of the companies
that issued residual value insurance policies to PNC was placed in liquidation.
PNC's vehicle leasing business had $1.9 billion in assets at December 31, 2001
that have been designated for exit and are expected to mature over a period of
approximately five years. Costs incurred in 2001 to exit this business and
additions to reserves related to insured residual value exposures totaled $135
million.
In connection with these repositioning actions and other strategic
initiatives, $1.2 billion of pretax charges were taken in 2001 as detailed in
the tables below. The charges related to institutional lending repositioning
reflect adjustments to market value that include the impact of deterioration in
asset quality and market liquidity conditions, among other factors.
DETAILS OF STRATEGIC REPOSITIONING CHARGES
Year ended December 31, 2001 - in millions Pretax charges
================================================================
Institutional lending repositioning $973
Vehicle leasing 135
Asset impairment and severance costs 37
Facilities consolidation and other charges 36
- ----------------------------------------------------------------
Total charges $1,181
================================================================
STRATEGIC REPOSITIONING CHARGES BY BUSINESS
Year ended December 31, 2001 - in millions Pretax charges
================================================================
Corporate Banking $907
Regional Community Banking 148
PNC Business Credit 48
PFPC 36
PNC Real Estate Finance 35
Other 7
- ----------------------------------------------------------------
Total $1,181
================================================================
28
<PAGE>
STRATEGIC REPOSITIONING CHARGES
BY INCOME STATEMENT CAPTION
Year ended December 31, 2001 - in millions Pretax charges
================================================================================
Provision for credit losses $714
Noninterest income
Corporate services 259
Net securities gains 5
Other 12
Noninterest expense
Staff expense 21
Equipment 1
Other 169
- --------------------------------------------------------------------------------
Total $1,181
================================================================================
At December 31, 2001, the institutional lending held for sale and exit
portfolios had a total of $7.7 billion of credit exposure including $2.8 billion
of outstandings. At year end, $5.0 billion of credit exposure including $2.6
billion of outstandings was classified as held for sale, net of total charges of
$855 million that represented the excess of principal balances over the lower of
cost or market values. Details of the credit exposure and outstandings by
business are as follows:
INSTITUTIONAL LENDING HELD FOR SALE AND EXIT PORTFOLIOS
Credit
December 31, 2001 - in billions Exposure Outstandings
================================================================================
LOANS HELD FOR SALE
Corporate Banking $4.6 $2.3
PNC Real Estate Finance .3 .2
PNC Business Credit .1 .1
- --------------------------------------------------------------------------------
Total loans held for sale 5.0 2.6
EXIT
Corporate Banking 2.6 .2
PNC Real Estate Finance .1
- --------------------------------------------------------------------------------
Total exit 2.7 .2
- --------------------------------------------------------------------------------
Total $7.7 $2.8
================================================================================
In the first quarter of 2001, PNC closed the sale of its residential mortgage
banking business. Certain closing date adjustments are currently in dispute
between PNC and the buyer, Washington Mutual Bank, FA. The ultimate financial
impact of the sale cannot be determined until the disputes are resolved. See
Note 24 Legal Proceedings for additional information.
See Strategic Repositioning in the Risk Factors section of this Financial
Review for additional information regarding certain risks associated with
executing these strategies.
RESTATEMENTS
Subsequent to year end, PNC announced two changes that affected 2001 results.
During 2001, the Corporation entered into transactions with subsidiaries of a
third party financial institution (American International Group, Inc.) involving
the sale of loans and venture capital investments and the receipt of preferred
interests in the subsidiaries.
At the time of the transactions, the loans and venture capital investments
were removed from PNC's balance sheet and the preferred interests in the
entities were recorded as securities available for sale in conformity with
accounting guidance received from PNC's independent auditors. In January 2002,
the Federal Reserve Board staff advised PNC that under generally accepted
accounting principles the subsidiaries of the third party financial institution
should be consolidated into the financial statements of PNC in preparing bank
holding company reports. After considering all the circumstances, PNC restated
its consolidated financial statements for the second and third quarters of 2001
to conform financial reporting with regulatory reporting requirements. All
amounts appearing in this report reflect the consolidation of these entities.
Loans in these entities are included in the consolidated balance sheet as
loans held for sale and are carried at the lower of cost or market value.
Charges recorded at the dates the assets were sold into the entities were
reflected as charge-offs on those loans in portfolio and as valuation
adjustments in noninterest income on loans previously classified as held for
sale. Subsequent charges to adjust the carrying value of the loans held for sale
were also reflected as valuation adjustments.
The amounts contained in this report also include the restatement of the
results for the first quarter of 2001 to reflect the correction of an error
related to the accounting for the sale of the residential mortgage banking
business. This restatement reduced income from discontinued operations and net
income for 2001 by $35 million.
See Note 3 Restatements for additional information.
SUMMARY FINANCIAL RESULTS
Consolidated net income for 2001 was $377 million or $1.26 per diluted share.
Excluding the effect of adopting the new accounting standard for financial
derivatives, net income was $382 million or $1.28 per diluted share compared
with $1.279 billion or $4.31 per diluted share for 2000. Income from continuing
operations in 2001 was $377 million or $1.26 per diluted share compared with
$1.214 billion or $4.09 per diluted share in 2000. Income from discontinued
operations was $5 million or $.02 per diluted share in 2001 compared with $65
million or $.22 per diluted share in 2000. Results for 2001 reflect the actions
taken during the year to accelerate the repositioning of PNC's lending
businesses and other strategic initiatives. These charges, totaling $1.2 billion
pretax, reduced 2001 net income by $768 million or $2.65 per diluted share.
Return on average common shareholders' equity was 5.65% and return on
average assets was .53% for 2001 compared with 21.63% and 1.68%, respectively,
for 2000.
29
<PAGE>
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. The remainder of the
presentation in this Financial Review reflects continuing operations, unless
otherwise noted.
Taxable-equivalent net interest income of $2.278 billion for 2001 increased
4% compared with 2000. The increase was primarily due to the impact of
transaction deposit growth and a lower rate environment that was partially
offset by the impact of continued downsizing of the loan portfolio. The net
interest margin widened 20 basis points to 3.84% for 2001 compared with 3.64%
for 2000. The increase was primarily due to the impact of the lower rate
environment, the benefit of growth in transaction deposits and the downsizing of
higher-cost, less valuable retail certificates and wholesale deposits.
The provision for credit losses was $903 million for 2001, which included
expense of $714 million associated with the institutional lending repositioning
initiatives described above. The provision was $136 million in 2000.
Noninterest income was $2.543 billion for 2001 compared with $2.891 billion
in 2000. Noninterest income in 2001 included charges of $259 million for
valuation adjustments on loans held for sale related to the institutional
lending repositioning and $17 million of charges for asset impairments
associated with other strategic initiatives. A $111 million increase in net
securities gains and growth in asset management, fund servicing, consumer
services and other revenue was more than offset by net losses of $179 million
resulting from lower valuations of equity management investments as well as
reduced brokerage and corporate services revenue as a result of lower capital
markets activity.
Noninterest expense was $3.338 billion for 2001 compared with $3.071
billion for 2000. Excluding charges in 2001 of $135 million related to PNC's
vehicle leasing business and $56 million of integration and severance costs
related to downsizing and other strategic initiatives, noninterest expense
increased 2% compared with 2000.
Total assets were $69.6 billion at December 31, 2001 compared with $69.8
billion at December 31, 2000. At December 31, 2001, loans were $38 billion and
loans held for sale were $4.2 billion, including $2.6 billion of institutional
loans held for sale. At December 31, 2000, loans were $50.6 billion and loans
held for sale were $1.7 billion, consisting primarily of student loans. Average
interest-earning assets were $59.3 billion for 2001 compared with $59.9 billion
for 2000. A decline in average loans and average loans held for sale was largely
offset by an increase in average securities available for sale.
Shareholders' equity totaled $5.8 billion at December 31, 2001 compared
with $6.7 billion at December 31, 2000. The payment of dividends, the impact of
share buybacks, the retirement of preferred stock and lower earnings in 2001
accounted for the decline. During 2001, PNC repurchased 9.5 million shares of
common stock and purchased and retired preferred stock for $301 million. The
regulatory capital ratios were 6.8% for leverage, 7.8% for tier I risk-based and
11.8% for total risk-based capital at December 31, 2001 compared with 8.0% for
leverage, 8.6% for tier I risk-based and 12.6% for total risk-based capital at
December 31, 2000.
Nonperforming assets were $391 million at December 31, 2001 compared with
$372 million at December 31, 2000. The ratio of nonperforming assets to total
loans, loans held for sale and foreclosed assets was .93% at December 31, 2001
compared with .71% at December 31, 2000.
The allowance for credit losses was $630 million and represented 1.66% of
total loans and 299% of nonaccrual loans at December 31, 2001. The comparable
amounts were $675 million, 1.33% and 209%, respectively, at December 31, 2000.
See Note 11 Allowance For Credit Losses, Critical Accounting Policies and
Judgments in the Risk Factors section and Credit Risk in the Risk Management
section of this Financial Review.
2002 OPERATING ENVIRONMENT
Management expects 2002 will be another challenging year with a weak economy and
moderate capital markets recovery, if any. The following challenges, and the
Corporation's success in addressing them, will be among the factors that
influence PNC's 2002 operating results and its ability to redeploy capital,
mitigate or avoid additional valuation charges to earnings, and meet revenue and
earnings targets for 2002:
- - Expeditious disposition of loans held for sale without significant
valuation losses;
- - Maintaining stable asset quality in all loan portfolios;
- - Successfully integrating the National Bank of Canada ("NBOC") asset-based
lending acquisition and managing the related serviced portfolio as
described on page 35;
- - Continuing to invest in and sustain revenue growth of fee-based businesses
such as asset management and processing notwithstanding market volatility
and intense competition; and
- - Continuing to improve the risk/return dynamics of traditional banking
businesses by building value-added customer relationships, leveraging
technology and managing the revenue/expense relationship.
See the Risk Factors, Risk Management and Forward-Looking Statements sections of
this Financial Review for additional information.
30
<PAGE>
REVIEW OF BUSINESSES
PNC operates seven major businesses engaged in regional community banking,
corporate banking, real estate finance, asset-based lending, wealth management,
asset management and global fund services.
Results of individual businesses are presented based on PNC's management
accounting practices and the Corporation's management structure. There is no
comprehensive, authoritative body of guidance for management accounting
equivalent to generally accepted accounting principles; therefore, the financial
results of individual businesses are not necessarily comparable with similar
information for any other financial services institution. Financial results are
presented, to the extent practicable, as if each business operated on a
stand-alone basis.
The management accounting process uses various balance sheet and income
statement assignments and transfers to measure performance of the businesses.
Methodologies change from time to time as management accounting practices are
enhanced and businesses change. Securities available for sale or borrowings and
related net interest income are assigned based on the net asset or liability
position of each business. Capital is assigned based on management's assessment
of inherent risks and equity levels at independent companies providing similar
products and services. The allowance for credit losses is allocated based on
management's assessment of risk inherent in the loan portfolios. Support areas
not directly aligned with the businesses are allocated primarily based on the
utilization of services.
Total business financial results differ from consolidated results from
continuing operations primarily due to differences between management accounting
practices and generally accepted accounting principles, equity management
activities, minority interest in income of consolidated entities, residual asset
and liability management activities, unallocated reserves, eliminations and
unassigned items, the impact of which is reflected in the "Other" category.
Details of inter-segment revenues are included in Note 26 Segment Reporting. The
operating results and financial impact of the disposition of the residential
mortgage banking business, previously PNC Mortgage, are included in discontinued
operations.
The impact of the institutional lending repositioning and other strategic
actions that occurred during 2001 is reflected in the business results presented
in the table below. The charges are separately identified in the business income
statements. Performance ratios in the results of individual businesses reflect
the impact of the charges.
RESULTS OF BUSINESSES
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------
Return on
Earnings (Net Loss) Revenue (a) Assigned Capital Average Assets
----------------------------------------------------------------------------------
Year ended December 31 - dollars in
millions 2001 2000 2001 2000 2001 2000 2001 2000
===========================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Banking Businesses
Regional Community Banking $596 $590 $2,231 $2,033 22% 22% $40,285 $38,958
Corporate Banking (375) 241 764 844 (30) 18 16,685 17,746
PNC Real Estate Finance 38 84 213 229 10 21 5,290 5,889
PNC Business Credit 22 49 134 119 13 32 2,463 2,271
- ------------------------------------------------------------------------------------ ------------------
Total banking businesses 281 964 3,342 3,225 6 21 64,723 64,864
Asset Management and Processing
PNC Advisors 143 173 735 792 26 32 3,330 3,500
BlackRock 107 87 533 477 25 27 684 537
PFPC 36 47 738 674 17 22 1,771 1,578
- ------------------------------------------------------------------------------------ ------------------
Total asset management and
processing 286 307 2,006 1,943 24 28 5,785 5,615
- ------------------------------------------------------------------------------------ ------------------
Total business results 567 1,271 5,348 5,168 10 23 70,508 70,479
Other (190) (57) (527) (95) (153) (1,988)
- ------------------------------------------------------------------------------------ ------------------
Results from continuing operations 377 1,214 4,821 5,073 6 21 70,355 68,491
Discontinued operations 5 65 51 487
- ------------------------------------------------------------------------------------ ------------------
Results before cumulative effect of
accounting change 382 1,279 4,821 5,073 6 22 70,406 68,978
Cumulative effect of accounting change (5)
- ----------------------------------------------------------------------------------------------------------------------------
Total consolidated - as reported $377 $1,279 $4,821 $5,073 6 22 $70,406 $68,978
============================================================================================================================
</TABLE>
(a) Business revenues are presented on a taxable-equivalent basis except for
BlackRock and PFPC.
31
<PAGE>
REGIONAL COMMUNITY BANKING
Year ended December 31
Taxable-equivalent basis
Dollars in millions 2001 2000
================================= =========== ===========
INCOME STATEMENT
Net interest income $1,466 $1,414
Other noninterest income 679 608
Net securities gains 86 11
- --------------------------------- ----------- -----------
Total revenue 2,231 2,033
Provision for credit losses 50 45
Noninterest expense 1,099 1,071
Vehicle leasing 135
Asset impairment and severance costs 13
- ------------------------------------- ------- -----------
Pretax earnings 934 917
Income taxes 338 327
- --------------------------------- ----------- -----------
Earnings $596 $590
- --------------------------------- ----------- -----------
AVERAGE BALANCE SHEET
Loans
Consumer
Home equity $6,293 $5,419
Indirect automobile 814 1,215
Other consumer 835 897
- --------------------------------- ----------- -----------
Total consumer 7,942 7,531
Residential mortgage 7,912 11,619
Commercial 3,557 3,649
Vehicle leasing 1,901 1,322
Other 133 144
- --------------------------------- ----------- -----------
Total loans 21,445 24,265
Securities available for sale 10,241 5,539
Loans held for sale 1,293 1,297
Assigned assets and other assets 7,306 7,857
- --------------------------------- ----------- -----------
Total assets $40,285 $38,958
- --------------------------------- ----------- -----------
Deposits
Noninterest-bearing demand $4,571 $4,548
Interest-bearing demand 5,713 5,428
Money market 12,162 10,253
- --------------------------------- ----------- -----------
Total transaction deposits 22,446 20,229
Savings 1,870 1,992
Certificates 11,906 13,745
- --------------------------------- ----------- -----------
Total deposits 36,222 35,966
Other liabilities 1,345 363
Assigned capital 2,718 2,629
- --------------------------------- ----------- -----------
Total funds $40,285 $38,958
- --------------------------------- ----------- -----------
PERFORMANCE RATIOS
Return on assigned capital 22% 22%
Noninterest income to total revenue 34 30
Efficiency 54 51
================================= =========== ===========
Regional Community Banking provides deposit, branch-based brokerage, electronic
banking and credit products and services to retail customers as well as deposit,
credit, treasury management and capital markets products and services to small
businesses primarily within PNC's geographic region.
Regional Community Banking's strategic focus is on driving sustainable
revenue growth, aggressively managing the revenue/expense relationship and
improving the risk/return dynamic of this business. Regional Community Banking
utilizes knowledge-based marketing capabilities to analyze customer demographic
information, transaction patterns and delivery preferences to develop customized
banking packages focused on improving customer satisfaction and profitability.
Regional Community Banking has also invested heavily in building a sales
culture and infrastructure while improving efficiency. Capital investments have
been strategically directed towards the expansion of multi-channel distribution,
consistent with customer preferences, as well as the delivery of relevant
customer information to all distribution channels.
In the fourth quarter of 2001, the Corporation made the decision to
discontinue its vehicle leasing business. This portfolio is expected to mature
over a period of approximately five years. Costs incurred in 2001 to exit this
business and additions to reserves related to insured residual value exposures
totaled $135 million. See Strategic Repositioning and Critical Accounting
Policies and Judgments in the Risk Factors section of this Financial Review for
additional information. Also, pretax charges of $13 million were incurred for
asset impairment and severance costs related to other strategic initiatives.
Regional Community Banking earnings were $596 million in 2001 compared with
$590 million in 2000.
Total revenue increased 10% to $2.231 billion for 2001. Excluding net
securities gains from both periods, revenue increased 6% in the period-to-period
comparison primarily due to higher consumer transaction deposit activity in
2001, gains on sales of residential mortgage loans and sales of student loans in
repayment.
The provision for credit losses for 2001 was $50 million compared with $45
million for 2000. See Critical Accounting Policies and Judgments in the Risk
Factors section and Credit Risk in the Risk Management section of this Financial
Review for additional information.
Total loans decreased in the comparison primarily due to the reduction of
residential mortgage loans resulting from sales and securitizations and the
continued downsizing of the indirect automobile lending portfolio. Securities
available for sale increased in the year-to-year comparison due to the retention
of interests from the securitization of residential mortgage loans combined with
net securities purchases for balance sheet and interest rate risk management
activities.
Transaction deposits grew 11% on average in the comparison primarily driven
by an increase in money market deposits that resulted from targeted consumer
marketing initiatives to add new accounts and retain existing customers as
higher cost certificates of deposit were de-emphasized.
32
<PAGE>
CORPORATE BANKING
Year ended December 31
Taxable-equivalent basis ------------------------
Dollars in millions 2001 2000
==========================================================
INCOME STATEMENT
Credit-related revenue $408 $411
Noncredit revenue 356 433
- ----------------------------------------------------------
Total revenue 764 844
Provision for credit losses 57 79
Noninterest expense 381 394
Institutional lending
repositioning 891
Asset impairment and severance
costs 16
- ----------------------------------------------------------
Pretax (loss) earnings (581) 371
Income tax (benefit) expense (206) 130
- ----------------------------------------------------------
(Net loss) earnings $(375) $241
==========================================================
AVERAGE BALANCE SHEET
Loans
Middle market $5,811 $6,553
Large corporate 3,103 3,193
Energy, metals and mining 1,233 1,507
Communications 1,110 1,501
Leasing 2,322 1,844
Other 328 357
- ----------------------------------------------------------
Total loans 13,907 14,955
Loans held for sale 367 800
Other assets 2,411 1,991
- ----------------------------------------------------------
Total assets $16,685 $17,746
==========================================================
Deposits $4,729 $4,701
Assigned funds and other
liabilities 10,705 11,714
Assigned capital 1,251 1,331
- ----------------------------------------------------------
Total funds $16,685 $17,746
==========================================================
PERFORMANCE RATIOS
Return on assigned capital (30)% 18%
Noncredit revenue to total
revenue 64 51
Efficiency 71 46
==========================================================
Corporate Banking provides credit, equipment leasing, treasury management and
capital markets products and services primarily to mid-sized corporations and
government entities within PNC's geographic region. The strategic focus for
Corporate Banking is to adapt its institutional expertise to the middle market
with an emphasis on higher-margin noncredit products and services, especially
treasury management and capital markets, and to improve the risk/return
characteristics of its institutional lending business.
During 2001, Corporate Banking took actions to accelerate the repositioning
of its institutional lending business. A total of $9.7 billion of credit
exposure including $4.0 billion of outstandings were designated for exit or
sale. Charges related to these actions were $891 million, including $41 million
of charge-offs on loans designated for exit in the first quarter of 2001.
Institutional lending credits designated for exit or sale were primarily in the
communications portfolio, certain portions of the energy, metals and mining and
large corporate portfolios, and relationships where the potential for future
returns was considered unacceptable in relation to risk. At December 31, 2001,
the exit and held for sale portfolios had total credit exposure of $7.2 billion
including outstandings of $2.5 billion. Of these amounts, $4.6 billion and $2.3
billion, respectively, were classified as held for sale, net of charges of $850
million that represented the excess of principal balances outstanding over the
lower of cost or market values. The Corporation is pursuing opportunities to
liquidate the held for sale portfolio expeditiously. Gains and losses may result
from the liquidation of loans held for sale to the extent actual performance
differs from estimates inherent in the recorded amounts or market valuations
change. See Strategic Repositioning and Critical Accounting Policies and
Judgments in the Risk Factors section of this Financial Review for additional
information. Additionally, a pretax charge of $16 million was incurred in 2001
for asset impairment and severance costs.
Corporate Banking incurred a net loss of $375 million in 2001 compared with
earnings of $241 million in 2000.
Total revenue of $764 million for 2001 decreased $80 million compared with
2000. Credit-related revenue decreased 1% compared with 2000 as the impact of a
wider net interest margin was more than offset by a decrease in average loans.
The decrease in average loans in 2001 was primarily due to downsizing partially
offset by the expansion of equipment leasing. Noncredit revenue includes
noninterest income and the benefit of compensating balances received in lieu of
fees. Noncredit revenue decreased $77 million compared with 2000 primarily due
to the impact of weak capital market conditions that resulted in lower capital
markets fees and losses resulting from lower valuations of equity investments.
Total credit costs in the 2001 consolidated provision for credit losses
were $733 million, including $57 million reflected in the Corporate Banking
provision for credit losses and $676 million reflected in the institutional
lending repositioning charge that represented net charge-offs. Additionally, $76
million was charged against the allowance for credit losses. The institutional
lending repositioning charge also included $215 million of valuation adjustments
related to loans held for sale. The provision for credit losses was $79 million
in 2000. See Strategic Repositioning and Critical Accounting Policies and
Judgments in the Risk Factors section and Credit Risk in the Risk Management
section of this Financial Review for additional information.
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 $331 million for 2001 compared with $341
million for 2000. Increases in fee revenue were more than offset by lower income
earned on customers' deposit balances resulting from the lower interest rate
environment in 2001 and the impact of downsizing institutional lending.
Consolidated revenue from capital markets was $123 million for 2001, a $10
million decrease compared with 2000 due to weak capital market conditions and
the impact of changing customer relationships due to downsizing certain lending
portfolios.
33
<PAGE>
PNC REAL ESTATE FINANCE
Year ended December 31
Taxable-equivalent basis ------------------------
Dollars in millions 2001 2000
==========================================================
INCOME STATEMENT
Net interest income $118 $121
Noninterest income
Commercial mortgage banking 58 68
Other 37 40
- ----------------------------------------------------------
Total noninterest income 95 108
- ----------------------------------------------------------
Total revenue 213 229
Provision for credit losses 16 (7)
Noninterest expense 157 145
Institutional lending
repositioning 34
Severance costs 1
- ----------------------------------------------------------
Pretax earnings 5 91
Income tax (benefit) expense (33) 7
- ----------------------------------------------------------
Earnings $38 $84
==========================================================
AVERAGE BALANCE SHEET
Loans
Commercial real estate $2,337 $2,427
Commercial - real estate
related 1,751 2,118
- ----------------------------------------------------------
Total loans 4,088 4,545
Commercial mortgages held for sale 279 396
Other assets 923 948
- ----------------------------------------------------------
Total assets $5,290 $5,889
==========================================================
Deposits $518 $697
Assigned funds and other
liabilities 4,375 4,784
Assigned capital 397 408
- ----------------------------------------------------------
Total funds $5,290 $5,889
==========================================================
PERFORMANCE RATIOS
Return on assigned capital 10% 21%
Noninterest income to total
revenue 43 47
Efficiency 60 51
==========================================================
PNC Real Estate Finance provides credit, capital markets, treasury management,
commercial mortgage loan servicing and other financial products and services to
developers, owners and investors in commercial real estate. PNC's commercial
real estate financial services platform provides processing services through
Midland Loan Services, Inc., a leading third-party provider of loan servicing
and technology to the commercial real estate finance industry, and national
syndication of affordable housing equity through Columbia Housing Partners, LP
("Columbia").
On October 17, 2001, PNC completed the acquisition of certain lending and
servicing-related business from TRI Acceptance Corporation. The acquisition
expands PNC Real Estate Finance's reach in multi-family finance, combining
permanent loan capacity with PNC's traditional interim lending activities and
Columbia's tax credit syndication capabilities.
Over the past three years, PNC Real Estate Finance has been strategically
shifting to a more balanced and valuable revenue stream by focusing on real
estate processing businesses and increasing the value of its lending business by
seeking to sell more fee-based products.
During 2001, PNC Real Estate Finance took actions to accelerate the
downsizing of its institutional lending business. A total of $400 million of
credit exposure including $250 million of outstandings were designated for exit
or held for sale. Charges related to these actions were $34 million. At December
31, 2001, $324 million of credit exposure including $244 million of outstandings
were classified as held for sale, net of charges of $34 million that represented
the excess of principal balances outstanding over the lower of cost or market
values. See Strategic Repositioning and Critical Accounting Policies and
Judgments in the Risk Factors section of this Financial Review for additional
information. A $1 million pretax charge for severance costs was incurred in
2001.
PNC Real Estate Finance earned $38 million in 2001 compared with $84
million in 2000.
Total revenue was $213 million for 2001 compared with $229 million for
2000. The decrease was primarily due to higher amortization of servicing
intangibles caused by lower interest rates and lower commercial mortgage-backed
securitization gains. The commercial mortgage servicing portfolio increased 26%
to $68 billion at December 31, 2001 as shown below:
COMMERCIAL MORTGAGE SERVICING PORTFOLIO
In billions 2001 2000
================================ ============= ============
January 1 $54 $45
Acquisitions/additions 25 17
Repayments/transfers (11) (8)
- -------------------------------- ------------- ------------
December 31 $68 $54
================================ ============= ============
Total credit costs in the 2001 consolidated provision for credit losses were $44
million, including $16 million reflected in the PNC Real Estate Finance
provision for credit losses and $28 million reflected in the institutional
lending repositioning charge that represented net charge-offs. Additionally, $14
million was charged against the allowance for credit losses. The institutional
lending repositioning charge also included $6 million of valuation adjustments
related to loans held for sale. The provision for 2000 reflected a net recovery
of $7 million. See Critical Accounting Policies and Judgments in the Risk
Factors section and Credit Risk in the Risk Management section of this Financial
Review for additional information.
Noninterest expense was $157 million for 2001 compared with $145 million in
the prior year. The increase was primarily due to non-cash (passive) losses on
affordable housing investments that were more than offset by related income tax
credits.
34
<PAGE>
PNC BUSINESS CREDIT
Year ended December 31
Taxable-equivalent basis ------------------------
Dollars in millions 2001 2000
==========================================================
INCOME STATEMENT
Net interest income $104 $99
Noninterest income 30 20
- ----------------------------------------------------------
Total revenue 134 119
Provision for credit losses 19 12
Noninterest expense 31 30
Institutional lending
repositioning 48
- ----------------------------------------------------------
Pretax earnings 36 77
Income taxes 14 28
- ----------------------------------------------------------
Earnings $22 $49
==========================================================
AVERAGE BALANCE SHEET
Loans $2,331 $2,197
Loans held for sale 72 24
Other assets 60 50
- ----------------------------------------------------------
Total assets $2,463 $2,271
==========================================================
Deposits $77 $66
Assigned funds and other
liabilities 2,223 2,053
Assigned capital 163 152
- ----------------------------------------------------------
Total funds $2,463 $2,271
==========================================================
PERFORMANCE RATIOS
Return on assigned capital 13% 32%
Efficiency 30 24
==========================================================
PNC Business Credit provides asset-based lending, capital markets and treasury
management products and services to middle market customers nationally. PNC
Business Credit's lending services include loans secured by accounts receivable,
inventory, machinery and equipment, and other collateral, and its customers
include manufacturing, wholesale, distribution, retailing and service industry
companies.
In January 2002, PNC Business Credit acquired a portion of the U.S.
asset-based lending business of NBOC. As a result of this acquisition, PNC
Business Credit established six new marketing offices and enhanced its presence
as one of the premier asset-based lenders for the middle market customer
segment. At the acquisition date, credit exposure acquired was approximately
$2.6 billion including $1.5 billion of loan outstandings. None of the loans were
nonperforming at acquisition.
Additionally, PNC Business Credit agreed to service a portion of NBOC's
remaining U.S. asset-based loan portfolio ("serviced portfolio") for a period of
eighteen months. The serviced portfolio consisted of approximately $670 million
of credit exposure including $463 million of outstandings as of the acquisition
date. At closing, $138 million of these outstandings were classified as
nonperforming. The serviced portfolio's credit exposure and outstandings are
expected to be reduced through managed liquidation and runoff during the
eighteen-month servicing period. At the end of the servicing term, NBOC has the
right to transfer the then remaining serviced portfolio to PNC Business Credit.
PNC Business Credit established a liability of $112 million in 2002 as part of
the allocation of the purchase price to reflect this obligation. The amount of
this liability will be assessed quarterly with any changes recognized in
earnings. During the servicing term, NBOC will be responsible for realized
credit losses with respect to the serviced portfolio to a maximum of $50
million. If the right to transfer is exercised, the Corporation is responsible
for realized credit losses on the serviced portfolio that may occur during the
eighteen-month period in excess of certain NBOC specific reserves related to
those assets, when applicable (available only on specified credits), and the $50
million first loss position. PNC Business Credit management currently expects
the amounts indicated above to be adequate to cover potential losses in
connection with the serviced portfolio.
During 2001, as part of the overall lending repositioning, a total of $88
million of credit exposure including $78 million of outstandings was designated
for sale. At December 31, 2001, $40 million of credit exposure including $30
million of outstandings was classified as held for sale, net of charges of $48
million that represented the excess of principal balances outstanding over the
lower of cost or market values. See Strategic Repositioning and Critical
Accounting Policies and Judgments in the Risk Factors section of this Financial
Review for additional information.
PNC Business Credit earnings were $22 million in 2001 compared with $49
million in 2000.
Revenue was $134 million for 2001, a $15 million or 13% increase compared
with 2000 primarily due to higher net interest income, as a result of loan
growth, and higher noninterest income. The increase in noninterest income
primarily resulted from gains on sales of equity interests received as
compensation in conjunction with lending relationships. Such gains, if any, are
recognized infrequently and may produce variability in revenues from period to
period.
Total credit costs in the 2001 consolidated provision for credit losses
were $29 million, including $19 million reflected in the PNC Business Credit
provision for credit losses and $10 million reflected in the institutional
lending repositioning charge that represented net charge-offs. The institutional
lending repositioning charge also included $38 million of valuation adjustments
related to loans held for sale. The provision for credit losses was $12 million
in 2000. PNC Business Credit loans are secured loans to borrowers, many with a
weaker credit risk rating. As a result, these loans exhibit a higher risk of
default. PNC Business Credit attempts to mitigate this risk through higher
interest rates, direct control of cash flows, and collateral. The impact of
these loans on the provision for credit losses and the level of nonperforming
assets may be even more pronounced during periods of economic downturn. See
Critical Accounting Policies and Judgments in the Risk Factors section and
Credit Risk in the Risk Management section of this Financial Review for
additional information.
35
<PAGE>
PNC ADVISORS
Year ended December 31
Taxable-equivalent basis ------------------------
Dollars in millions 2001 2000
==========================================================
INCOME STATEMENT
Net interest income $128 $136
Noninterest income
Investment management and trust 393 421
Brokerage 130 171
Other 84 64
- ----------------------------------------------------------
Total noninterest income 607 656
- ----------------------------------------------------------
Total revenue 735 792
Provision for credit losses 2 5
Noninterest expense 504 511
- ----------------------------------------------------------
Pretax earnings 229 276
Income taxes 86 103
- ----------------------------------------------------------
Earnings $143 $173
==========================================================
AVERAGE BALANCE SHEET
Loans
Consumer $1,103 $965
Residential mortgage 848 962
Commercial 528 602
Other 384 532
- ----------------------------------------------------------
Total loans 2,863 3,061
Other assets 467 439
- ----------------------------------------------------------
Total assets $3,330 $3,500
==========================================================
Deposits $2,058 $2,034
Assigned funds and other
liabilities 730 917
Assigned capital 542 549
- ----------------------------------------------------------
Total funds $3,330 $3,500
==========================================================
PERFORMANCE RATIOS
Return on assigned capital 26% 32%
Noninterest income to total
revenue 83 83
Efficiency 68 64
==========================================================
PNC Advisors provides a full range of tailored investment products and services
to affluent individuals and families, including full-service brokerage through
J.J.B. Hilliard, W.L. Lyons, Inc. ("Hilliard Lyons") and investment advisory
services to the ultra-affluent through Hawthorn. PNC Advisors also serves as
investment manager and trustee for employee benefit plans and charitable and
endowment assets. PNC Advisors is focused on selectively expanding Hilliard
Lyons and Hawthorn, increasing market share in PNC's primary geographic region
and leveraging its expansive distribution platform.
PNC Advisors earned $143 million in 2001 compared with $173 million in
2000. Earnings for 2001 decreased 17% compared with the prior year primarily due
to a $57 million decrease in total revenue resulting from the impact of weak
equity market conditions on brokerage activity and asset management fees.
Investment management and trust revenue benefited from accrual adjustments of
$15 million in 2001 and $11 million in 2000. Management expects that revenue and
earnings in this business will continue to be challenged at least until equity
market conditions improve.
Noninterest expense decreased $7 million in the year-to-year comparison
primarily due to lower production-based compensation and expense management
initiatives.
ASSETS UNDER MANAGEMENT (a)
------------------
December 31 - in billions 2001 2000
===========================================================
Personal investment management and
trust $47 $50
Institutional trust 13 15
- -----------------------------------------------------------
Total $60 $65
===========================================================
(a) Excludes brokerage assets administered.
Assets under management decreased $5 billion as net new asset inflows of $1
billion from new and existing customers during 2001 were more than offset by a
decline in the value of the equity component of customers' portfolios. See
Business and Economic Conditions and Asset Management Performance in the Risk
Factors section of this Financial Review for additional information regarding
matters that could impact PNC Advisors' revenue.
Brokerage assets administered by PNC Advisors were $28 billion at December
31, 2001 and 2000 and were also impacted by weak equity market conditions.
PNC Advisors expects to continue to focus on acquiring new customers and
growing and expanding existing customer relationships while aggressively
managing its revenue/expense relationship.
36
<PAGE>
BLACKROCK
Year ended December 31 ------------------------
Dollars in millions 2001 2000
==========================================================
INCOME STATEMENT
Investment advisory and
administrative fees $495 $453
Other income 38 24
- ----------------------------------------------------------
Total revenue 533 477
Operating expense 292 248
Fund administration
and servicing costs -
affiliates 61 76
Amortization of intangible
assets 10 10
- ----------------------------------------------------------
Total expense 363 334
- ----------------------------------------------------------
Operating income 170 143
Nonoperating income 11 7
- ----------------------------------------------------------
Pretax earnings 181 150
Income taxes 74 63
- ----------------------------------------------------------
Earnings $107 $87
==========================================================
PERIOD-END BALANCE SHEET
Intangible assets $182 $192
Other assets 502 345
- ----------------------------------------------------------
Total assets $684 $537
==========================================================
Liabilities $198 $169
Stockholders' equity 486 368
- ----------------------------------------------------------
Total liabilities and
stockholders' equity $684 $537
==========================================================
PERFORMANCE DATA
Return on equity 25% 27%
Operating margin (a) 36 36
Diluted earnings per share $1.65 $1.35
==========================================================
(a) Excludes the impact of fund administration and servicing costs -
affiliates.
BlackRock is one of the largest publicly traded investment management firms in
the United States with approximately $239 billion of assets under management at
December 31, 2001. BlackRock manages assets on behalf of institutions and
individuals worldwide through a variety of fixed income, liquidity and equity
mutual funds, separate accounts and alternative investment products. Mutual
funds include the flagship fund families, BlackRock Funds and BlackRock
Provident Institutional Funds. In addition, BlackRock provides risk management
and investment system services to institutional investors under the BlackRock
Solutions name.
BlackRock continues to focus on delivering superior investment performance
to clients while pursuing strategies to build on core strengths and to
selectively expand the firm's expertise and breadth of distribution.
Earnings increased 23% in the year-to-year comparison primarily due to a
$35 billion or 17% increase in assets under management. New client mandates and
additional funding from existing clients resulted in $31 billion or 90% of the
increase in assets under management.
Total revenue for 2001 increased $56 million or 12% compared with 2000
primarily due to new institutional liquidity and fixed-income business and
strong sales of BlackRock Solutions products. The increase in operating expense
in the year-to-year comparison supported revenue growth and business expansion.
See Business and Economic Conditions and Asset Management Performance in
the Risk Factors section of this Financial Review for additional information
regarding matters that could impact asset management revenue.
ASSETS UNDER MANAGEMENT
----------------------
December 31 - in billions 2001 2000
===========================================================
Separate accounts
Fixed income $119 $104
Liquidity 7 6
Liquidity - securities lending 11 12
Equity 10 9
Alternative investment products 5 3
- -----------------------------------------------------------
Total separate accounts 152 134
- -----------------------------------------------------------
Mutual funds (a)
Fixed income 16 13
Liquidity 62 43
Equity 9 14
- -----------------------------------------------------------
Total mutual funds 87 70
- -----------------------------------------------------------
Total assets under management $239 $204
===========================================================
(a) Includes BlackRock Funds, BlackRock Provident Institutional Funds,
BlackRock Closed End Funds, Short Term Investment Funds and BlackRock
Global Series Funds.
BlackRock, Inc. is approximately 70% owned by PNC and is listed on the New York
Stock Exchange under the symbol BLK. Additional information about BlackRock is
available in its filings with the Securities and Exchange Commission ("SEC") and
may be obtained electronically at the SEC's home page at www.sec.gov.
37
<PAGE>
PFPC
Year ended December 31 ------------------------
Dollars in millions 2001 2000
==========================================================
INCOME STATEMENT
Fund servicing revenue $738 $674
Operating expense 536 501
Amortization 25 31
- ----------------------------------------------------------
Operating income 177 142
Nonoperating income (a) 14 31
Debt financing 94 95
Facilities consolidation
and other charges 36
- ----------------------------------------------------------
Pretax earnings 61 78
Income taxes 25 31
- ----------------------------------------------------------
Earnings $36 $47
==========================================================
AVERAGE BALANCE SHEET
Intangible assets $1,065 $1,107
Other assets 706 471
- ----------------------------------------------------------
Total assets $1,771 $1,578
==========================================================
Assigned funds and other
liabilities $1,563 $1,369
Assigned capital 208 209
- ----------------------------------------------------------
Total funds $1,771 $1,578
==========================================================
PERFORMANCE RATIOS
Return on assigned capital 17% 22%
Operating margin 19 21
==========================================================
(a) Net of nonoperating expense
PFPC is the largest full-service mutual fund transfer agent and second largest
provider of mutual fund accounting and administration services in the United
States, providing a wide range of fund services to the investment management
industry. PFPC also provides processing solutions to the international
marketplace through its Ireland and Luxembourg operations.
To meet the growing needs of the European marketplace, PFPC continues its
pursuit of offshore expansion. PFPC is also focusing technological resources on
targeted Web-based initiatives and exploring strategic alliances.
In the fourth quarter of 2001, PFPC incurred $36 million of pretax charges
largely related to a plan to consolidate certain facilities as a follow-up to
the integration of the Investor Services Group ("ISG") acquisition. The charges
primarily reflect termination costs related to exiting certain lease agreements
and the abandonment of related leasehold improvements.
PFPC earned $36 million in 2001 compared with $47 million in 2000.
Excluding facilities consolidation and other charges in 2001, earnings increased
$12 million or 26% in the year-to-year comparison and the return on assigned
capital and operating margin improved to 28% and 24%, respectively. The increase
was primarily due to growth in transfer agency and subaccounting revenue that
resulted from an increase in shareholder accounts serviced, and $9 million of
nonrecurring fee adjustments.
Revenue of $738 million for 2001 increased $64 million compared with 2000.
An increase in shareholder accounts serviced drove strong performance in
transfer agency and subaccounting revenues. The benefit of growth in
accounting/administration assets and shareholder accounts more than offset the
impact on revenue of lower custody assets serviced. Revenue growth rates in this
business may be pressured by lower equity valuations, pricing and other
competitive factors. See Business and Economic Conditions and Fund Servicing in
the Risk Factors section of this Financial Review for additional information
regarding matters that could impact fund servicing revenue.
Operating expense increased 7% in the year-to-year comparison as the impact
of business expansion was partially mitigated by expense management initiatives
and the comparative impact of ISG integration costs that were incurred in the
prior year.
SERVICING STATISTICS
-----------------------
December 31 2001 2000
========================================================
Accounting/administration assets ($ in billions)
Domestic $514 $454
Foreign 21 9
- --------------------------------------------------------
Total $535 $463
Custody assets ($ in billions) 357 437
Shareholder accounts (in millions) 49 43
========================================================
38
<PAGE>
CONSOLIDATED STATEMENT OF INCOME REVIEW
NET INTEREST INCOME
Changes in net interest income and margin result from the interaction between
the volume and composition of earning assets, related yields and associated
funding costs. Accordingly, portfolio size, composition and yields earned and
funding costs can have a significant impact on net interest income and margin.
Taxable-equivalent net interest income of $2.278 billion for 2001 increased
4% compared with 2000. The increase was primarily due to the impact of
transaction deposit growth and a lower rate environment that was partially
offset by the impact of continued downsizing of the loan portfolio. The net
interest margin widened 20 basis points to 3.84% for 2001 compared with 3.64%
for 2000. The increase was primarily due to the impact of the lower rate
environment, the benefit of growth in transaction deposits and downsizing of
higher-cost, less valuable retail certificates and wholesale deposits. See
Interest Rate Risk in the Risk Management section of this Financial Review for
additional information regarding interest rate risk.
Loans represented 76% of average interest-earning assets for 2001 compared
with 84% for 2000. The decrease was primarily due to the continued downsizing of
certain institutional lending portfolios and the securitization of residential
mortgage loans during 2001.
NET INTEREST INCOME ANALYSIS
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
Average Balances Interest Income/Expense Average Yields/Rates
-------------------------------- -------------------------- ----------------------------
Taxable-equivalent basis
Year ended December 31
Dollars in millions 2001 2000 Change 2001 2000 Change 2001 2000 Change
================================================================== ========================== ============================
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets
Loans held for sale $2,021 $2,507 $(486) $119 $204 $(85) 5.89% 8.14% (225)bp
Securities 10,867 6,061 4,806 627 389 238 5.77 6.42 (65)
Loans, net of unearned income
Commercial 19,658 21,685 (2,027) 1,418 1,839 (421) 7.21 8.48 (127)
Commercial real estate 2,580 2,685 (105) 184 240 (56) 7.13 8.94 (181)
Consumer 9,099 9,177 (78) 732 791 (59) 8.04 8.62 (58)
Residential mortgage 8,801 12,599 (3,798) 635 900 (265) 7.22 7.14 8
Lease financing 4,223 3,222 1,001 293 235 58 6.94 7.29 (35)
Other 460 650 (190) 30 55 (25) 6.52 8.46 (194)
- ------------------------------------------------------------------ --------------------------
Total loans, net of
unearned income 44,821 50,018 (5,197) 3,292 4,060 (768) 7.34 8.12 (78)
Other 1,632 1,289 343 115 97 18 7.05 7.53 (48)
- ------------------------------------------------------------------ --------------------------
Total interest-earning
assets/ interest income 59,341 59,875 (534) 4,153 4,750 (597) 7.00 7.93 (93)
Noninterest-earning assets 11,014 8,616 2,398
Investment in discontinued
operations 51 487 (436)
- ------------------------------------------------------------------
Total assets $70,406 $68,978 $1,428
==================================================================
Interest-bearing liabilities
Deposits
Demand and money market $21,322 $18,735 $2,587 506 658 (152) 2.37 3.51 (114)
Savings 1,928 2,050 (122) 18 36 (18) .93 1.76 (83)
Retail certificates of
deposit 12,313 14,642 (2,329) 634 826 (192) 5.15 5.64 (49)
Other time 522 621 (99) 34 40 (6) 6.51 6.44 7
Deposits in foreign offices 829 1,473 (644) 37 93 (56) 4.46 6.31 (185)
- ------------------------------------------------------------------ --------------------------
Total interest-bearing
deposits 36,914 37,521 (607) 1,229 1,653 (424) 3.33 4.41 (108)
Borrowed funds 13,482 13,746 (264) 646 915 (269) 4.79 6.66 (187)
- ------------------------------------------------------------------ --------------------------
Total interest-bearing
liabilities/ interest expense 50,396 51,267 (871) 1,875 2,568 (693) 3.72 5.01 (129)
-------------------------- ----------------------------
Noninterest-bearing liabilities,
minority interest, capital
securities and shareholders'
equity 20,010 17,711 2,299
- ------------------------------------------------------------------
Total liabilities, minority
interest, capital
securities and
shareholders' equity $70,406 $68,978 $1,428
==================================================================
Interest rate spread 3.28 2.92 36
Impact of noninterest-bearing
sources .56 .72 (16)
----------------------------
Net interest income/margin $2,278 $2,182 $ 96 3.84% 3.64% 20bp
============================================================================================================================
</TABLE>
39
<PAGE>
Securities represented 18% of average interest-earning assets for 2001 compared
with 10% for 2000. The increase was primarily due to the retention of interests
from the securitization of residential mortgage loans and net securities
purchases upon redeployment of funds resulting from loan downsizing and interest
rate risk management activities.
Funding cost is affected by the volume and composition of funding sources
as well as related rates paid thereon. Average deposits comprised 64% and 66% of
total sources of funds for 2001 and 2000, respectively, with the remainder
primarily comprised of wholesale funding obtained at prevailing market rates.
Average interest-bearing demand and money market deposits increased $2.6
billion or 14% compared with 2000, primarily reflecting the impact of strategic
marketing initiatives to grow more valuable transaction accounts, while all
other interest-bearing deposit categories decreased in the year-to-year
comparison as management de-emphasized these more costly sources of funds.
Average borrowed funds for 2001 were essentially flat compared with 2000.
PROVISION FOR CREDIT LOSSES
The provision for credit losses was $903 million for 2001 compared with $136
million for 2000. The increase was primarily related to provision expense of
$714 million to provide for net charge-offs associated with institutional
lending repositioning initiatives in 2001. As a result of these charge-offs and
other reserve activity in 2001, the allowance for credit losses was $630 million
at December 31, 2001 compared with $675 million at December 31, 2000. See Credit
Risk in the Risk Management section and Critical Accounting Policies and
Judgments in the Risk Factors section of this Financial Review for additional
information regarding credit risk.
NONINTEREST INCOME
Noninterest income was $2.543 billion for 2001 compared with $2.891 billion in
2000.
Asset management fees of $848 million for 2001 increased $39 million or 5%
primarily driven by new institutional business and strong fixed-income
performance at BlackRock which more than offset decreases at PNC Advisors
primarily due to the impact of declining equity markets. Consolidated assets
under management were $284 billion at December 31, 2001, a 12% increase compared
with December 31, 2000. Fund servicing fees were $724 million for 2001, a $70
million increase compared with 2000 primarily driven by new client growth.
Service charges on deposits increased 6% to $218 million for 2001 mainly
due to an increase in transaction deposit accounts. Brokerage fees were $206
million for 2001 compared with $249 million for 2000 as increased fees from
sales of insurance products were more than offset by declines in other brokerage
revenue due to weak equity markets.
Consumer services revenue of $229 million for 2001 increased $20 million or
10% compared with 2000 mainly due to the expansion of PNC's ATM network and the
increase in transaction deposit accounts.
Corporate services revenue was $60 million for 2001 compared with $342
million for 2000. Revenue in 2001 was adversely impacted by valuation
adjustments on loans held for sale of $259 million. In addition, increases in
treasury management and CMBS servicing revenue were more than offset by the
comparative impact of losses resulting from lower valuations of equity
investments and lower capital markets fees in 2001.
Equity management, which is comprised of venture capital activities,
reflected net losses of $179 million for 2001 compared with net gains of $133
million in 2000. The decrease primarily resulted from a decline in the estimated
fair value of both limited partnership and direct investments. At December 31,
2001, equity management investments held by PNC and consolidated subsidiaries
totaled approximately $574 million. Approximately 53% of that amount is invested
directly in a variety of companies and 47% is invested in various limited
partnerships. The valuation of equity management assets is subject to the
performance of the underlying companies as well as market conditions and may be
volatile. The Corporation's strategy in equity management is to attract funding
from investors and generate a greater proportion of revenues from fees earned by
managing investments for others. See Business and Economic Conditions and
Critical Accounting Policies and Judgments in the Risk Factors section of this
Financial Review for additional information regarding equity management assets.
Net securities gains were $131 million for 2001 compared with $20 million
in 2000.
Other noninterest income was $306 million for 2001 compared with $269
million for 2000. Excluding $12 million of asset write-downs in the fourth
quarter of 2001, other noninterest income increased 18% primarily due to higher
revenue from trading activities and gains on the sale of residential mortgage
loans. Net trading income included in other noninterest income was $142 million
in 2001 compared with $84 million in 2000. See details in Note 7 Trading
Activities.
40
<PAGE>
NONINTEREST EXPENSE
Noninterest expense was $3.338 billion for 2001 compared with $3.071 billion for
2000. Costs to exit the vehicle leasing business, including the impairment of
goodwill associated with a prior acquisition and employee severance costs, and
additions to reserves related to insured residual value exposures totaled $135
million and are included in 2001 noninterest expense. In addition, $56 million
of integration and severance costs related to other strategic initiatives were
incurred in 2001. Excluding these items, noninterest expense increased 2%
compared with 2000. The increase was primarily in businesses that have shown
higher revenue growth including Regional Community Banking, BlackRock and PFPC.
Average full-time equivalent employees totaled approximately 24,500 and 24,100
for 2001 and 2000, respectively. The increase was mainly in asset management and
processing businesses.
CONSOLIDATED BALANCE SHEET REVIEW
LOANS
Loans were $38.0 billion at December 31, 2001, a decrease of $12.6 billion from
year end 2000 primarily due to residential mortgage securitizations and runoff,
transfers to held for sale and the managed reduction of institutional loans.
DETAILS OF LOANS
-----------------------
December 31 - in millions 2001 2000
=======================================================
Commercial
Manufacturing $3,352 $5,581
Retail/wholesale 3,856 4,413
Service providers 2,136 2,944
Real estate related 1,720 1,783
Financial services 1,362 1,726
Communications 139 1,296
Health care 517 722
Other 2,123 2,742
- -------------------------------------------------------
Total commercial 15,205 21,207
- -------------------------------------------------------
Commercial real estate
Mortgage 592 673
Real estate project 1,780 1,910
- -------------------------------------------------------
Total commercial real
estate 2,372 2,583
- -------------------------------------------------------
Consumer
Home equity 7,016 6,228
Automobile 773 1,166
Other 1,375 1,739
- -------------------------------------------------------
Total consumer 9,164 9,133
- -------------------------------------------------------
Residential mortgage 6,395 13,264
Lease financing 5,557 4,845
Other 445 568
Unearned income (1,164) (999)
- -------------------------------------------------------
Total, net of unearned
income $37,974 $50,601
=======================================================
At December 31, 2001, loans of $38.0 billion included $1.9 billion of vehicle
leases and $200 million of commercial loans that have been designated for exit.
LOANS HELD FOR SALE
Loans held for sale were $4.2 billion at December 31, 2001 compared with $1.7
billion at December 31, 2000. In the fourth quarter of 2001, PNC designated for
exit $3.1 billion of loans and $7.9 billion of institutional credit exposure. Of
these amounts, $2.3 billion, net of $.6 billion of related charges, with total
credit exposure of $4.6 billion were transferred to loans held for sale.
Approximately $276 million of loans held at December 31, 2001 by subsidiaries of
a third-party financial institution are classified in the consolidated financial
statements as loans held for sale. Substantially all student loans are
classified as loans held for sale. See Note 14 Securitizations for information
as to any interests retained in these loans.
DETAILS OF LOANS HELD FOR SALE
----------------------
December 31 - in millions 2001 2000
========================================================
Institutional lending
repositioning $2,568 $286
Student loans 1,340 1,201
Other 281 168
- --------------------------------------------------------
Total loans held for sale $4,189 $1,655
========================================================
See Strategic Repositioning and Critical Accounting Policies and Judgments in
the Risk Factors section of this Financial Review for additional information
regarding loans held for sale.
SECURITIES
Total securities at December 31, 2001 were $13.9 billion compared with $5.9
billion at December 31, 2000. Total securities represented 20% of total assets
at December 31, 2001 compared with 8% at December 31, 2000. The increase was
primarily due to purchases of mortgage-backed and asset-backed securities during
2001 and the retention of interests from the securitization of residential
mortgage loans as loans declined and were replaced with securities.
At December 31, 2001, the securities available for sale balance included a
net unrealized loss of $132 million, which represented the difference between
fair value and amortized cost. The comparable amount at December 31, 2000 was a
net unrealized loss of $54 million. Net unrealized gains and losses in the
securities available for sale portfolio are included in accumulated other
comprehensive income or loss, net of tax or, for the portion attributable to a
hedged risk as part of a fair value hedge strategy, in net income. The expected
weighted-average life of securities available for sale was 4 years at
41
<PAGE>
December 31, 2001 compared with 4 years and 5 months at December 31, 2000.
Securities designated as held to maturity are carried at amortized cost and
are assets of subsidiaries of a third party financial institution, which are
consolidated in PNC's financial statements. The expected weighted-average life
of securities held to maturity was 18 years and 11 months at December 31, 2001.
PNC had no securities held to maturity at December 31, 2000.
DETAILS OF SECURITIES
---------------------
Amortized Fair
In millions Cost Value
=========================================================
DECEMBER 31, 2001
SECURITIES AVAILABLE FOR SALE
Debt securities
U.S. Treasury and government
agencies $808 $807
Mortgage-backed 7,302 7,261
Asset-backed 5,166 5,093
State and municipal 62 64
Other debt 75 75
Corporate stocks and other 264 245
- ---------------------------------------------------------
Total securities available for
sale $13,677 $13,545
- ---------------------------------------------------------
SECURITIES HELD TO MATURITY
Debt securities
U.S. Treasury and government
agencies $260 $257
Asset-backed 8 8
Other debt 95 95
- ---------------------------------------------------------
Total securities held to maturity $363 $360
=========================================================
December 31, 2000
SECURITIES AVAILABLE FOR SALE
Debt securities
U.S. Treasury and government
agencies $313 $313
Mortgage-backed 4,037 4,002
Asset-backed 902 893
State and municipal 94 96
Other debt 73 73
Corporate stocks and other 537 525
- ---------------------------------------------------------
Total securities available for
sale $5,956 $5,902
=========================================================
See Securitizations in the Risk Management section of this Financial Review and
Note 14 Securitizations for additional information regarding the change in
securities available for sale.
FUNDING SOURCES
Total funding sources were $59.4 billion at December 31, 2001 and 2000. Demand
and money market deposits increased due to ongoing strategic marketing efforts
to retain customers, as higher-cost, less valuable retail certificates of
deposit were de-emphasized. The change in the composition of borrowed funds
reflected a shift within categories to manage overall funding costs. See
Liquidity Risk under Risk Management in the Financial Review section for
additional information.
DETAILS OF FUNDING SOURCES
-------------------------
December 31 - in millions 2001 2000
=========================================================
Deposits
Demand and money market $32,589 $28,771
Savings 1,942 1,915
Retail certificates of
deposit 10,727 14,175
Other time 472 567
Deposits in foreign offices 1,574 2,236
- ---------------------------------------------------------
Total deposits 47,304 47,664
- ---------------------------------------------------------
Borrowed funds
Federal funds purchased 167 1,445
Repurchase agreements 954 607
Bank notes and senior debt 6,362 6,110
Federal Home Loan Bank
borrowings 2,047 500
Subordinated debt 2,298 2,407
Other borrowed funds 262 649
- ---------------------------------------------------------
Total borrowed funds 12,090 11,718
- ---------------------------------------------------------
Total $59,394 $59,382
=========================================================
CAPITAL
The access to and cost of funding new business initiatives including
acquisitions, the ability to engage in expanded business activities, the ability
to pay dividends, the level of 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, 2001, the Corporation and each bank subsidiary
were considered "well-capitalized" based on regulatory capital ratio
requirements. See Note 19 Regulatory Matters and Supervision and Regulation in
the Risk Factors section of this Financial Review for additional information.
42
<PAGE>
RISK-BASED CAPITAL
------------------
December 31 - dollars in millions 2001 2000
=========================================================
Capital components
Shareholders' equity
Common $5,813 $6,344
Preferred 10 312
Trust preferred capital securities 848 848
Minority interest 134 109
Goodwill and other intangibles (2,174) (2,312)
Net unrealized securities losses
Continuing operations 86 35
Discontinued operations 45
Net unrealized gains on cash flow
hedge derivatives (98)
Other, net (20) (14)
- ---------------------------------------------------------
Tier I risk-based capital 4,599 5,367
Subordinated debt 1,616 1,811
Minority interest 36
Eligible allowance for credit
losses 707 667
- ---------------------------------------------------------
Total risk-based capital $6,958 $7,845
=========================================================
Assets
Risk-weighted assets and
off-balance-sheet instruments,
and market risk equivalent
assets $58,958 $62,430
Average tangible assets 67,604 66,809
=========================================================
Capital ratios
Tier I risk-based 7.8% 8.6%
Total risk-based 11.8 12.6
Leverage 6.8 8.0
=========================================================
The capital position is managed through balance sheet size and composition,
issuance of debt and equity instruments, treasury stock activities, dividend
policies and retention of earnings.
During 2001, PNC purchased a portion and redeemed the balance of the
outstanding shares of Fixed/Adjustable Rate Noncumulative Preferred Stock Series
F for approximately $301 million.
During 2001, PNC repurchased 9.5 million shares of its common stock. On
January 3, 2002, the Board of Directors authorized the Corporation to purchase
up to 35 million shares of its common stock through February 29, 2004. These
shares may be purchased in the open market or privately negotiated transactions.
This authorization terminated any prior authorization. The extent and timing of
any share repurchases will depend on a number of factors including, among
others, progress in disposing of loans held for sale, regulatory capital
considerations, alternative uses of capital and receipt of regulatory approvals
if then required.
RISK FACTORS
The Corporation is subject to a number of risks including, among others, those
described below and in the Risk Management and Forward-Looking Statements
sections of this Financial Review. These factors and others could impact the
Corporation's business, financial condition and results of operations.
BUSINESS AND ECONOMIC CONDITIONS
The Corporation's business and results of operations are sensitive to general
business and economic conditions in the United States. These conditions include
the level and movement of interest rates, inflation, monetary supply,
fluctuations in both debt and equity capital markets, and the strength of the
U.S. economy, in general, and the regional economies in which the Corporation
conducts business. A sustained weakness or further weakening of the economy
could decrease the value of loans held for sale, decrease the demand for loans
and other products and services offered by the Corporation, increase usage of
unfunded commitments or increase the number of customers and counterparties who
become delinquent, file for protection under bankruptcy laws or default on their
loans or other obligations to the Corporation. An increase in the number of
delinquencies, bankruptcies or defaults could result in a higher level of
nonperforming assets, net charge-offs, provision for credit losses, and
valuation adjustments on loans held for sale. Changes in interest rates could
affect the value of certain on-balance-sheet and off-balance-sheet financial
instruments of the Corporation. Higher interest rates would also increase the
Corporation's cost to borrow funds and may increase the rate paid on deposits.
Changes in interest rates could also affect the value of assets under
management. In a period of rapidly rising interest rates, certain assets under
management would likely be negatively impacted by reduced asset values and
increased redemptions. Also, changes in equity markets could affect the value of
equity investments and the value of net assets under management and
administration. A decline in the equity markets adversely affected results in
2001 and could continue to negatively affect noninterest revenues in future
periods.
43
<PAGE>
STRATEGIC REPOSITIONING
The Corporation took several actions in 2001 to accelerate the strategic
repositioning of its lending business that began in 1998. These actions entail a
degree of risk pending completion.
At December 31, 2001, $5.0 billion of institutional lending credit exposure
including $2.6 billion of outstandings were classified as held for sale. A total
of $169 million of these loans was included in nonperforming assets at that
date. The loans are carried at the lower of cost or estimated fair market value.
The estimation of fair market values involves a number of judgments, and is
inherently uncertain. In addition, the value of loan assets is affected by a
variety of company, industry, economic and other factors, and can be volatile.
If the value of loans held for sale deteriorates prior to disposition, valuation
adjustments will be made through charges to earnings. Moreover, deterioration in
the condition of the borrowers could lead to additional loans being placed on
nonperforming status. See Critical Accounting Policies and Judgments for
additional information.
During the fourth quarter of 2001, the Corporation decided to discontinue
its vehicle leasing business and recorded charges of $135 million related to
exit costs and additions to reserves related to insured residual value
exposures. At December 31, 2001, approximately $1.9 billion of vehicle leases
remained on the Corporation's books. These leases are expected to mature over a
period of approximately five years. During this period, the Corporation will
continue to be subject to risks inherent in the vehicle leasing business,
including credit risk and the risk that vehicles returned during or at the
conclusion of the lease term cannot be disposed of at a price at least as great
as the Corporation's remaining investment in the vehicles after application of
any available residual value insurance or related reserves.
In January 2001, PNC sold its residential mortgage banking business.
Certain closing date purchase price adjustments aggregating approximately $300
million pretax are currently in dispute between the parties. The Corporation has
established a receivable of approximately $140 million to reflect additional
purchase price it believes is due from the buyer. The buyer has taken the
position that the purchase price it has already paid should be reduced by
approximately $160 million. The Corporation has established specific reserves
related to a portion of its recorded receivable. The purchase agreement requires
that an independent public accounting firm determine the final adjustments. The
buyer also has filed a lawsuit against the Corporation seeking compensatory
damages with respect to certain of the disputed matters that the Corporation
believes are covered by the process provided in the purchase agreement,
unquantified punitive damages and declaratory and other relief. Management
intends to assert the Corporation's positions vigorously. Management believes
that, net of available reserves, an adverse outcome, expected to be recorded in
discontinued operations, could be material to net income in the period in which
recorded, but that the final disposition of this matter will not be material to
the Corporation's financial position.
CRITICAL ACCOUNTING POLICIES AND JUDGMENTS
The Corporation's consolidated financial statements are prepared based on the
application of certain accounting policies, the most significant of which are
described in Note 1 Accounting Policies. Certain of these policies require
numerous estimates and strategic or economic assumptions that may prove
inaccurate or subject to variations and may significantly affect PNC's reported
results and financial position for the period or in future periods. Changes in
underlying factors, assumptions, or estimates in any of these areas could have a
material impact on PNC's future financial condition and results of operations.
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses is calculated with the objective of maintaining
a reserve level believed by management to be sufficient to absorb estimated
probable credit losses. Management's determination of the adequacy of the
allowance is based on periodic evaluations of the credit portfolio and other
relevant factors. However, this evaluation is inherently subjective as it
requires material estimates, including, among others, expected default
probabilities, loss given default, expected commitment usage, the amounts and
timing of expected future cash flows on impaired loans, value of collateral,
estimated losses on consumer loans and residential mortgages, and general
amounts for historical loss experience. The process also considers economic
conditions, uncertainties in estimating losses and inherent risks in the various
credit portfolios. All of these factors may be susceptible to significant
change. Also, the allocation of the allowance to specific loan pools is based on
historical loss trends and management's judgment concerning those trends.
Commercial loans are the largest category of credits and are the most sensitive
to changes in assumptions and judgments underlying the determination of the
allowance. As such, approximately $467 million or 74% of the total allowance at
December 31, 2001 has been allocated to the commercial loan category. This
allocation also considers other relevant factors such as actual versus estimated
losses, regional and national economic conditions, business segment and
portfolio concentrations, industry competition and consolidation, the impact of
government regulations, and risk of potential estimation or judgmental errors.
To the extent actual outcomes differ from management estimates, additional
provision for credit losses may be required that would adversely impact earnings
in future periods.
44
<PAGE>
LOANS HELD FOR SALE
Loans are classified as held for sale based on management's intent to sell them.
At the initial transfer date of a loan from portfolio to held for sale, any
lower of cost or market ("LOCOM") adjustment is recorded as a charge-off. This
results in a new cost basis. Any subsequent adjustment as a result of the LOCOM
analysis is recognized as a valuation adjustment with changes included in
noninterest income. Although the market value for certain held for sale assets
may be readily obtainable, other assets require significant judgments by
management as to the value that could be realized at the balance sheet date.
These assumptions include but are not limited to the cash flows generated from
the asset, the timing of a sale, the value of any collateral, the market
conditions for the particular credit, overall investor demand for these assets
and the determination of a proper discount rate. Changes in market conditions
and actual liquidation experience may result in additional valuation adjustments
that could adversely impact earnings in future periods.
EQUITY MANAGEMENT ASSET VALUATION
Equity management assets are valued at each balance sheet date based primarily
on either, in the case of limited partnership investments, the financial
statements received from the limited partnership or, with respect to direct
investments, the estimated fair value. Changes in the market value of these
investments are reflected in the Corporation's results of operations as equity
management income. The value of limited partnership investments is based on the
financial statements received from the general partners. Due to the nature of
the direct investments, management must make assumptions as to future
performance, financial condition, liquidity, availability of capital, and market
conditions, among others, to determine the estimated fair value of the
investments. Market conditions and actual performance of the companies invested
in could differ from these assumptions resulting in lower valuations that could
adversely impact earnings in future periods.
LEASE RESIDUALS
Leases are carried at the aggregate of lease payments and the estimated residual
value of the leased property, less unearned income. The Corporation provides
financing for various types of equipment, aircraft, energy and power systems and
rolling stock through a variety of lease arrangements. A significant portion of
the residual value is guaranteed by governmental entities or covered by residual
value insurance. Residual values are subject to judgments as to the value of the
underlying equipment that can be affected by changes in economic and market
conditions and the financial viability of the residual guarantors and insurers.
To the extent not guaranteed or assumed by a third party, or otherwise insured
against, the Corporation bears the risk of ownership of the leased assets
including the risk that the actual value of the leased assets at the end of the
lease term will be less than the residual value which could result in a charge
and adversely impact earnings in future periods.
GOODWILL AND OTHER AMORTIZABLE ASSETS
Goodwill arising from business acquisitions represents the value attributable to
unidentifiable intangible elements in the business acquired. The majority of the
Corporation's goodwill relates to value inherent in fund servicing and banking
businesses. The value of this goodwill is dependent upon the Corporation's
ability to provide quality, cost effective services in the face of competition
from other market leaders on a national and global basis. This ability in turn
relies upon continuing investments in processing systems, the development of
value-added service features, and the ease of use of the Corporation's services.
As such, goodwill value is supported ultimately by revenue which is driven
by the volume of business transacted and the market value of the assets under
administration. A decline in earnings as a result of a lack of growth or the
Corporation's inability to deliver cost effective services over sustained
periods can lead to impairment of goodwill which could result in a charge and
adversely impact earnings in future periods.
Total goodwill and other amortizable assets were $2.4 billion at December
31, 2001.
SUPERVISION AND REGULATION
The Corporation operates in highly regulated industries. Applicable laws and
regulations, among other things, restrict permissible activities and investments
and require compliance with consumer-related protections for loan, deposit,
fiduciary, mutual fund and other customers. The consequences of noncompliance
can include substantial monetary and nonmonetary sanctions. In addition, the
Corporation is subject to comprehensive examination and supervision by, among
other regulatory bodies, the Federal Reserve Board and the Office of the
Comptroller of the Currency. These regulatory agencies generally have broad
discretion to impose restrictions and limitations on the operations of a
regulated entity where the agencies determine, among other things, that such
operations are unsafe or unsound, fail to comply with applicable law or are
otherwise inconsistent with laws and regulations or with the supervisory
policies of these agencies. The examination process and the regulators'
associated supervisory tools could materially impact the conduct, growth and
profitability of the
45
<PAGE>
Corporation's operations. Additional information is included in Note 19
Regulatory Matters and Item 1 of the Corporation's Annual Report on Form 10-K.
RESTATEMENTS
Early in 2002, the Corporation announced two restatements affecting previously
reported financial results. See Note 3 Restatements. The Corporation is a
defendant in several lawsuits filed after announcement of the restatement
related to consolidation of subsidiaries of a third party financial institution.
The staffs of the Securities and Exchange Commission and the Federal Reserve
Board have informed the Corporation that they are conducting inquiries into the
transactions that are the subject of such restatement. In addition, the
reputational risk created by the restatements may have consequences to the
Corporation in such areas as business generation and retention, funding and
liquidity that cannot be predicted at this time.
MONETARY AND OTHER POLICIES
The financial services industry is subject to various monetary and other
policies and regulations of the United States government and its agencies, which
include the Federal Reserve Board, the Office of the Comptroller of Currency and
the Federal Deposit Insurance Corporation as well as state regulators. The
Corporation is particularly affected by the policies of the Federal Reserve
Board, which regulates the supply of money and credit in the United States. The
Federal Reserve Board's policies influence the rates of interest that PNC
charges on loans and pays on interest-bearing deposits and can also affect the
value of on-balance-sheet and off-balance-sheet financial instruments. Those
policies also influence, to a significant extent, the cost of funding for the
Corporation.
COMPETITION
PNC operates in a highly competitive environment, both in terms of the products
and services offered and the geographic markets in which PNC conducts business.
This environment could become even more competitive in the future. The
Corporation competes with local, regional and national banks, thrifts, credit
unions and non-bank financial institutions, such as investment banking firms,
investment advisory firms, brokerage firms, investment companies, venture
capital firms, mutual fund complexes and insurance companies, as well as other
entities that offer financial and processing services, and through alternative
delivery channels such as the World Wide Web. Technological advances and
legislation, among other changes, have lowered barriers to entry, have made it
possible for non-bank institutions to offer products and services that
traditionally have been provided by banks, and have increased the level of
competition faced by the Corporation. Many of the Corporation's competitors
benefit from fewer regulatory constraints and lower cost structures, allowing
for more competitive pricing of products and services.
DISINTERMEDIATION
Disintermediation is the process of eliminating the role of the intermediary in
completing a transaction. For the financial services industry, this means
eliminating or significantly reducing the role of banks and other depository
institutions in completing transactions that have traditionally involved banks.
Disintermediation could result in, among other things, the loss of customer
deposits and decreases in transactions that generate fee income.
ASSET MANAGEMENT PERFORMANCE
Asset management revenue is primarily based on a percentage of the value of
assets under management and performance fees expressed as a percentage of the
returns realized on assets under management. A decline in the value of debt and
equity instruments, among other things, could cause asset management revenue to
decline.
Investment performance is an important factor for the level of assets under
management. Poor investment performance could impair revenue and growth as
existing clients might withdraw funds in favor of better performing products.
Also, performance fees could be lower or nonexistent. Additionally, the ability
to attract funds from existing and new clients might diminish.
FUND SERVICING
Fund servicing fees are primarily based on the market value of the assets and
the number of shareholder accounts administered by the Corporation for its
clients. A rise in interest rates or a sustained weakness or further weakening
or volatility in the debt and equity markets could influence an investor's
decision to invest or maintain an investment in a mutual fund. As a result,
fluctuations may occur in the level or value of assets that the Corporation has
under administration. A significant investor migration from mutual fund
investments could have a negative impact on the Corporation's revenues by
reducing the assets and the number of shareholder accounts it administers. There
has been and continues to be merger, acquisition and consolidation activity in
the financial services industry. Mergers or consolidations of financial
institutions in the future could reduce the number of existing or potential fund
servicing clients.
46
<PAGE>
ACQUISITIONS
The Corporation expands its business from time to time by acquiring other
financial services companies. Factors pertaining to acquisitions that could
adversely affect the Corporation's business and earnings include, among others:
anticipated cost savings or potential revenue enhancements that may not be fully
realized or realized within the expected time frame; key employee, customer or
revenue loss following an acquisition that may be greater than expected; and
costs or difficulties related to the integration of businesses that may be
greater than expected.
TERRORIST ACTIVITIES
The impact of the September 11th terrorist attacks or any future terrorist
activities and responses to such activities cannot be predicted at this time
with respect to severity or duration. The impact could adversely affect the
Corporation in a number of ways including, among others, an increase in
delinquencies, bankruptcies or defaults that could result in a higher level of
nonperforming assets, net charge-offs and provision for credit losses.
RISK MANAGEMENT
In the normal course of business, the Corporation assumes various types of risk,
which include, among other things, credit risk, interest rate risk, liquidity
risk, and risk associated with trading activities, financial derivatives and
"off-balance sheet" activities. PNC has risk management processes designed to
provide for risk identification, measurement and monitoring.
CREDIT RISK
Credit risk represents the possibility that a borrower, counterparty or insurer
may not perform in accordance with contractual terms. Credit risk is inherent in
the financial services business and results from extending credit to customers,
purchasing securities and entering into financial derivative transactions. The
Corporation seeks to manage credit risk through, among other things,
diversification, limiting credit exposure to any single industry or customer,
requiring collateral, selling participations to third parties, and purchasing
credit-related derivatives.
ALLOWANCE FOR CREDIT LOSSES
The Corporation maintains an allowance for credit losses to absorb losses
inherent in the loan portfolio. The allowance is determined based on regular
quarterly assessments of the probable estimated losses inherent in the loan
portfolio and is in compliance with applicable regulatory standards and
generally accepted accounting principles. The methodology for measuring the
appropriate level of the allowance consists of several elements, including
specific allocations to impaired loans, allocations to pools of non-impaired
loans and unallocated reserves. While allocations are made to specific loans and
pools of loans, the total reserve is available for all credit losses.
Specific allowances are established for all loans considered impaired by a
method prescribed by Statement of Financial Accounting Standards ("SFAS") No.
114, "Accounting by Creditors for Impairment of a Loan." Specific allowances are
determined by PNC's Special Asset Committee based on an analysis of the present
value of the loan's expected future cash flows, the loan's observable market
price or the fair value of the loan's collateral.
Allocations to non-impaired commercial loans (pool reserve allocations) are
assigned to pools of loans as defined by PNC's internal risk rating categories.
The pool reserve methodology's key elements include expected default
probabilities (EDP), loss given default (LGD) and expected commitment usage.
EDPs are derived from historical default analyses and are a function of the
borrower's risk rating grade and loan tenor. LGDs are derived from historical
loss data and are a function of the loan's collateral value and other structural
factors that may affect the ultimate ability to collect the loan. The final
non-impaired loan reserve allocations are based on this methodology and
management's judgment of other relevant factors which may include, among others,
regional and national economic conditions, business segment and portfolio
concentrations, historical actual versus estimated losses and the volatility of
PNC's historic loss trends.
This methodology is sensitive to changes in key risk parameters such as
EDPs and LGDs. In general, a given change in any of the major risk parameters
will have a commensurate change in the pool reserve allocations to non-impaired
commercial loans. Additionally, other factors such as the rate of migration in
the severity of problem loans or changes in the distribution of loan tenor will
contribute to the final pool reserve allocations.
Consumer and residential mortgage loan allocations are made at a total
portfolio level by consumer product line based on actual historical loss
experience adjusted for volatility, current economic conditions and other
relevant factors.
While PNC's specific and pool reserve methodologies strive to reflect all
risk factors, there continues to be certain elements of risk associated with,
but not limited to, potential
47
<PAGE>
estimation and judgmental errors. Furthermore, events may have occurred as of
the reserve evaluation date that are not yet reflected in the risk measures or
characteristics of the portfolio due to inherent lags in information.
Unallocated reserves are established to provide coverage for such risks.
Senior management's Reserve Adequacy Committee provides oversight for the
allowance evaluation process, including quarterly evaluations and methodology
and estimation changes. The results of the evaluations are reported to the
Credit Committee of the Board of Directors.
ALLOCATION OF ALLOWANCE FOR CREDIT LOSSES
--------------------------------------------------
2001 2000
--------------------------------------------------
December 31
Dollars in Loans to Loans to
millions Allowance Total Loans Allowance Total Loans
====================================================================
Commercial $467 40.0% $536 41.9%
Commercial
real estate 67 6.3 53 5.1
Consumer 49 24.1 51 18.0
Residential
mortgage 8 16.8 10 26.2
Other 39 12.8 25 8.8
- --------------------------------------------------------------------
Total $630 100.0% $675 100.0%
====================================================================
For purposes of this presentation, the unallocated portion of the allowance for
credit losses of $143 million has been assigned to loan categories based on the
relative specific and pool allocation amounts.
The provision for credit losses for 2001 and the evaluation of the
allowance for credit losses as of December 31, 2001 reflected changes in loan
portfolio composition, the net impact of downsizing credit exposure and changes
in asset quality. The unallocated portion of the allowance for credit losses
represents 23% of the total allowance and .38% of total loans at December 31,
2001, compared with 20% and .26%, respectively, at December 31, 2000.
ROLLFORWARD OF ALLOWANCE FOR CREDIT LOSSES
In millions 2001 2000
===========================================================
January 1 $675 $674
Charge-offs (985) (186)
Recoveries 37 51
- -----------------------------------------------------------
Net charge-offs (948) (135)
Provision for credit losses 903 136
- -----------------------------------------------------------
December 31 $630 $675
===========================================================
The allowance as a percent of nonaccrual loans and total loans was 299% and
1.66%, respectively, at December 31, 2001. The comparable year end 2000
percentages were 209% and 1.33%, respectively. During 2001, the Corporation took
several actions to accelerate the strategic repositioning of the institutional
lending business. These repositioning initiatives resulted in a decrease in
commercial loan portfolio credit exposure and a decrease in both specific and
pooled allowances at December 31, 2001.
CHARGE-OFFS AND RECOVERIES
--------------------------------------------------
Percent of
Year ended December 31 Net Average
Dollars in millions Charge-offs Recoveries Charge-offs Loans
=========================================================================
2001
Commercial $876 $17 $859 4.37%
Commercial real
estate 37 1 36 1.40
Consumer 42 16 26 .29
Residential mortgage 2 1 1 .01
Lease financing 28 2 26 .62
- -----------------------------------------------------------
Total $985 $37 $948 2.12
=========================================================================
2000
Commercial $121 $21 $100 .46%
Commercial real
estate 3 4 (1) (.04)
Consumer 46 22 24 .26
Residential mortgage 8 2 6 .05
Lease financing 8 2 6 .19
- -----------------------------------------------------------
Total $186 $51 $135 .27
=========================================================================
Net charge-offs were $948 million for 2001 compared with $135 million for the
same period in 2000 and included $804 million of net charge-offs in 2001 related
to institutional lending repositioning initiatives, of which $673 million
related to charges on loans transferred to held for sale.
NONPERFORMING, PAST DUE AND POTENTIAL PROBLEM ASSETS
Nonperforming assets include nonaccrual loans, troubled debt restructurings,
nonaccrual loans held for sale and foreclosed assets. In addition, certain
performing assets have interest payments that are past due or have the potential
for future repayment problems.
48
<PAGE>
NONPERFORMING ASSETS BY TYPE
-----------------
December 31 - dollars in millions 2001 2000
=========================================================
Nonaccrual loans
Commercial $188 $312
Commercial real estate 4 3
Consumer 3 2
Residential mortgage 5 4
Lease financing 11 2
- ---------------------------------------------------------
Total nonaccrual loans 211 323
Nonperforming loans held for sale (a) 169 33
Foreclosed assets
Commercial real estate 1 3
Residential mortgage 3 8
Other 7 5
- ---------------------------------------------------------
Total foreclosed assets 11 16
- ---------------------------------------------------------
Total nonperforming assets $391 $372
=========================================================
Nonaccrual loans to total loans .56% .64%
Nonperforming assets to total loans,
loans held for sale and foreclosed
assets .93 .71
Nonperforming assets to total assets .56 .53
=========================================================
(a) Includes $6 million of a troubled debt restructured loan held for sale in
2001.
Of the total nonaccrual loans at December 31, 2001, approximately 47% are
related to PNC Business Credit. These loans are to borrowers many of which have
weaker credit risk ratings. As a result, a greater proportion of such loans may
be classified as nonperforming. Such loans are secured by accounts receivable,
inventory, machinery and equipment, and other collateral. This secured position
helps to mitigate risk of loss on these loans by reducing the reliance on cash
flows for repayment. The above table excludes $18 million of equity management
assets carried at estimated fair value at December 31, 2001 and 2000. The amount
of nonaccrual loans that were current as to principal and interest was $93
million at December 31, 2001 and $67 million at December 31, 2000. The amount of
nonperforming loans held for sale that were current as to principal and interest
was $8 million at December 31, 2001. There were no nonperforming loans held for
sale that were current as to principal and interest at December 31, 2000.
NONPERFORMING ASSETS BY BUSINESS
----------------------
December 31 - in millions 2001 2000
=========================================================
Regional Community Banking $52 $47
Corporate Banking 220 252
PNC Real Estate Finance 6 35
PNC Business Credit 109 36
PNC Advisors 4 2
- ---------------------------------------------------------
Total nonperforming assets $391 $372
=========================================================
At December 31, 2001, Corporate Banking, PNC Business Credit and PNC Real Estate
Finance had nonperforming loans held for sale of $161 million, $7 million and $1
million, respectively.
Credit quality was adversely impacted in 2001 and a sustained weakness or
further weakening of the economy, or other factors that affect asset quality,
could result in an increase in the number of delinquencies, bankruptcies or
defaults, and a higher level of nonperforming assets, net charge-offs and
provision for credit losses in future periods. With the current weak economy and
growth in PNC Business Credit, nonperforming assets will likely increase from
year end amounts. See the Forward-Looking Statements section of this Financial
Review for additional factors that could cause actual results to differ
materially from forward-looking statements or historical performance.
CHANGE IN NONPERFORMING ASSETS
--------------------
In millions 2001 2000
=========================================================
January 1 $372 $325
Transferred from accrual 852 471
Returned to performing (28) (13)
Principal reductions (278) (184)
Asset sales (27) (79)
Charge-offs and other (500) (148)
- ---------------------------------------------------------
December 31 $391 $372
=========================================================
ACCRUING LOANS AND LOANS HELD FOR SALE PAST DUE 90 DAYS OR MORE
------------------------------------
Percent of
Total
Amount Outstandings
------------------------------------
December 31
Dollars in millions 2001 2000 2001 2000
=========================================================
Commercial $54 $46 .36% .22%
Commercial real
estate 11 6 .46 .23
Consumer 36 24 .39 .26
Residential
mortgage 56 36 .88 .27
Lease financing 2 1 .05 .03
- ---------------------------------------
Total loans 159 113 .42 .22
Loans held for sale 33 16 .79 .97
- ---------------------------------------
Total loans and
loans held for
sale $192 $129 .46 .25
=========================================================
Loans and loans held for sale not included in nonperforming or past due
categories, but where information about possible credit problems causes
management to be uncertain about the borrower's ability to comply with existing
repayment terms over the next six months, totaled $87 million and $213 million,
respectively, at December 31, 2001, compared with $182 million and $11 million,
respectively, at December 31, 2000.
49
<PAGE>
CREDIT-RELATED INSTRUMENTS
Credit default swaps provide, for a fee, an assumption of a portion of the
credit risk associated with the underlying financial instruments. The
Corporation primarily uses such contracts to mitigate credit risk associated
with commercial lending activities. At December 31, 2001, credit default swaps
of $198 million in notional value were used by the Corporation to hedge credit
risk associated with commercial lending activities.
INTEREST RATE RISK
Interest rate risk arises primarily through the Corporation's traditional
business activities of extending loans and accepting deposits. Many factors,
including economic and financial conditions, movements in interest rates and
consumer preferences affect the spread between interest earned on assets and
interest paid on liabilities. In managing interest rate risk, the Corporation
seeks to minimize its reliance on a particular interest rate scenario as a
source of earnings while maximizing net interest income and net interest margin.
To further these objectives, the Corporation uses securities purchases and
sales, short-term and long-term funding, financial derivatives and other capital
markets instruments.
Interest rate risk is centrally managed by Asset and Liability Management.
The Corporation actively measures and monitors components of interest rate risk
including term structure or repricing risk, yield curve or nonparallel rate
shift risk, basis risk and options risk. The Corporation measures and manages
both the short-term and long-term effects of changing interest rates. An income
simulation model is designed to measure the sensitivity of net interest income
to changing interest rates over the next twenty-four month period. An economic
value of equity model is designed to measure the sensitivity of the value of
existing on-balance-sheet and off-balance-sheet positions to changing interest
rates.
The income simulation model is the primary tool used to measure the
direction and magnitude of changes in net interest income resulting from changes
in interest rates. Forecasting net interest income and its sensitivity to
changes in interest rates requires that the Corporation make assumptions about
the volume and characteristics of new business and the behavior of existing
positions. These business assumptions are based on the Corporation's experience,
business plans and published industry experience. Key assumptions employed in
the model include prepayment speeds on mortgage-related assets and consumer
loans, loan volumes and pricing, deposit volumes and pricing, the expected life
and repricing characteristics of nonmaturity loans and deposits, and
management's financial and capital plans.
Because these assumptions are inherently uncertain, the model cannot
precisely estimate net interest income or precisely predict the effect of higher
or lower interest rates on net interest income. Actual results will differ from
simulated results due to the timing, magnitude and frequency of interest rate
changes, the difference between actual experience and the assumed volume and
characteristics of new business and behavior of existing positions, and changes
in market conditions and management strategies, among other factors.
The Corporation models additional interest rate scenarios covering a wider
range of rate movements to identify yield curve, term structure and basis risk
exposures. These scenarios are developed based on historical rate relationships
or management's expectations regarding the future direction and level of
interest rates. Depending on market conditions and other factors, these
scenarios may be modeled more or less frequently. Such analyses are used to
identify risk and develop strategies.
An economic value of equity model is used by the Corporation to value all
current on-balance-sheet and off-balance-sheet positions under a range of
instantaneous interest rate changes. The resulting change in the value of equity
is a measure of overall long-term interest rate risk inherent in the
Corporation's existing on-balance-sheet and off-balance-sheet positions. The
Corporation uses the economic value of equity model to complement the net
interest income simulation modeling process.
The Corporation's interest rate risk management policies provide that net
interest income should not decrease by more than 3% if interest rates gradually
increase or decrease from current rates by 100 basis points over a twelve-month
period and that the economic value of equity should not decline by more than
1.5% of the book value of assets for a 200 basis point instantaneous increase or
decrease in interest rates. Policy exceptions, if any, are reported to the
Finance Committee of the Board of Directors.
The following table sets forth the sensitivity results for the last two
years.
50
<PAGE>
INTEREST SENSITIVITY ANALYSIS
December 31 2001 2000
============================================ === ==========
NET INTEREST INCOME SENSITIVITY SIMULATION
Effect on net interest income from
gradual interest rate change over
following 12 months of:
100 basis point increase (.3)% (.3)%
100 basis point decrease (2.8)% .4%
ECONOMIC VALUE OF EQUITY SENSITIVITY MODEL
Effect on value of on- and
off-balance-sheet positions as a
percentage of assets from
instantaneous change in interest
rates of:
200 basis point increase (1.4)% (.8)%
200 basis point decrease .5% (.1)%
KEY PERIOD-END INTEREST RATES
One month LIBOR 1.87% 6.56%
Three-year swap 4.33% 5.89%
==================================== =========== ==========
Current market interest rates, which are used as base rates in the Corporation's
net interest income simulation and economic value of equity models, have
declined significantly from year-end 2000 to year-end 2001.
The major sources of the change in net interest income sensitivities from
2000 to 2001 are the effects of this decline in rates on two of the key drivers
of the simulation results. First, the decline in market rates and the lowering
of the rates paid by PNC on transaction deposits have reduced the expected
impact that further rate declines could have on the rate paid on transaction
deposits. Second, the lower rate environment has increased the effect that a
further rate decline could have on the anticipated prepayment rates of
mortgage-related assets.
Over the course of 2001, management has taken actions to mitigate the
adverse effects of significantly declining interest rates on the Corporation's
net interest income. Without these actions, the Corporation's reported
sensitivity to a 100 basis point decline in interest rates at year end 2001
would have been significantly higher. These actions included purchasing
fixed-rate securities and financial derivatives. The effects of these actions
have contributed to the year-over-year change in the Corporation's economic
value of equity sensitivities. Thus far in 2002, management's actions have
focused on reducing the effects of significantly higher interest rates on the
Corporation's net interest income and economic value of equity.
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.
The Corporation's main sources of funds to meet its liquidity requirements
are access to the capital markets, sale of liquid assets, secured advances from
the Federal Home Loan Bank, its core deposit base and the capability to
securitize assets for sale.
Access to capital markets is a key factor affecting liquidity management.
Access to such markets is in part based on the Corporation's credit ratings,
which are influenced by a number of factors including capital ratios, asset
quality and earnings. Additional factors that impact liquidity include the
maturity structure of existing assets, liabilities, and off-balance-sheet
positions, the level of liquid securities and loans available for sale,
regulatory capital classification, and the Corporation's ability to securitize
and sell various types of loans.
Liquid assets consist of short-term investments and securities available for
sale. At December 31, 2001, such assets totaled $14.9 billion, with $6.2 billion
pledged as collateral for borrowings, trust and other commitments. Secured
advances from the Federal Home Loan Bank, of which PNC Bank, N.A. ("PNC Bank"),
PNC's principal bank subsidiary, is a member, are generally secured by
residential mortgages, other real-estate related loans and mortgage-backed
securities. At December 31, 2001, approximately $10.6 billion of residential
mortgages and other real-estate related loans were available as collateral for
borrowings from the Federal Home Loan Bank. Funding can also be obtained through
alternative forms of borrowing, including federal funds purchased, repurchase
agreements and short-term and long-term debt issuances.
Liquidity for the parent company and subsidiaries is also generated through
the issuance of securities in public or private markets and lines of credit. At
December 31, 2001, the Corporation had unused capacity under effective shelf
registration statements of approximately $3.3 billion of debt or equity
securities and $400 million of trust preferred capital securities. The
Corporation had an unused line of credit of $500 million at December 31, 2001.
51
<PAGE>
The principal source of parent company revenue and cash flow is the
dividends it receives from PNC Bank. The bank's dividend level may be impacted
by its capital needs, supervisory policies, corporate policies, contractual
restrictions and other factors. Also, there are legal limitations on the ability
of national banks to pay dividends or make other capital distributions. PNC Bank
was not permitted to pay dividends to the parent company as of December 31, 2001
without prior approval from banking regulators as a result of the repositioning
charges taken in 2001 and prior dividends. Under these limitations, PNC Bank's
capacity to pay dividends without prior regulatory approval can be restored
through retention of earnings. Management expects PNC Bank's dividend capacity
relative to such legal limitations to be restored during 2002 from retained
earnings.
In addition to dividends from PNC Bank, other sources of parent company
liquidity include cash and short-term investments, as well as dividends and loan
repayments from other subsidiaries. As of December 31, 2001, the parent company
had approximately $800 million in funds available from its cash and short-term
investments or other funds available from unrestricted subsidiaries. Management
believes the parent company has sufficient liquidity available from sources
other than dividends from PNC Bank to meet current obligations to its debt
holders, vendors, and others and to pay dividends at current rates through 2002.
The following tables set forth contractual obligations and various
commitments representing required and potential cash outflows as of December 31,
2001.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS Payment Due By Period
-----------------------------------------------------------------------
December 31, 2001 - in millions Total Less than One to Four to five After five
one year three years years years
===========================================================================================================================
<S> <C> <C> <C> <C> <C>
Minimum annual rentals on noncancellable leases $908 $125 $220 $181 $382
Remaining contractual maturities of time deposits 12,773 8,718 2,456 1,110 489
Borrowed funds 12,090 3,382 4,482 2,742 1,484
Capital securities of subsidiary trusts (a) 848 848
-----------------------------------------------------------------------
Total contractual cash obligations $26,619 $12,225 $7,158 $4,033 $3,203
===========================================================================================================================
</TABLE>
(a) Reflects the maturity of junior subordinated debentures held by subsidiary
trusts.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
OTHER COMMITMENTS (a) Total Amount Of Commitment Expiration By Period
-----------------------------------------------------------------------
December 31, 2001 - in millions Amounts Less than One to Four to five After five
Committed one year three years years years
===========================================================================================================================
<S> <C> <C> <C> <C> <C>
Standby letters of credit $3,998 $2,102 $1,727 $156 $13
Loan commitments 25,279 15,507 6,632 2,808 332
Asset-backed commercial paper conduit 5,764 5,713 51
Other commitments (b) 247 9 211 27
-----------------------------------------------------------------------
Total commitments $35,288 $23,331 $8,621 $2,991 $345
===========================================================================================================================
</TABLE>
(a) Commitments are funding commitments that could potentially require
performance in the event of demands by third parties or contingent events.
Loan commitments are reported net of participations, assignments and
syndications.
(b) Equity Management funding commitments.
TRADING ACTIVITIES
Most of PNC's trading activities are designed to provide capital markets
services to customers and not to position the Corporation's portfolio for gains
from market movements. Trading activities are confined to financial instruments
and financial derivatives. PNC participates in derivatives and foreign exchange
trading as well as underwriting and "market making" in equity securities as an
accommodation to customers. PNC also engages in trading activities as part of
risk management strategies. Net trading income was $147 million in 2001 compared
with $91 million in 2000. See Note 7 Trading Activities for additional
information.
Risk associated with trading, capital markets and foreign exchange
activities is managed using a value-at-risk approach that combines interest rate
risk, foreign exchange rate risk, spread risk and volatility risk. Using this
approach, exposure is measured as the potential loss due to a two standard
deviation, one-day move in interest rates. The estimated average combined
value-at-risk of all trading operations using this measurement was $.7 million
for both 2001 and 2000. The estimated combined period-end value-at-risk was $.9
million at December 31, 2001 and $.5 million at December 31, 2000.
52
<PAGE>
FINANCIAL DERIVATIVES
As required, effective January 1, 2001, the Corporation implemented SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," as amended
by SFAS No. 137 and No. 138. The statement requires the Corporation to recognize
all derivative instruments at fair value as either assets or liabilities.
Financial derivatives are reported at fair value in other assets or other
liabilities. The cumulative effect of the change in accounting principle
resulting from the adoption of SFAS No. 133 was an after-tax charge of $5
million reported in the consolidated income statement and an after-tax
accumulated other comprehensive loss of $4 million in the consolidated balance
sheet. See Note 20 Financial Derivatives for additional information.
The Corporation uses a variety of financial derivatives as part of the
overall asset and liability risk management process to manage interest rate,
market and credit risk inherent in the Corporation's business activities.
Substantially all such instruments are used to manage risk related to changes in
interest rates. Interest rate and total rate of return swaps, purchased interest
rate caps and floors and futures contracts are the primary instruments used by
the Corporation for interest rate risk management.
Interest rate swaps are agreements with a counterparty to exchange periodic
fixed and floating interest payments calculated on a notional amount. The
floating rate is based on a money market index, primarily short-term LIBOR.
Total rate of return swaps are agreements with a counterparty to exchange an
interest rate payment for the total rate of return on a specified reference
index calculated on a notional amount. Purchased interest rate caps and floors
are agreements where, for a fee, the counterparty agrees to pay the Corporation
the amount, if any, by which a specified market interest rate exceeds or is less
than a defined rate applied to a notional amount, respectively. Interest rate
futures contracts are exchange-traded agreements to make or take delivery of a
financial instrument at an agreed upon price and are settled in cash daily.
Financial derivatives involve, to varying degrees, interest rate, market
and credit risk. For interest rate and total rate of return swaps, caps and
floors and futures contracts, only periodic cash payments and, with respect to
caps and floors, premiums, are exchanged. Therefore, cash requirements and
exposure to credit risk are significantly less than the notional value.
Not all elements of interest rate, market and credit risk are addressed
through the use of financial or other derivatives, and such instruments may be
ineffective for their intended purposes due to unanticipated market
characteristics among other reasons.
The following table sets forth changes, during 2001, in the notional value
of financial derivatives used for risk management and designated as accounting
hedges under SFAS No. 133.
FINANCIAL DERIVATIVES ACTIVITY
<TABLE>
<CAPTION>
Weighted-
December 21 Adjustments January 1 December 31 Average
Dollars in millions 2000 (a) 2001 Additions Maturities Terminations 2001 Maturity
================================ =========== ============ ========== ========= ========== ============ ========== =========
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest rate risk management
Interest rate swaps
Receive fixed $4,756 $180 $4,936 $6,300 $(2,118) $(2,370) $6,748 3 YRS. 2 MOS.
Pay fixed 1 248 249 248 (390) 107 4 YRS. 1 MO.
Basis swaps 2,230 (1,773) 457 235 (5) (600) 87 6 YRS. 10 MOS.
Interest rate caps 308 (243) 65 44 (84) 25 4 YRS. 4 MOS.
Interest rate floors 3,238 (238) 3,000 60 (3,053) 7 3 YRS. 4 MOS.
Futures contracts 642 (244) 398 7 MOS.
- -------------------------------- ----------- ------------ ---------- --------- --------- ----------- ----------
Total interest rate risk
management 10,533 (1,826) 8,707 7,529 (2,123) (6,741) 7,372
- -------------------------------- ----------- ------------ ---------- --------- --------- ----------- ----------
Commercial mortgage banking
risk management
Interest rate swaps 311 311 965 (1,171) 105 9 YRS. 9 MOS.
Total rate of return swaps 75 75 250 (175) 150 2 MOS.
- -------------------------------- ----------- ------------ ---------- --------- --------- ----------- ----------
Total commercial mortgage
banking risk management 386 386 1,215 (175) (1,171) 255
Student lending activities
Forward contracts 347 (347)
Credit-related activities
Credit default swaps 4,391 (4,391)
- -------------------------------- ----------- ------------ ---------- --------- -------- ----------- ----------
Total $15,657 $(6,564) $9,093 $8,744 $(2,298) $(7,912) $7,627
================================ =========== ============ ========== ========= ======== =========== ==========
</TABLE>
(a) Primarily consists of derivatives that are not designated as accounting
hedges under SFAS No. 133 and instruments no longer considered financial
derivatives under SFAS No. 133.
53
<PAGE>
The following table sets forth the notional value and the fair value of
financial derivatives used for risk management and designated as accounting
hedges under SFAS No. 133 at December 31, 2001. Weighted-average interest rates
presented are based on the implied forward yield curve at December 31, 2001.
FINANCIAL DERIVATIVES - 2001
<TABLE>
<CAPTION>
Weighted-Average Interest
Rates
Notional -----------------------------
December 31, 2001 - dollars in millions Value Fair Value Paid Received
=========================================================== ================= =============== ================ =============
<S> <C> <C> <C> <C>
Interest rate risk management
Asset rate conversion
Interest rate swaps (a)
Receive fixed designated to loans $4,335 $132 3.35% 5.23%
Pay fixed designated to loans 107 (5) 5.88 4.66
Basis swaps designated to loans 87 5.49 5.42
Interest rate caps designated to loans (b) 25 NM NM
Interest rate floors designated to loans (c) 7 NM NM
Future contracts designated to loans 398 NM NM
- ----------------------------------------------------------- ----------------- ---------------
Total asset rate conversion 4,959 127
- ----------------------------------------------------------- ----------------- ---------------
Liability rate conversion
Interest rate swaps (a)
Receive fixed designated to borrowed funds 2,413 135 5.20 5.94
- ----------------------------------------------------------- ----------------- ---------------
Total liability rate conversion 2,413 135
- ----------------------------------------------------------- ----------------- ---------------
Total interest rate risk management 7,372 262
- ----------------------------------------------------------- -- --------------- ---------------
Commercial mortgage banking risk management
Pay fixed interest rate swaps
designated to loans held for
sale (a) 105 1 5.52 5.82
Pay total rate of return swaps designated to loans held
for sale (a) 150 5.89 1.39
- ----------------------------------------------------------- ----------------- ---------------
Total commercial mortgage banking risk management 255 1
- ----------------------------------------------------------- ----------------- ---------------
Total financial derivatives designated for risk
management $7,627 $263
=========================================================== ================= ===============
</TABLE>
(a) The floating rate portion of interest rate contracts is based on
money-market indices. As a percent of notional value, 65% were based on
1-month LIBOR, 34% on 3-month LIBOR and the remainder on other short-term
indices.
(b) Interest rate caps with notional values of $15 million require the
counterparty to pay the Corporation the excess, if any, of 3-month LIBOR
over a weighted-average strike of 6.40%. In addition, interest rate caps
with notional values of $6 million require the counterparty to pay the
excess, if any, of 1-month LIBOR over a weighted-average strike of 6.00%.
The remainder is based on other short-term indices. At December 31, 2001,
3-month LIBOR was 1.88% and 1-month LIBOR was 1.87%.
(c) Interest rate floors with notional values of $5 million require the
counterparty to pay the excess, if any, of the weighted-average strike of
4.50% over 3-month LIBOR. The remainder is based on other short-term
indices. At December 31, 2001, 3-month LIBOR was 1.88%.
NM-Not meaningful
54
<PAGE>
The following table sets forth the notional value and the estimated fair value
of financial derivatives used for risk management at December 31, 2000.
Weighted-average interest rates presented are based on the implied forward yield
curve at December 31, 2000.
FINANCIAL DERIVATIVES - 2000
<TABLE>
<CAPTION>
Weighted-Average Interest
Notional Estimated Rates
-------------------------------
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 (a)
Receive fixed designated to loans $3,250 $27 5.96% 5.56%
Basis swaps designated to other earning assets 226 3 5.63 5.85
Interest rate caps designated to loans (b) 308 4 NM NM
Interest rate floors designated to loans (c) 3,238 (1) NM NM
- --------------------------------------------------------- ----------------- ---------------
Total asset rate conversion 7,022 33
- --------------------------------------------------------- ----------------- ---------------
Liability rate conversion
Interest rate swaps (a)
Receive fixed designated to:
Interest-bearing deposits 125 4 5.85 6.73
Borrowed funds 1,381 57 5.96 6.60
Pay fixed designated to borrowed funds 1 5.88 5.78
Basis swaps designated to borrowed funds 2,004 10 5.76 5.79
- --------------------------------------------------------- ----------------- ---------------
Total liability rate conversion 3,511 71
- --------------------------------------------------------- ----------------- ---------------
Total interest rate risk management 10,533 104
- --------------------------------------------------------- ----------------- ---------------
Commercial mortgage banking risk management
Pay fixed interest rate swaps
designated to securities held
for sale (a) 135 (8) 6.94 6.04
Pay fixed interest rate swaps designated to loans held for
sale (a) 176 3 5.76 5.99
Pay total rate of return swaps designated to loans held for
sale (a) 75 (5) 5.76 6.15
- --------------------------------------------------------- ----------------- ---------------
Total commercial mortgage banking risk management 386 (10)
- --------------------------------------------------------- ----------------- ---------------
Student lending activities - Forward contracts (d) 347 NM NM
Credit-related activities - Credit default swaps (d) 4,391 (2) NM NM
- --------------------------------------------------------- ----------------- ---------------
Total financial derivatives designated for risk $15,657 $92
management
========================================================= ================= ===============
</TABLE>
(a) The floating rate portion of interest rate contracts is based on
money-market indices. As a percent of notional value, 62% were based on
1-month LIBOR, 36% on 3-month LIBOR and the remainder on other short-term
indices.
(b) Interest rate caps with notional values of $61 million, $95 million and
$150 million require the counterparty to pay the Corporation the excess, if
any, of 3-month LIBOR over a weighted-average strike of 6.00%, 1-month
LIBOR over a weighted-average strike of 5.68% and Prime over a
weighted-average strike of 8.76%, respectively. At December 31, 2000,
3-month LIBOR was 6.40%, 1-month LIBOR was 6.56% and Prime was 9.50%.
(c) Interest rate floors with notional values of $3.0 billion require the
counterparty to pay the excess, if any, of the weighted-average strike of
4.63% over 3-month LIBOR. At December 31, 2000, 3-month LIBOR was 6.40%.
(d) Due to the structure of these contracts, they are no longer considered
financial derivatives under SFAS No. 133.
NM-Not meaningful
55
<PAGE>
OTHER DERIVATIVES
To accommodate customer needs, PNC enters into customer-related financial
derivative transactions primarily consisting of interest rate swaps, caps,
floors and foreign exchange contracts. Risk exposure from customer positions is
managed through transactions with other dealers.
Additionally, the Corporation enters into other derivative transactions for
risk management purposes that are not designated as accounting hedges, primarily
consisting of interest rate floors and caps and basis swaps. Other noninterest
income for 2001 included $31 million of net gains related to the derivatives
held for risk management purposes not designated as accounting hedges. Prior to
2001, changes in the fair value of these derivatives that were previously
accounted for under the accrual method were not reflected in operating results.
OTHER DERIVATIVES
<TABLE>
<CAPTION>
At December 31, 2001
-----------------------------------------------------------------
2001
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 $20,317 $336 $(335) $1 $(6)
Caps/floors
Sold 3,493 (34) (34) (25)
Purchased 2,791 27 27 21
Foreign exchange 4,429 43 (39) 4 11
Other 2,957 65 (55) 10 4
- ---------------------------------------- ------------------ --------------- ----------------- --------------- -------------
Total customer-related 33,987 471 (463) 8 5
- ---------------------------------------- ------------------ --------------- ----------------- --------------- -------------
Other risk management and proprietary
Interest rate
Basis swaps 2,408 8 8 10
Caps/floors
Sold 250 (2) (2) (1)
Purchased 4,650 2 2 1
Other 547 8 (3) 5 7
- ---------------------------------------- ------------------ --------------- ----------------- --------------- -------------
Total other risk management and 7,855 18 (5) 13 17
proprietary
- ---------------------------------------- ------------------ --------------- ----------------- --------------- -------------
Total other derivatives $41,842 $489 $(468) $21 $22
======================================== ================== =============== ================= =============== =============
</TABLE>
"OFF-BALANCE-SHEET" ACTIVITIES
PNC has reputation, legal, operational and fiduciary risks in virtually every
area of its business, many of which are not reflected in assets and liabilities
recorded on the balance sheet, and some of which are conducted through limited
purpose entities known as "special purpose entities." These activities are part
of the banking business and would be found in most larger financial institutions
with the size and activities of PNC. Most of these involve financial products
distributed to customers, trust and custody services, and processing and funds
transfer services, and the amounts involved can be quite large in relation to
the Corporation's assets, equity and earnings. The primary accounting for these
activities on PNC's records is to reflect the earned income, operating expenses
and any receivables or liabilities for transaction settlements. For example: PNC
Bank provides credit and liquidity to customers through loan commitments and
letters of credit (see the Other Commitments table in the Liquidity Risk section
of Risk Management in this Financial Review); BlackRock provides investment
advisory and administration services for others through registered investment
companies, separate accounts, and other legal entities - additional information
about BlackRock is available in its filings with the SEC and may be obtained
electronically at the SEC's home page at www.sec.gov; PFPC processes mutual fund
transactions, provides securities lending services and maintains custody of
certain fund assets; PNC Advisors provides trust services and holds assets for
personal and institutional customers; Hilliard Lyons maintains brokerage assets
of customers; and Columbia Housing administers and manages funds that invest in
affordable housing projects that generate tax credits to investors; among
others. In addition to these activities, PNC has other activities or financial
interests that involve credit risk and market risk (including interest rate
risk) that are not fully reflected on the balance sheet. The most significant of
these activities include the following:
- - PNC sponsors Market Street Funding Corporation ("Market Street"), a
multi-seller asset-backed commercial paper conduit -- see discussion that
follows
56
<PAGE>
and the Other Commitments table under Liquidity Risk in the Risk Management
section of this Financial Review.
- - Loan commitments and letters of credit -- see the Other Commitments table
under Liquidity Risk and Credit Risk in the Risk Management section of this
Financial Review, and Note 9 Loans and Commitments to Extend Credit.
- - Financial derivatives -- see Financial Derivatives in the Risk Management
section of this Financial Review and Note 20 Financial Derivatives.
- - Loan securitization and servicing activities - see Securitizations in the
Risk Management section of this Financial Review and Note 14
Securitizations. See also the discussion of the National Bank of Canada
servicing arrangement in Note 30 Subsequent Events.
Except to the extent inherent in customary activities such as those described
above, PNC does not use off-balance-sheet entities to fund its business
operations. The Corporation does not capitalize any off-balance-sheet entity
with PNC stock and has no commitments to provide financial backing to any such
entity by issuing PNC stock.
The accounting for special purpose entities is currently under review by the
Financial Accounting Standards Board and the conditions for consolidation or
non-consolidation of such entities could change.
See the Risk Factors section in this Financial Review for a discussion of
key risks associated with these and other off-balance-sheet activities.
MARKET STREET FUNDING CORPORATION
The most significant portion of commercial loan facilities provided by PNC Bank
is to Market Street, an asset-backed commercial paper conduit that is 100%
independently owned and managed. PNC Bank provides credit enhancement, liquidity
facilities and certain administrative services to Market Street. Market Street
had total assets of $5.2 billion and $4.0 billion at December 31, 2001 and 2000,
respectively. The activities of Market Street are limited to the purchase of
undivided interests in pools of receivables from U.S. corporations ("sellers")
that desire access to the commercial paper market. Market Street funds the
purchases by issuing commercial paper ("CP"). The CP has been rated A1/P1 by
Standard & Poor's and Moody's. Credit enhancement provided by PNC is in the form
of a revolving credit facility with a five year term expiring December 31, 2004.
At December 31, 2001 and 2000, $166.1 million and $115.7 million, respectively,
was outstanding. Also at December 31, 2001 and 2000, Market Street had liquidity
facilities totaling $5.8 billion and $4.5 billion, respectively, provided by PNC
Bank. The maximum total amount of such facilities and the amount of such total
provided by PNC Bank during the years ended December 31, 2001 and 2000, was $7.0
billion and $5.8 billion, and $5.2 billion and $4.5 billion, respectively. PNC
Bank received related loan commitment fees of $7.8 million and $6.5 million for
the years ended December 31, 2001 and 2000, respectively.
PNC Bank serves as Market Street's program administrator for which it
received related fees of $11.7 million and $10.7 million for the years ended
December 31, 2001 and 2000, respectively.
SECURITIZATIONS
From time to time the Corporation has sold loans in secondary market
securitization transactions. The Corporation uses securitizations to manage
various balance sheet risks. Also, in such securitization transactions, the
Corporation may retain certain interest-only strips and servicing rights that
were created in the sale of the loans. The Corporation's liquidity is not
dependent on securitizations.
During 2001 and 2000, the Corporation sold loans totaling $1.5 billion and
$865 million, respectively, in secondary market securitization transactions,
resulting in pre-tax gains of $13 million in each year.
In addition to these transactions, in March 2001 PNC securitized $3.8
billion of residential mortgage loans by selling the loans into a trust with PNC
retaining 99% or $3.7 billion of the certificates. PNC also securitized $175
million of commercial mortgage loans by selling the loans into a trust with PNC
retaining 99% or $173 million of the certificates. In each case, the 1% interest
in the trust was purchased by a publicly-traded entity managed by a subsidiary
of PNC. A substantial portion of the entity's purchase price was financed by
PNC. The reclassification of these loans to securities increased the liquidity
of the assets and was consistent with PNC's on-going balance sheet
restructuring. At the time of the residential mortgage securitization, gains of
$25.9 million were deferred and are being recognized when principal payments are
received or the securities are sold to third parties. At December 31, 2001,
these securities had been reduced to $1.3 billion through sales and principal
payments and the remaining deferred gains were $7.8 million. No gain was
recognized at the time of the commercial mortgage loan securitization and none
of the securities retained at the time of the securitization remained on the
balance sheet at December 31, 2001.
57
<PAGE>
2000 VERSUS 1999
CONSOLIDATED INCOME STATEMENT REVIEW
SUMMARY RESULTS
Income from continuing operations for 2000 was $1.214 billion or $4.09 per
diluted share compared with $1.202 billion or $3.94 per diluted share,
respectively, for 1999. Return on average common shareholders' equity was 20.52%
and return on average assets was 1.76% for 2000 compared with 21.29% and 1.76%,
respectively, for 1999.
NET INTEREST INCOME
Taxable-equivalent net interest income of $2.182 billion for 2000 decreased $184
million or 8% compared with 1999. The net interest margin of 3.64% for 2000
narrowed 22 basis points from 3.86% in the prior year. These 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.
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 decrease in
the provision was primarily due to the sale of the credit card business in the
first quarter of 1999, partially offset by higher commercial loan net
charge-offs in 2000.
NONINTEREST INCOME
Noninterest income was $2.891 billion for 2000 and represented 57% of total
revenue compared with $2.450 billion and 51%, respectively, for 1999. The
increase was primarily driven by growth in certain fee-based businesses, the
benefit of the ISG acquisition and higher equity management income.
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 of $654 million for 2000 increased $403 million compared with
1999 primarily due to the ISG acquisition. Excluding ISG, fund servicing fees
increased 22% mainly due to existing and new client growth.
Service charges on deposits of $206 million for 2000 were consistent with
the prior year. Brokerage fees of $249 million for 2000 increased $30 million or
14% compared with 1999 reflecting 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, primarily due to
higher consumer transaction volume.
Corporate services revenue was $342 million for 2000 compared with $133
million for 1999. The increase in corporate services revenue was primarily
driven by the comparative impact of valuation adjustments in the prior year and
higher treasury management and commercial mortgage servicing fees that were
partially offset by a lower level of commercial mortgage-backed securitization
gains due to the impact of weaker capital market conditions.
Equity management income was $133 million for 2000 compared to $100 million
in the prior year.
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. 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 initial public offering.
Other noninterest income was $269 million for 2000 compared with $555
million for 1999. The decrease resulted primarily from the comparative impact of
gains in 1999 from the sale of the credit card business of $193 million and from
the sale of an equity interest in Electronic Payment Services, Inc. of $97
million.
NONINTEREST EXPENSE
Noninterest expense was $3.071 billion and the efficiency ratio was 56.85% for
2000 compared with $2.843 billion and 55.54%, respectively, for 1999. The
increases were primarily related to the ISG acquisition. Average full-time
equivalent employees totaled approximately 24,100 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 1999.
58
<PAGE>
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
more than offset lower consumer, commercial and commercial real estate loans.
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.
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 as of December 31, 1999. Securities
represented 8% of total assets at December 31, 2000 and 9% at December 31, 1999.
The expected weighted-average life of securities available for sale was 4 years
and 5 months at December 31, 2000 and 4 years and 7 months at year-end 1999.
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-costing funding sources including deposits in foreign offices,
Federal Home Loan Bank borrowings and bank notes and senior debt.
Total deposits were $47.7 billion at December 31, 2000 compared to $45.8
billion at December 31, 1999. Increases in demand and money market deposits, as
a result of strategic marketing initiatives to grow more valuable transaction
accounts, were partially offset by a decrease in deposits in foreign offices.
ASSET QUALITY
The ratio of nonperforming assets to total loans, loans held for sale and
foreclosed assets was .71% at December 31, 2000 and .61% at December 31, 1999.
Nonperforming assets were $372 million at December 31, 2000 compared with $325
million at December 31, 1999. The allowance for credit losses was $675 million
and represented 209% of nonaccrual loans and 1.33% of total loans at December
31, 2000. The comparable amounts were $674 million, 232% and 1.36%,
respectively, at December 31, 1999.
CAPITAL
Shareholders' equity totaled $6.7 billion and $5.9 billion at December 31, 2000
and 1999, respectively, and the leverage ratio was 8.0% and 6.6%, respectively,
in the comparison. Tier I and total risk-based capital ratios were 8.6% and
12.6%, respectively, at December 31, 2000, compared with 7.1% and 11.1%,
respectively, at December 31, 1999, computed on a basis including discontinued
operations.
59
<PAGE>
FORWARD-LOOKING STATEMENTS
This report contains, and other statements made by the Corporation may contain,
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act with respect to the outlook or expectations for earnings,
revenues, asset quality, share repurchases, and other future financial or
business performance, strategies and expectations. Forward-looking statements
are typically identified by words or phrases such as "believe," "feel,"
"expect," "anticipate," "intend," "outlook," "estimate," "forecast," "position,"
"poised," "target," "mission," "assume," "achievable," "potential," "strategy,"
"goal," "objective," "plan," "aspiration," "outcome," "continue," "remain,"
"maintain," "seek," "strive," "trend" and variations of such words and similar
expressions, or future or conditional verbs such as "will," "would," "should,"
"could," "might," "can," "may" or similar expressions.
The Corporation cautions that forward-looking statements are subject to
numerous assumptions, risks and uncertainties, which change over time. Actual
results could differ materially from those anticipated in forward-looking
statements and future results could differ materially from historical
performance. Forward-looking statements speak only as of the date they are made,
and the Corporation assumes no duty to update forward-looking statements.
In addition to factors mentioned elsewhere in this report or previously
disclosed in the Corporation's SEC reports (accessible on the SEC's website at
www.sec.gov), the following factors, among others, could cause actual results to
differ materially from forward-looking statements or historical performance:
(1) adjustments to recorded results of the sale of the residential mortgage
banking business after disputes over certain closing date adjustments have
been resolved;
(2) changes in political, economic or industry conditions, the interest rate
environment or financial and capital markets, which could result in: a
deterioration in credit quality and increased credit losses; an adverse
effect on the allowance for credit losses; a reduction in demand for credit
or fee-based products and services, net interest income, value of assets
under management and assets serviced, value of venture capital investments
and of other debt and equity investments, value of loans held for sale or
value of other on-balance-sheet and off-balance-sheet assets; or changes in
the availability and terms of funding necessary to meet PNC's liquidity
needs;
(3) relative investment performance of assets under management;
(4) the introduction, withdrawal, success and timing of business initiatives
and strategies, decisions regarding further reductions in balance sheet
leverage, the timing and pricing of any sales of loans held for sale, and
PNC's inability to realize cost savings or revenue enhancements, implement
integration plans and other consequences of mergers, acquisitions,
restructurings and divestitures;
(5) customer borrowing, repayment, investment and deposit practices and their
acceptance of PNC's products and services;
(6) the impact of increased competition;
(7) the means PNC chooses to redeploy available capital, including the extent
and timing of any share repurchases and investments in PNC businesses;
(8) the inability to manage risks inherent in PNC's business;
(9) the unfavorable resolution of legal proceedings or government inquiries;
(10) the denial of insurance coverage for claims made by PNC;
(11) an increase in the number of customer or counterparty delinquencies,
bankruptcies or defaults that could result in, among other things,
increased credit and asset quality risk, a higher loan loss provision and
reduced profitability;
(12) the impact, extent and timing of technological changes, the adequacy of
intellectual property protection and costs associated with obtaining rights
in intellectual property claimed by others;
(13) actions of the Federal Reserve Board, legislative and regulatory reforms,
and regulatory, supervisory or enforcement actions of government agencies;
and
(14) terrorist activities, including the September 11th terrorist attacks, which
may adversely affect the general economy, financial and capital markets,
specific industries, and PNC. The Corporation cannot predict the severity
or duration of effects stemming from such activities or any actions taken
in connection with them.
Some of the above factors are described in more detail in the 2002 Operating
Environment and Risk Factors sections of this Financial Review and factors
relating to credit risk, interest rate risk, liquidity risk, trading activities,
financial and other derivatives and "off-balance-sheet" activities are discussed
in the Risk Management section of this Financial Review. Other factors are
described elsewhere in this report.
60
<PAGE>
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, 2001. 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 and considered the matters
that gave rise to the restatements announced in early 2002. 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, 2001.
/s/ JAMES E. ROHR /s/ ROBERT L. HAUNSCHILD
James E. Rohr Robert L. Haunschild
Chairman, President Chief Financial Officer
and Chief Executive 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, 2001 and 2000, and the
related consolidated statements of income, shareholders' equity, and cash flows
for each of the three years in the period ended December 31, 2001. 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, 2001 and 2000,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Pittsburgh, Pennsylvania
March 1, 2002
61
<PAGE>
CONSOLIDATED STATEMENT OF INCOME
THE PNC FINANCIAL SERVICES GROUP, INC.
<TABLE>
<CAPTION>
Year ended December 31
---------------------------------------------------
In millions, except per share data 2001 2000 1999
======================================================================================== ================================
<S> <C> <C> <C>
INTEREST INCOME
Loans and fees on loans $3,279 $4,045 $4,064
Securities 625 386 362
Loans held for sale 119 204 104
Other 114 97 53
- ---------------------------------------------------------------------------------------- --------------------------------
Total interest income 4,137 4,732 4,583
Interest Expense
Deposits 1,229 1,653 1,369
Borrowed funds 646 915 870
- ---------------------------------------------------------------------------------------- --------------------------------
Total interest expense 1,875 2,568 2,239
- ---------------------------------------------------------------------------------------- --------------------------------
Net interest income 2,262 2,164 2,344
Provision for credit losses 903 136 163
- ---------------------------------------------------------------------------------------- --------------------------------
Net interest income less provision for credit losses 1,359 2,028 2,181
- ---------------------------------------------------------------------------------------- --------------------------------
NONINTEREST INCOME
Asset management 848 809 681
Fund servicing 724 654 251
Service charges on deposits 218 206 207
Brokerage 206 249 219
Consumer services 229 209 218
Corporate services 60 342 133
Equity management (179) 133 100
Net securities gains 131 20 22
Sale of subsidiary stock 64
Other 306 269 555
- ---------------------------------------------------------------------------------------- --------------------------------
Total noninterest income 2,543 2,891 2,450
- ---------------------------------------------------------------------------------------- --------------------------------
Noninterest Expense
Staff expense 1,667 1,616 1,380
Net occupancy 220 203 224
Equipment 255 224 232
Amortization 105 110 92
Marketing 57 70 70
Distributions on capital securities 63 67 65
Minority interest in income of consolidated entities 33 27 15
Other 938 754 765
- ---------------------------------------------------------------------------------------- --------------------------------
Total noninterest expense 3,338 3,071 2,843
- ---------------------------------------------------------------------------------------- --------------------------------
Income from continuing operations before income taxes 564 1,848 1,788
Income taxes 187 634 586
- ---------------------------------------------------------------------------------------- --------------------------------
Income from continuing operations 377 1,214 1,202
Income from discontinued operations
(less applicable income taxes of $0, $44 and $41) 5 65 62
- ---------------------------------------------------------------------------------------- --------------------------------
Net income before cumulative effect of accounting change 382 1,279 1,264
Cumulative effect of accounting change (less applicable income
tax benefit of $2) (5)
- ---------------------------------------------------------------------------------------- --------------------------------
Net income $377 $1,279 $1,264
======================================================================================== ================================
EARNINGS PER COMMON SHARE
FROM CONTINUING OPERATIONS
Basic $1.27 $4.12 $3.98
Diluted 1.26 4.09 3.94
FROM NET INCOME
Basic 1.27 4.35 4.19
Diluted 1.26 4.31 4.15
CASH DIVIDENDS DECLARED PER COMMON SHARE 1.92 1.83 1.68
AVERAGE COMMON SHARES OUTSTANDING
Basic 287 290 297
Diluted 290 293 300
======================================================================================== ================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
62
<PAGE>
CONSOLIDATED BALANCE SHEET
THE PNC FINANCIAL SERVICES GROUP, INC.
<TABLE>
<CAPTION>
December 31
----------------------------------
In millions, except par value 2001 2000
======================================================================================================== ==============
<S> <C> <C>
ASSETS
Cash and due from banks $4,327 $3,662
Short-term investments 1,335 1,151
Loans held for sale 4,189 1,655
Securities 13,908 5,902
Loans, net of unearned income of $1,164 and $999 37,974 50,601
Allowance for credit losses (630) (675)
- -------------------------------------------------------------------------------------------------------- --------------
Net loans 37,344 49,926
Goodwill and other amortizable assets 2,373 2,468
Investment in discontinued operations 356
Other 6,092 4,724
- -------------------------------------------------------------------------------------------------------- --------------
Total assets $69,568 $69,844
- -------------------------------------------------------------------------------------------------------- --------------
LIABILITIES
Deposits
Noninterest-bearing $10,124 $8,490
Interest-bearing 37,180 39,174
- -------------------------------------------------------------------------------------------------------- --------------
Total deposits 47,304 47,664
Borrowed funds
Federal funds purchased 167 1,445
Repurchase agreements 954 607
Bank notes and senior debt 6,362 6,110
Federal Home Loan Bank borrowings 2,047 500
Subordinated debt 2,298 2,407
Other borrowed funds 262 649
- -------------------------------------------------------------------------------------------------------- --------------
Total borrowed funds 12,090 11,718
Other 3,333 2,849
- -------------------------------------------------------------------------------------------------------- --------------
Total liabilities 62,727 62,231
- -------------------------------------------------------------------------------------------------------- --------------
Minority interest 170 109
Mandatorily redeemable capital securities of subsidiary trusts 848 848
SHAREHOLDERS' EQUITY
Preferred stock 1 7
Common stock - $5 par value
Authorized 800 and 450 shares
Issued 353 shares 1,764 1,764
Capital surplus 1,077 1,303
Retained earnings 6,549 6,736
Deferred benefit expense (16) (25)
Accumulated other comprehensive income (loss) from continuing operations 5 (43)
Accumulated other comprehensive loss from discontinued operations (45)
Common stock held in treasury at cost: 70 and 63 shares (3,557) (3,041)
- -------------------------------------------------------------------------------------------------------- --------------
Total shareholders' equity 5,823 6,656
- -------------------------------------------------------------------------------------------------------- --------------
Total liabilities, minority interest, capital securities and shareholders' equity $69,568 $69,844
======================================================================================================== ==============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
63
<PAGE>
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
THE PNC FINANCIAL SERVICES GROUP, INC.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
Accumulated Other
Comprehensive Income
(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, 1999 $7 $1,764 $1,250 $5,262 $(36) $(24) $(19) $(2,161) $6,043
Net income 1,264 1,264
Net unrealized securities losses (104) (116) (220)
Minimum pension liability adjustment (5) (5)
Other 1 1
- --------------------------------------------------------------------------------------------------------------------------------
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 86 90 176
Minimum pension liability adjustment 1 1
Other 2 2
- --------------------------------------------------------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------------------------------------------------------
Net income 377 377
Net unrealized securities (losses)
gains (51) 45 (6)
Net unrealized gains on cash flow
hedge derivatives 98 98
Minimum pension liability adjustment (1) (1)
Other 2 2
- --------------------------------------------------------------------------------------------------------------------------------
Comprehensive income 470
- --------------------------------------------------------------------------------------------------------------------------------
Cash dividends declared
Common (552) (552)
Preferred (12) (12)
Treasury stock activity
(6.4 net shares purchased) 26 (516) (490)
Tax benefit of ESOP and stock
option plans 43 43
Series F preferred stock tender
offer/redemption (6.0 shares
purchased/redeemed) (6) (295) (301)
Deferred benefit expense 9 9
- --------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 $1 $1,764 $1,077 $6,549 $(16) $5 $(3,557) $5,823
================================================================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
64
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
THE PNC FINANCIAL SERVICES GROUP, INC.
<TABLE>
<CAPTION>
Year ended December 31
-------------------------------------------------------
In millions 2001 2000 1999
===============================================================================================================================
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $377 $1,279 $1,264
Income from discontinued operations (5) (65) (62)
Cumulative effect of accounting change 5
- -------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations 377 1,214 1,202
Adjustments to reconcile income from continuing operations
to net cash provided by operating activities
Provision for credit losses 903 136 163
Depreciation, amortization and accretion 260 340 305
Deferred income taxes (48) 376 97
Securities transactions (128) (29) (25)
Gain on sale of businesses (317)
Valuation adjustments 265 27 195
Change in
Loans held for sale (92) 1,652 175
Other (271) (668) (23)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,266 3,048 1,772
- -------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Net change in loans 4,099 (2,215) 348
Repayment of securities 2,445 920 1,303
Sales
Securities 22,144 8,427 7,553
Loans 1,155 551 648
Foreclosed assets 15 24 36
Purchases
Securities (28,598) (8,437) (9,576)
Loans (758) (363)
Net cash received (paid) for divestitures/acquisitions 485 (30) 1,854
Other (131) (301) (139)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities 856 (1,061) 1,664
- -------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net change in
Noninterest-bearing deposits 1,634 329 (1,289)
Interest-bearing deposits (1,994) 1,533 1,328
Federal funds purchased (1,260) 164 891
Repurchase agreements 347 205 (45)
Sale/issuance
Bank notes and senior debt 2,157 2,849 2,416
Federal Home Loan Bank borrowings 3,123 1,781 1,696
Subordinated debt 100 650
Other borrowed funds 35,346 37,060 32,997
Common stock 184 189 141
Repayment/maturity
Bank notes and senior debt (1,915) (3,715) (5,827)
Federal Home Loan Bank borrowings (1,576) (3,539) (1,802)
Subordinated debt (200) (20) (104)
Other borrowed funds (35,752) (37,367) (32,614)
Acquisition of treasury stock (681) (428) (803)
Series F preferred stock tender offer/redemption (301)
Cash dividends paid (569) (546) (520)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash used by financing activities (1,457) (1,405) (2,885)
- -------------------------------------------------------------------------------------------------------------------------------
INCREASE IN CASH AND DUE FROM BANKS 665 582 551
Cash and due from banks at beginning of year 3,662 3,080 2,529
- -------------------------------------------------------------------------------------------------------------------------------
Cash and due from banks at end of year $4,327 $3,662 $3,080
- -------------------------------------------------------------------------------------------------------------------------------
CASH PAID FOR
Interest $1,813 $2,598 $2,237
Income taxes 215 289 344
NON-CASH ITEMS
Transfer of mortgage loans to securities 4,341 710
Transfer to (from) loans from (to) loans held for sale (2,707) 143 (3,378)
Transfer from loans to other assets 11 23 37
===============================================================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
65
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE PNC FINANCIAL SERVICES GROUP, INC.
BUSINESS
The PNC Financial Services Group, Inc. ("Corporation" or "PNC") is one of the
largest diversified financial services companies in the United States, operating
businesses engaged in regional community banking, corporate banking, real estate
finance, asset-based lending, wealth management, asset management and global
fund services. The Corporation provides certain products and services nationally
and others in PNC's primary geographic markets in Pennsylvania, New Jersey,
Delaware, Ohio and Kentucky. The Corporation also provides certain banking,
asset management and global fund services internationally. PNC is subject to
intense competition from other financial services companies and is subject to
regulation by various domestic and international authorities.
NOTE 1 ACCOUNTING POLICIES
BASIS OF FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements include the accounts of PNC, its
subsidiaries, most of which are wholly owned, and other consolidated entities.
Such statements have been prepared in accordance with accounting principles
generally accepted in the United States. All significant intercompany accounts
and transactions have been eliminated. Certain prior-period amounts have been
reclassified to conform with the current period presentation. These
reclassifications did not impact the Corporation's financial condition or
results of operations.
In preparing the consolidated financial statements, management is required
to make estimates and assumptions that affect the amounts reported. Actual
results will differ from such estimates and the differences may be material to
the consolidated financial statements.
The consolidated financial statements, notes to consolidated financial
statements and statistical information reflect the residential mortgage banking
business, which was sold on January 31, 2001, in discontinued operations, unless
otherwise noted. Certain quarterly amounts for 2001 contained in this report
have been restated to reflect accounting adjustments that reduced income from
discontinued operations for the year and to reflect the consolidation of the
subsidiaries of a third party financial institution.
BUSINESS COMBINATIONS
In business combinations accounted for using the purchase method of accounting,
the net assets of the companies acquired are recorded at their estimated fair
value at the date of acquisition and include the results of operations of the
acquired business from the date of acquisition.
In business combinations accounted for as poolings-of-interests, the
financial position and results of operations and cash flows of the respective
companies are restated as though the companies were combined for all historical
periods. Effective July 1, 2001, the Corporation adopted Statement of Financial
Accounting Standards ("SFAS") No. 141, "Business Combinations," which prohibits
the use of the pooling-of-interests method of accounting for business
combinations. On January 1, 2002, the Corporation adopted SFAS No. 142,
"Goodwill and Other Intangible Assets." Under this standard, goodwill is no
longer amortized but rather must be tested for impairment periodically. Refer to
"Recent Accounting Pronouncements" herein for further discussion of the impact
of these new standards.
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. At the time of transfer, related write-downs on the
loans are recorded as charge-offs. A new cost basis of the loan is established
and any subsequent adjustment as a result of lower of cost or market analysis is
recognized as a valuation allowance with changes included in noninterest income.
The lower of cost or market analysis on pools of homogeneous loans is
applied on a net aggregate basis. Such analysis on non-homogeneous loans is
applied on an individual loan basis.
Interest income with respect to loans held for sale is accrued on the
principal amount outstanding.
SECURITIES
Securities are classified as investments and carried at amortized cost if
management has the positive intent and ability to hold the securities to
maturity. 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 investments or
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.
Interest and dividends on securities, including amortization of premiums and
accretion of discounts using
66
<PAGE>
the effective-interest method, are included in interest income. 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 AND LEASES
Loans are stated at the principal amounts outstanding, net of unearned income.
Interest income with respect to loans other than nonaccrual loans is accrued on
the principal amount outstanding. Significant loan fees are deferred and
accreted to interest income over the respective lives of the loans.
The Corporation also provides financing for various types of equipment,
aircraft, energy and power systems and rolling stock through a variety of lease
arrangements. Direct financing leases are carried at the aggregate of lease
payments plus estimated residual value of the leased property, less unearned
income. Lease financing income is recognized over the term of the lease using
methods that approximate the level yield method. Gains or losses on the sale of
leased assets or valuation adjustments on lease residuals are included in
noninterest income.
LOAN SECURITIZATIONS AND RETAINED INTERESTS
The Corporation sells mortgage and other loans through secondary market
securitizations. In certain cases, the Corporation will retain a portion of the
securities issued, interest-only strips, one or more subordinated tranches,
servicing rights and/or cash reserve accounts, all of which are associated with
the securitized asset. Any gain or loss recognized on the sale of the loans
depends on the allocation 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.
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
included in other assets. For retained interests classified as securities
available for sale, adjustments to fair market value are recognized 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.
For purposes of measuring impairment, the Corporation stratifies the pools
of assets underlying servicing rights by product type and geographic region of
the borrower. A valuation allowance is recorded when the carrying amount of
specific asset strata exceeds its fair value.
NONPERFORMING ASSETS
Nonperforming assets include 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 significant concession is granted to the borrower due to
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.
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.
Loans held for sale, which are carried at lower of cost or 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.
67
<PAGE>
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, expected default probabilities, loss given default, expected commitment
usage, 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
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.
EQUITY MANAGEMENT ASSETS
Equity management assets are included in other assets and are comprised of
limited partnerships and direct investments. Investments in limited partnerships
are valued based on the financial statements received from the general partner.
Direct investments are carried at estimated fair value. Changes in the value of
these assets are 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. If the sum of the expected
undiscounted future cash flows, excluding interest charges, is less than the
carrying amount of the asset, an impairment loss is recognized. Impairment, if
any, is measured on a discounted future cash flow basis.
Effective January 1, 2002, the Corporation adopted SFAS No. 142, "Goodwill
and Other Intangible Assets," which changes the method of recognition and
accounting for goodwill and certain other intangible assets, and SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-lived Assets," which
addresses implementation issues regarding the impairment of long-lived assets.
Refer to "Recent Accounting Pronouncements" herein for further discussion of the
impact of these new standards.
DEPRECIATION AND AMORTIZATION
For financial reporting purposes, premises and equipment are depreciated
principally using the straight-line method over their 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 at which 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.
68
<PAGE>
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Corporation uses a variety of financial derivatives as part of the overall
asset and liability risk management process to manage interest rate, market and
credit risk inherent in the Corporation's business activities. Substantially all
such instruments are used to manage risk related to changes in interest rates.
Interest rate and total rate of return swaps, purchased interest rate caps and
floors and futures contracts are the primary instruments used by the Corporation
for interest rate risk management.
Interest rate swaps are agreements with a counterparty to exchange periodic
fixed and floating interest payments calculated on a notional amount. The
floating rate is based on a money market index, primarily short-term LIBOR.
Total rate of return swaps are agreements with a counterparty to exchange an
interest rate payment for the total rate of return on a specified reference
index calculated on a notional amount. Purchased interest rate caps and floors
are agreements where, for a fee, the counterparty agrees to pay the Corporation
the amount, if any, by which a specified market interest rate exceeds or is less
than a defined rate applied to a notional amount, respectively. Interest rate
futures contracts are exchange-traded agreements to make or take delivery of a
financial instrument at an agreed upon price and are settled in cash daily.
Financial derivatives involve, to varying degrees, interest rate, market and
credit risk. The Corporation manages these risks as part of its asset and
liability management process and through credit policies and procedures. The
Corporation seeks to minimize the credit risk by entering into transactions with
only a select number of high-quality institutions, establishing credit limits,
and generally requiring bilateral netting and collateral agreements.
As required, effective January 1, 2001, the Corporation implemented SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," as amended
by SFAS No. 137 and No. 138. The statement requires the Corporation to recognize
all derivative instruments at fair value as either assets or liabilities.
Financial derivatives are reported at fair value in other assets or other
liabilities. The accounting for changes in the fair value of a derivative
instrument depends on whether it has been designated and qualifies as part of a
hedging relationship. For derivatives not designated as hedges, the gain or loss
is recognized in current earnings.
For those derivative instruments that are designated and qualify as hedging
instruments, the Corporation must designate the hedging instrument, based on the
exposure being hedged, as either a fair value hedge, a cash flow hedge or a
hedge of a net investment in a foreign operation. The Corporation has no
derivatives that hedge the net investment in a foreign operation.
For derivatives that are designated as fair value hedges (i.e., hedging the
exposure to changes in the fair value of an asset or a liability attributable to
a particular risk), the gain or loss on derivatives as well as the loss or gain
on the hedged items are recognized in current earnings. An adjustment to the
hedged item for the change in its fair value pertaining to the hedged risk is
included in its carrying value. For derivatives designated as cash flow hedges
(i.e., hedging the exposure to variability in expected future cash flows), the
effective portions of the gain or loss on derivatives are reported as a
component of accumulated other comprehensive income and recognized in earnings
in the same period or periods during which the hedged transaction affects
earnings. Any remaining gain or loss on these derivatives is recognized in
current earnings.
Fair Value Hedging Strategies
The Corporation enters into interest rate and total rate of return swaps, caps,
floors and interest rate futures derivative contracts to hedge designated
commercial mortgage loans held for sale, securities available for sale,
commercial loans, bank notes, senior debt and subordinated debt for changes in
fair value primarily due to changes in interest rates. Adjustments related to
the ineffective portion of fair value hedging instruments are recorded in
interest income, interest expense or noninterest income depending on the hedged
item.
Cash Flow Hedging Strategy
The Corporation enters into interest rate swap contracts to modify the interest
rate characteristics of designated commercial loans from variable to fixed in
order to reduce the impact of interest rate changes on future interest income.
The fair value of these derivatives is reported in other assets or other
liabilities and offset in accumulated other comprehensive income for the
effective portion of the derivatives. Amounts reclassed into earnings, when the
hedged transaction culminates, are included in interest income. Ineffectiveness
of the strategy, as defined under SFAS No. 133, if any, is reported in interest
income.
Customer And Other Derivatives
To accommodate customer needs, PNC also enters into financial derivative
transactions primarily consisting of interest rate swaps, caps, floors and
foreign exchange contracts. Market risk exposure from customer positions are
managed through transactions with other dealers. The credit risk associated with
derivatives executed with customers is
69
<PAGE>
essentially the same as that involved in extending loans and is subject to
normal credit policies. Collateral may be obtained based on management's
assessment of the customer. Additionally, the Corporation enters into other
derivative transactions for risk management purposes that are not designated as
accounting hedges. The positions of customer and other derivatives are recorded
at fair value and changes in value are included in noninterest income.
Derivative Instruments And Hedging Activities - Pre-Sfas No. 133
Prior to January 1, 2001, interest rate swaps, caps and floors that modified the
interest rate characteristics (such as from fixed to variable, variable to
fixed, or one variable index to another) of designated interest-bearing assets
or liabilities were accounted for under the accrual method. The net amount
payable or receivable from the derivative contract was accrued as an adjustment
to interest income or interest expense of the designated instrument. Premiums on
contracts were deferred and amortized over the life of the agreement as an
adjustment to interest income or interest expense of the designated instruments.
Unamortized premiums were included in other assets.
Changes in the fair value of financial derivatives accounted for under the
accrual method were not reflected in results of operations. Realized gains and
losses, except losses on terminated interest rate caps and floors, were deferred
as an adjustment to the carrying amount of the designated instruments and
amortized over the shorter of the remaining original life of the agreements or
the designated instruments. Losses on terminated interest rate caps and floors
were recognized immediately in results of operations. If the designated
instruments were disposed of, the fair value of the associated derivative
contracts and any unamortized deferred gains or losses were included in the
determination of gain or loss on the disposition of such instruments. Contracts
not qualifying for accrual accounting were marked to market with gains or losses
included in noninterest income.
Credit default swaps were entered into to mitigate credit risk and lower the
required regulatory capital associated with commercial lending activities. If
the credit default swaps qualified for hedge accounting treatment, the premium
paid to enter into the credit default swaps was recorded in other assets and
deferred and amortized to noninterest expense over the life of the agreement.
Changes in the fair value of credit default swaps qualifying for hedge
accounting treatment were not reflected in the Corporation's financial position
and had no impact on results of operations.
If the credit default swap did not qualify for hedge accounting treatment or
if the Corporation was the seller of credit protection, the credit default swap
was marked to market with gains or losses included in noninterest income.
Due to the particular structure of the Corporation's credit default swaps
discussed in the preceding paragraphs, these instruments are not considered
financial derivatives under the provisions of SFAS No. 133. Commencing January
1, 2001, the premiums paid to enter credit default swaps not considered to be
derivatives are recorded in other assets and amortized to noninterest expense
over the life of the agreement.
ASSET MANAGEMENT AND FUND SERVICING FEES
Asset management and fund servicing fees are recognized primarily as the
services are performed. Asset management fees are primarily based on a
percentage of the fair value of the assets under management and performance fees
based on a percentage of the returns on such assets. Fund servicing fees are
primarily based on a percentage of the fair value of the assets, and the number
of shareholder accounts, administered by the Corporation.
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 are expected to be in effect when the differences are
expected to reverse.
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.
70
<PAGE>
STOCK OPTIONS
Stock options are granted at exercise prices not less than the fair market value
of common stock on the date of grant. No compensation expense is recognized on
such stock options.
RECENT ACCOUNTING PRONOUNCEMENTS
As stated previously, the Corporation adopted SFAS No. 133 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, which is
reported in the consolidated statement of income for the year ended December 31,
2001, and an after-tax accumulated other comprehensive loss of $4 million. Refer
to "Derivative Instruments and Hedging Activities" herein and to Note 20
Financial Derivatives for additional detail on the accounting for derivative
instruments held by the Corporation.
SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities," was issued in September 2000 and replaced
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 applied
the new rules prospectively to transactions consummated beginning in the second
quarter of 2001. 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 14 Securitizations.
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, "Business Combinations." SFAS No. 141 requires the purchase method of
accounting be used for all business combinations initiated or completed after
June 30, 2001 and eliminates the pooling-of-interests method of accounting. The
statement also addresses disclosure requirements for business combinations and
initial recognition and measurement criteria for goodwill and other intangible
assets as a result of purchase business combinations.
While SFAS No. 141 will affect how future business combinations, if
undertaken, are accounted for and disclosed in the financial statements, the
issuance of the new standard had no effect on the Corporation's results of
operations, financial position, or liquidity during 2001.
Also in July 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets," which changes the accounting from amortizing goodwill to an
impairment-only approach. The amortization of goodwill, including goodwill
recognized relating to past business combinations, will cease upon adoption of
the new standard. Impairment testing for goodwill at a reporting unit level will
be required on at least an annual basis. The new standard also addresses other
accounting matters, disclosure requirements and financial statement presentation
issues relating to goodwill and other intangible assets.
The Corporation adopted SFAS No. 142 effective January 1, 2002. Assuming no
impairment adjustments are necessary, no future business combinations and no
other changes to goodwill, the Corporation expects net income to increase by
approximately $93 million in 2002 resulting from the cessation of goodwill
amortization. The Corporation currently does not have any other indefinite-lived
assets on its balance sheet, nor does it anticipate any material
reclassifications or adjustments to the useful lives of finite-lived intangible
assets as a result of adopting the new standard.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," which requires that the fair value of a liability be
recognized when incurred for the retirement of a long-lived asset and the value
of the related asset be increased by that amount. The statement also requires
that the liability be maintained at its present value in subsequent periods and
outlines certain disclosures for such obligations. The adoption of this
statement, which is effective January 1, 2003, is not expected to have a
material impact on the Corporation's consolidated financial statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which replaces SFAS No. 121. This
statement primarily defines one accounting model for long-lived assets to be
disposed of by sale, including discontinued operations, and addresses
implementation issues regarding the impairment of long-lived assets. PNC adopted
this standard effective January 1, 2002. The standard is not expected to have a
material impact on the Corporation's consolidated financial statements.
71
<PAGE>
NOTE 2 DISCONTINUED OPERATIONS
In the first quarter of 2001, PNC closed the sale of its residential mortgage
banking business. Certain closing date adjustments are currently in dispute
between PNC and the buyer, Washington Mutual Bank, FA. The ultimate financial
impact of the sale will not be determined until the disputed matters are finally
resolved. See Note 24 Legal Proceedings. The income and net assets of the
residential mortgage banking business, which are presented on one line in the
income statement and balance sheet, respectively, are as follows:
Income From Discontinued Operations
----------------------
Year ended December 31 - in millions 2001 2000 1999
============================================================
Income from operations, after tax $15 $65 $62
Net loss on sale of business, after
tax (a) (10)
- ------------------------------------------------------------
Total income from discontinued
operations $5 $65 $62
===================================== ====== ======= =======
(a) Includes recognition of $35 million of previously unrealized
securities losses in accumulated other comprehensive income.
Investment In Discontinued Operations
----------------
December 31 - in millions 2000
============================================================
Loans held for sale $3,003
Securities available for sale 3,016
Loans, net of unearned income 739
Goodwill and other amortizable assets 1,925
All other assets 1,168
- ------------------------------------------------------------
Total assets 9,851
- ------------------------------------------------------------
Deposits 1,150
Borrowed funds 7,601
Other liabilities 744
- ------------------------------------------------------------
Total liabilities 9,495
- ------------------------------------------------------------
Net assets $356
============================================================
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.
NOTE 3 RESTATEMENTS
In connection with the repositioning of its institutional lending and venture
capital businesses, PNC completed three transactions during 2001, one each in
June, September, and November. In each of these transactions, assets were sold
or transferred to a subsidiary of a third party financial institution and PNC
received preferred interests in the subsidiaries.
The transactions in the aggregate involved the sale of loan assets of $592
million and venture capital assets of $170 million. Of the loan assets sold,
$132 million were classified as nonperforming assets at the date of sale. Loan
assets sold included loans previously held for sale and other loans that
were reclassified from loans to loans held for sale and marked to the lower of
cost or market prior to the sale. This resulted in charge-offs at the date
transferred of $24 million on loans and valuation adjustments of $4 million for
those loans that previously had been classified as held for sale. Including
previous charge-offs and valuation adjustments, loans transferred had been
charged down by approximately $108 million prior to sale. In addition to the
loan and venture capital assets, PNC also transferred cash amounting to $403
million. In return, PNC received one hundred percent of the Class A convertible
preferred shares in each subsidiary. The Class A convertible preferred shares
owned by PNC have no voting rights. PNC, as holder of the Class A convertible
preferred shares, may convert such preferred shares to Class A common shares and
cause the liquidation of the subsidiary. A noncumulative annual dividend may be
paid on the preferred stock.
The third party financial institution formed each of the entities,
contributed three percent equity in the form of cash and received one hundred
percent of the Class B preferred shares and one hundred percent of the Class B
common shares of each entity. The proceeds received by the applicable entity
from the issuance of the Class A preferred and all of the Class B shares were
used by each entity to fund certain operating expenses, future commitments under
the loan and venture capital agreements, investment in a managed asset account
and to purchase U. S. Treasury zero coupon securities. The third party financial
institution is the managing member of each of the entities and holds one hundred
percent of the voting power. All management and operating decisions regarding
the assets are at the discretion of the managing member. The managing member is
paid an annual fee for its services. PNC is the servicer of the loans and
venture capital assets and is paid a servicing fee.
At the time of the transactions, the loans and venture capital investments
were removed from PNC's balance sheet and the preferred interests in the
entities were recorded as securities available for sale in conformity with
accounting guidance received from PNC's independent auditors. In January 2002,
the Federal Reserve Board staff advised PNC that under generally accepted
accounting principles the subsidiaries of the third party financial institution
should be consolidated into the financial statements of PNC in preparing bank
holding company reports. After considering all the circumstances, PNC restated
its consolidated financial statements for the second and third quarters of 2001
to conform financial reporting with regulatory reporting requirements.
72
<PAGE>
The amounts contained in this report also include the restatement of the
results for the first quarter of 2001 to reflect the correction of an error
related to the accounting for the sale of the residential mortgage banking
business. This restatement reduced income from discontinued operations and net
income for 2001 by $35 million.
NOTE 4 FOURTH QUARTER ACTIONS
In the fourth quarter of 2001, PNC took several actions to accelerate the
strategic repositioning of its lending businesses that began in 1998. The
Corporation decided to exit approximately $7.9 billion of credit exposure
including $3.1 billion of loan outstandings in the institutional lending
portfolios. Of these amounts, approximately $5.2 billion of credit exposure and
$2.9 billion of loans, respectively, have been transferred to loans held for
sale. The remaining amounts have been designated for exit and are expected to
run off over the next several years. In connection with the transfer to held for
sale, $653 million of charge-offs and valuation adjustments were recognized in
the fourth quarter. Additionally, $90 million in charge-offs were taken against
the allowance for credit losses specifically allocated to these loans.
PNC also made the decision to discontinue its vehicle leasing business due
to continued depressed market conditions and the increased difficulty and cost
of obtaining residual value insurance protection. The vehicle leasing business
had $1.9 billion in assets at December 31, 2001 that have been designated for
exit and will mature over a period of approximately five years. Costs incurred
in 2001 to exit this business, including the impairment of goodwill associated
with a prior acquisition and employee severance costs, and additions to reserves
related to insured residual value exposures totaled $135 million and were
charged to noninterest expense.
The Corporation also recorded charges of $65 million in the fourth quarter
for certain integration, severance and other costs related to other strategic
initiatives.
NOTE 5 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, 2001, PNC
owned approximately 70% of BlackRock.
NOTE 6 CASH FLOWS
For the consolidated 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 affected cash flows:
Cash Flows
----------------------------
Year ended December 31 - in millions 2001 2000 1999
=======================================================================
Assets divested (acquired) $7,252 $(4) $2,062
Liabilities divested (acquired) 6,852 (4) 208
Cash paid 18 31 1,407
Cash and due from banks received 503 1 3,261
========================================================================
NOTE 7 TRADING ACTIVITIES
Most of PNC's trading activities are designed to provide capital markets
services to customers and not to position the Corporation's portfolio for gains
from market movements. PNC participates in derivatives and foreign exchange
trading as well as underwriting and "market making" in equity securities as an
accommodation to customers. PNC also engages in trading activities as part of
risk management strategies.
Net trading income in 2001, 2000 and 1999 included in noninterest income was
as follows:
Details Of Trading Activities
-------- -------- -------
Year ended December 31 - in millions 2001 2000 1999
====================================== ======== ======== =======
Corporate services $5 $7
Other noninterest income
Securities underwriting and
trading 55 42 $48
Derivatives trading 61 20 8
Foreign exchange 26 22 17
- ------------------------------------------------------------------------
Net trading income $147 $91 $73
========================================================================
73
<PAGE>
NOTE 8 SECURITIES
<TABLE>
<CAPTION>
--------------------------------------------------------------------
Unrealized
Amortized ------------------------------------ Fair
In millions Cost Gains Losses Value
=========================================================================================================================
<S> <C> <C> <C> <C>
December 31, 2001
SECURITIES AVAILABLE FOR SALE
Debt securities
U.S. Treasury and government agencies $ 808 $ 3 $ (4) $ 807
Mortgage-backed 7,302 35 (76) 7,261
Asset-backed 5,166 10 (83) 5,093
State and municipal 62 2 64
Other debt 75 1 (1) 75
- --------------------------------------------------------------------------------------------------------------------------
Total debt securities 13,413 51 (164) 13,300
Corporate stocks and other 264 (19) 245
- --------------------------------------------------------------------------------------------------------------------------
Total securities available for sale $13,677 $ 51 $ (183) $13,545
- --------------------------------------------------------------------------------------------------------------------------
SECURITIES HELD TO MATURITY
Debt securities
U.S. Treasury and government agencies $ 260 $ (3) $ 257
Asset-backed 8 8
Other debt 95 95
- --------------------------------------------------------------------------------------------------------------------------
Total debt securities 363 (3) 360
- --------------------------------------------------------------------------------------------------------------------------
Total securities held to maturity $ 363 $ (3) $ 360
- --------------------------------------------------------------------------------------------------------------------------
December 31, 2000
SECURITIES AVAILABLE FOR SALE
Debt securities
U.S. Treasury and government agencies $ 313 $ 1 $ (1) $ 313
Mortgage-backed 4,037 13 (48) 4,002
Asset-backed 902 1 (10) 893
State and municipal 94 2 96
Other debt 73 1 (1) 73
- --------------------------------------------------------------------------------------------------------------------------
Total debt securities 5,419 18 (60) 5,377
Corporate stocks and other 537 2 (14) 525
- --------------------------------------------------------------------------------------------------------------------------
Total securities available for sale $ 5,956 $ 20 $ (74) $ 5,902
- --------------------------------------------------------------------------------------------------------------------------
December 31, 1999
SECURITIES AVAILABLE FOR SALE
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
==========================================================================================================================
</TABLE>
The expected weighted-average life of securities available for sale was 4 years
at December 31, 2001 compared with 4 years and 5 months at year-end 2000 and 4
years and 7 months at year-end 1999.
The securities classified as held to maturity are owned by the subsidiaries
of a third party financial institution described in Note 3 Restatements. The
expected weighted-average life of securities held to maturity was 18 years and
11 months at December 31, 2001. PNC had no securities held to maturity at
December 31, 2000.
Net securities gains associated with the disposition of securities available
for sale were $131 million in 2001, $20 million in 2000 and $22 million in 1999.
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 losses of $3 million
in 2001 and net securities gains of $9 million and $3 million in 2000 and 1999,
respectively, related to commercial mortgage banking activities were included in
corporate services revenue.
Information relating to securities sold is set forth in the following table:
Securities Sold
-----------------------------------------
Year ended
December 31 Gross Gross Net
In millions Proceeds Gains Losses Gains Taxes
==========================================================
2001 $22,144 $144 $16 $128 $45
2000 8,427 37 8 29 10
1999 7,573 69 44 25 9
==========================================================
74
<PAGE>
The carrying value of securities pledged to secure public and trust deposits and
repurchase agreements and for other purposes was $6.2 billion and $3.8 billion
at December 31, 2001 and December 31, 2000, respectively. The fair value of
securities accepted as collateral that the Corporation is permitted by contract
or custom to sell or repledge was $260 million at December 31, 2001, of which
$160 million was repledged to others.
The following table presents the amortized cost, fair value and
weighted-average yield of debt securities at December 31, 2001, by remaining
contractual maturity.
<TABLE>
<CAPTION>
Contractual Maturity Of Debt Securities
---------------------------------------------------------------------------------
December 31, 2001 Within 1 to 5 to After 10
Dollars in millions 1 Year 5 Years 10 Years Years Total
========================================================================================================================
<S> <C> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE
U.S. Treasury and government agencies $ 95 $ 591 $ 116 $ 6 $ 808
Mortgage-backed 29 11 7,262 7,302
Asset-backed 2,309 1,010 1,847 5,166
State and municipal 2 15 38 7 62
Other debt 3 30 27 15 75
- -----------------------------------------------------------------------------------------------------------------------
Total securities available for sale $ 100 $ 2,974 $ 1,202 $ 9,137 $13,413
- -----------------------------------------------------------------------------------------------------------------------
Fair value $ 100 $ 2,958 $ 1,183 $ 9,059 $13,300
Weighted-average yield 1.93% 3.65% 5.35% 5.80% 5.26%
- -----------------------------------------------------------------------------------------------------------------------
SECURITIES HELD TO MATURITY
U.S. Treasury and government agencies $ 260 $ 260
Asset-backed $ 8 8
Other debt $ 66 23 $ 6 95
- -----------------------------------------------------------------------------------------------------------------------
Total securities held to maturity $ 66 $ 31 $ 6 $ 260 $ 363
- -----------------------------------------------------------------------------------------------------------------------
Fair value $ 66 $ 31 $ 6 $ 257 $ 360
Weighted-average yield 2.04% 2.30% 5.88% 5.80% 4.82%
========================================================================================================================
</TABLE>
Based on current interest rates and expected prepayment speeds, the total
weighted-average expected maturity of mortgage-backed securities was 4 years and
asset-backed securities was 4 years and 2 months at December 31, 2001.
Weighted-average yields are based on historical cost with effective yields
weighted for the contractual maturity of each security.
NOTE 9 LOANS AND COMMITMENTS TO EXTEND CREDIT
Loans outstanding were as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------
December 31 - in millions 2001 2000 1999 1998 1997
=========================================================================================================================
<S> <C> <C> <C> <C> <C>
Commercial $ 15,205 $ 21,207 $ 21,468 $ 25,177 $ 19,988
Commercial real estate 2,372 2,583 2,730 3,449 3,974
Consumer 9,164 9,133 9,348 10,980 11,205
Residential mortgage 6,395 13,264 12,506 12,253 12,776
Lease financing 5,557 4,845 3,663 2,978 2,224
Credit card 2,958 3,830
Other 445 568 682 392 650
- -------------------------------------------------------------------------------------------------------------------------
Total loans 39,138 51,600 50,397 58,187 54,647
Unearned income (1,164) (999) (724) (554) (412)
- -------------------------------------------------------------------------------------------------------------------------
Total loans, net of unearned income $ 37,974 $ 50,601 $ 49,673 $ 57,633 $ 54,235
=========================================================================================================================
</TABLE>
Loans outstanding and related unfunded commitments are concentrated in PNC's
primary geographic markets. At December 31, 2001, no specific industry
concentration exceeded 8.3% of total commercial loans outstanding and unfunded
commitments.
75
<PAGE>
Net Unfunded Commitments
------------ ------------
December 31 - in millions 2001 2000
===============================================================
Commercial $20,233 $24,253
Commercial real estate 711 1,039
Consumer 4,977 4,414
Lease financing 146 123
Other 139 173
Institutional lending
repositioning 4,837 1,700
- ----------------------------------------------------------------
Total $31,043 $31,702
================================================================
Commitments to extend credit represent arrangements to lend funds subject to
specified contractual conditions. At December 31, 2001, commercial commitments
are reported net of $7.1 billion of participations, assignments and
syndications, primarily to financial institutions. The comparable amount was
$7.2 billion at December 31, 2000. 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 at December 31, 2001
and 2000 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 2001, the largest industry concentration within standby letters of
credit was for educational services, which accounted for approximately 9% of the
total. Maturities for standby letters of credit ranged from 2002 to 2011.
At December 31, 2001, $14.7 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 principal amounts of these loans
were $24 million and $29 million at December 31, 2001 and 2000, respectively.
During 2001, new loans of $47 million were funded and repayments totaled $52
million.
NOTE 10 NONPERFORMING ASSETS
The following table sets forth nonperforming assets and related information:
<TABLE>
<CAPTION>
----------------------------------------------------------------
December 31 - dollars in millions 2001 2000 1999 1998 1997
=====================================================================================================================
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $211 $323 $291 $286 $270
Nonperforming loans held for sale (a) 169 33 17
Foreclosed assets 11 16 17 33 52
- ---------------------------------------------------------------------------------------------------------------------
Total nonperforming assets (b) $391 $372 $325 $319 $322
- ---------------------------------------------------------------------------------------------------------------------
Nonaccrual loans to total loans .56% .64% .59% .50% .50%
Nonperforming assets to total loans, loans held for
sale and foreclosed assets .93 .71 .61 .55 .59
Nonperforming assets to total assets .56 .53 .47 .45 .45
- ---------------------------------------------------------------------------------------------------------------------
Interest on nonperforming loans
Computed on original terms $ 27 $ 42 $ 28 $ 25 $ 31
Recognized 10 10 11 6 6
- ---------------------------------------------------------------------------------------------------------------------
Past due loans
Accruing loans past due 90 days or more $159 $113 $ 86 $263 $287
As a percentage of total loans .42% .22% .17% .46% .53%
Past due loans held for sale
Accruing loans held for sale past due 90 days or
more $ 33 $ 16 $ 24
As a percentage of total loans held for sale .79% .97% .69%
=====================================================================================================================
</TABLE>
(a) Includes $6 million of a troubled debt restructured loan held for sale in
2001.
(b) The above table excludes $18 million, $18 million and $13 million of equity
management assets at December 31, 2001, 2000 and 1999, respectively, that
are carried at estimated fair value.
76
<PAGE>
NOTE 11 ALLOWANCE FOR CREDIT LOSSES
Changes in the allowance for credit losses were as follows:
---------------------------
In millions 2001 2000 1999
=======================================================
January 1 $675 $674 $753
Charge-offs (985) (186) (216)
Recoveries 37 51 55
- -------------------------------------------------------
Net charge-offs (948) (135) (161)
Provision for credit
losses 903 136 163
Sale of credit card
business (81)
- -------------------------------------------------------
December 31 $630 $675 $674
=======================================================
Impaired loans totaling $192 million and $316 million at December 31, 2001 and
2000, respectively, had a corresponding specific allowance for credit losses of
$28 million and $76 million. The average balance of impaired loans was $319
million in 2001, $277 million in 2000 and $243 million in 1999. There was no
interest income recognized on impaired loans in 2001, 2000 or 1999.
NOTE 12 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 2001 2000
=======================================================
Land $87 $86
Buildings 448 456
Equipment 1,413 1,373
Leasehold improvements 321 190
- -------------------------------------------------------
Total 2,269 2,105
Accumulated depreciation and
amortization (1,141) (1,069)
- -------------------------------------------------------
Net book value $1,128 $1,036
=======================================================
Depreciation and amortization expense on premises, equipment and leasehold
improvements totaled $168 million in 2001, $149 million in 2000 and $204 million
in 1999.
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 $165 million
in 2001, $148 million in 2000 and $132 million in 1999.
At December 31, 2001 and 2000, required minimum annual rentals due on
noncancelable leases having terms in excess of one year aggregated $908 million
and $684 million, respectively. Minimum annual rentals for each of the years
2002 through 2006 are $125 million, $115 million, $104 million, $96 million and
$85 million, respectively.
In the fourth quarter of 2001, management of PFPC Worldwide Inc., a
majority-owned subsidiary of the Corporation, initiated a plan to consolidate
certain facilities as a follow-up to the integration of the Investor Services
Group acquisition. In connection with this initiative and other strategic
actions in the fourth quarter 2001, pretax charges to noninterest expense of $36
million were recognized in the fourth quarter. The charges primarily reflect
termination costs related to exiting certain lease agreements and the
abandonment of related leasehold improvements.
During 1999, PNC made the decision to sell various branches and office
buildings. 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 13 GOODWILL AND OTHER AMORTIZABLE ASSETS
Goodwill and other amortizable assets, net of amortization, consisted of the
following:
--------------------
December 31 - in millions 2001 2000
==========================================================
Goodwill $2,043 $2,155
Customer-related intangibles 131 157
Commercial mortgage
servicing rights 199 156
- ----------------------------------------------------------
Total $2,373 $2,468
==========================================================
Amortization of goodwill and other amortizable assets was as follows:
---------------------------
Year ended December 31
In millions 2001 2000 1999
==========================================================
Goodwill $117 $116 $80
Purchased credit cards 6
Commercial mortgage
servicing rights 27 18 20
Other (12) (6) 6
- ----------------------------------------------------------
Total $132 $128 $112
==========================================================
In addition, write-downs of $11 million related to impairment of goodwill for
the year ended December 31, 2001 resulted from PNC's decision to discontinue its
vehicle leasing business.
77
<PAGE>
NOTE 14 SECURITIZATIONS
During 2001, the Corporation sold residential mortgage loans, commercial
mortgage loans and other loans totaling $1.0 billion, $374 million, and $82
million, respectively, in secondary market securitization transactions. These
securitization transactions resulted in pretax gains of $9.6 million, $1
million, and $2 million, respectively, for the year ended December 31, 2001.
In addition to the sale of loans discussed above, in March 2001 PNC
securitized $3.8 billion of residential mortgage loans by selling the loans into
a trust with PNC retaining 99% or $3.7 billion of the certificates. PNC also
securitized $175 million of commercial mortgage loans by selling the loans into
a trust with PNC retaining 99% or $173 million of the certificates. In each
case, the 1% interest in the trust was purchased by a publicly-traded entity
managed by a subsidiary of PNC. A substantial portion of the entity's purchase
price was financed by PNC. The reclassification of these loans to securities
increased the liquidity of the assets and was consistent with PNC's on-going
balance sheet restructuring. At the time of the residential mortgage
securitization, gains of $25.9 million were deferred and are being recognized
when principal payments are received or the securities are sold to third
parties. At December 31, 2001, these securities had been reduced to $1.3 billion
through sales and principal payments and the remaining deferred gains were $7.8
million. No gain was recognized at the time of the commercial mortgage loan
securitization and none of the securities retained at the time of the
securitization remained on the balance sheet at December 31, 2001.
In addition to the securities discussed above, the Corporation retained
certain interest-only strips and servicing rights that were created in the sale
of certain loans. Additional information on these items is contained below.
Key economic assumptions used in measuring the fair value of the
interest-only strips and servicing rights at the date of the securitization
resulting from securitizations completed during the year and related information
were as follows:
KEY ECONOMIC ASSUMPTIONS
-------------------------------------------
Weighted-
average Prepayment
Dollars in Fair Life Speed Discount
millions Value (Years) (CPR)(a) Rate
===========================================================
During 2001
Residential
mortgage $38 1.2 - 1.7 36.0% 10.00%
Commercial
mortgage 5 9.4 10.0 10.00
Other 2 1.9 4.14
- ----------------------------------------------------------
During 2000
Commercial
mortgage $ 7 9.6 10.0% 10.00%
===========================================================
(a) Constant Prepayment Rate ("CPR").
Quantitative information about managed securitized loan portfolios in which the
Corporation had interest-only strips outstanding at December 31, 2001 and
related delinquencies follows:
INTEREST-ONLY STRIPS
----------------------------------------------
Managed Delinquencies
----------------------------------------------
December 31 - in millions 2001 2000 2001 2000
===========================================================================
Residential loans $1,058 $ 178 $ 24 $ 2
Student loans 453 573 49 66
- ---------------------------------------------------------------------------
Total managed loans $1,511 $ 751 $ 73 $ 68
===========================================================================
Certain cash flows received from and paid to securitization trusts in which the
Corporation had interest-only strips outstanding during the period follows:
SECURITIZATION CASH FLOWS
---------------------
Year ended December 31 - in millions 2001 2000
=============================================================================
Proceeds from new securitizations $1,040 $ 877
Servicing revenue 8 7
Other cash flows received on retained
interests 16 22
=============================================================================
Proceeds from new securitizations are limited to cash proceeds received from
third parties. It excludes the value of securities generated as a result of the
recharacterization of loans to securities. During 2001 and 2000, there were no
purchases of delinquent or foreclosed assets, and servicing advances and
repayments of servicing advances were not significant.
Changes in the Corporation's commercial mortgage servicing assets are as
follows:
COMMERCIAL MORTGAGE SERVICING ACTIVITY
--------------------------
In millions 2001 2000
==============================================================================
Balance at January 1 $ 156 $ 125
Additions 70 49
Amortization (27) (18)
- ------------------------------------------------------------------------------
Balance at December 31 $ 199 $ 156
==============================================================================
Assuming a prepayment speed of 10% and weighted average life of 10.8 years
discounted at 10%, the estimated fair value of commercial mortgage servicing
rights was $240 million at December 31, 2001. A 10% and 20% adverse change in
all assumptions used to determine fair value at December 31, 2001, results in a
$22 million and $44 million decrease in fair value, respectively. No valuation
allowance was necessary for the years ended December 31, 2001 and December 31,
2000.
78
<PAGE>
At December 31, 2001, key economic assumptions and the sensitivity of the
current fair value of residual cash flows to an immediate 10% or 20% adverse
change in those assumptions are as follows:
FAIR VALUE ASSUMPTIONS
------------------------------------
December 31, 2001 Residential Student
Dollars in millions Mortgage Loans Other
==========================================================================
Fair value of retained interest
(carrying value) $ 29 $ 52 $ 2
Weighted-average life (in years) .8 2.0 1.8
Residual cash flows discount
rate 7.50% 4.40% 4.14%
Impact on fair value of 10%
adverse change $(.2) $(2.2)
Impact on fair value of 20%
adverse change (.3) (3.3)
Prepayment speed assumption
(CPR) 50.0% 13.7% (a)
Impact on fair value of 10%
adverse change $ (1.9) $ (.8) (a)
Impact on fair value of 20%
adverse change (3.5) (1.3) (a)
==========================================================================
(a) Historically, there have been no prepayments on these loans, which are
guaranteed by an agency of the U. S. Government.
These sensitivities are hypothetical and should be used with caution. As the
figures indicate, changes in fair value based on a 10% variation in assumptions
generally cannot be extrapolated because the relationship of the change in
assumption to the change in fair value may not be linear. Also, the effect of a
variation in a particular assumption on fair value is calculated independently
of variations in other assumptions, whereas a change in one factor may
realistically have an impact on another, which might magnify or counteract the
sensitivities.
During 2000, the Corporation sold commercial mortgage loans of $865 million
in secondary market securitization transactions and recognized a pretax gain of
$13 million. Additionally, the Corporation sold $737 million of commercial
mortgage loans into a trust. The Corporation retained servicing rights in the
loans and 99% or $730 million of the mortgage-backed securities. The 1% interest
in the trust was purchased by a publicly-traded entity managed by a subsidiary
of PNC. A substantial portion of the entity's purchase price was financed by
PNC. The Corporation had securities of $155 million related to the trust in its
portfolio at December 31, 2000. No gain related to the portion of securities
retained was recognized by the Corporation as of December 31, 2000. The
securities were subsequently sold to third parties in the first quarter of 2001.
NOTE 15 DEPOSITS
The aggregate amount of time deposits with a denomination greater than $100,000
was $4.0 billion and $5.8 billion at December 31, 2001 and 2000, respectively.
Remaining contractual maturities of time deposits for the years 2002 through
2006 and thereafter are $8.7 billion, $1.3 billion, $1.2 billion, $681 million
and $917 million, respectively.
NOTE 16 BORROWED FUNDS
Bank notes have interest rates ranging from 1.95% to 6.50% with approximately
40% maturing in 2002. Senior and subordinated notes consisted of the following:
------------------------------------------
December 31, 2001
Dollars in
millions Outstanding Stated Rate Maturity
============================================================
Senior $2,762 2.45% - 7.00% 2002-2006
Subordinated
Nonconvertible 2,298 6.13 - 8.25 2003-2009
---------
Total $5,060
=============================================================
Borrowed funds have scheduled repayments for the years 2002 through 2006 and
thereafter of $3.4 billion, $2.4 billion, $2.1 billion, $1.6 billion and $2.6
billion, respectively.
Included in outstandings for the senior and subordinated notes in the table
above are basis adjustments of $8 million and $89 million, respectively, related
to SFAS No. 133.
NOTE 17 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 premium that
declines 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 premium that declines 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, 2001 was 2.65%. Trust C Capital
Securities are redeemable on or after June 1, 2008 at par.
79
<PAGE>
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., PNC's
principal bank subsidiary, and Trusts B and C are wholly owned finance
subsidiaries of the Corporation.
The respective parents of the Trusts have, through the agreements governing
the Capital Securities, taken together, fully, irrevocably and unconditionally
guaranteed all of the obligations of the Trusts under the Capital Securities.
For a discussion of certain dividend restrictions, see Note 19 Regulatory
Matters.
NOTE 18 SHAREHOLDERS' EQUITY
Information related to preferred stock is as follows:
----------------------------------------
Preferred Shares
Liquidation ------------------------
December 31 Value per
Shares in thousands Share 2001 2000
==============================================================
Authorized
$1 par value 17,172 17,224
Issued and outstanding
Series A $ 40 10 11
Series B 40 3 3
Series C 20 204 229
Series D 20 293 318
Series F 50 6,000
- --------------------------------------------------------------
Total 510 6,561
==============================================================
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.
The Series F preferred stock was nonconvertible and nonvoting, except in
limited circumstances. On March 6, 2001, the Corporation commenced a cash tender
offer for its nonconvertible Series F preferred stock. Approximately 1.9
million shares were purchased by the Corporation at a price of $50.35 per share
plus accrued and unpaid dividends on April 5, 2001. The remainder of the
outstanding shares of Series F preferred stock was redeemed on October 4, 2001
for approximately $205 million.
During 2000, the Board of Directors adopted a shareholder rights plan
providing for issuance of share purchase rights. Except as provided in the plan,
if a person or group becomes beneficial owner of 10% or more of PNC's
outstanding 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: 472,015 shares in 2001, 649,334 shares in 2000 and
567,266 shares in 1999.
At December 31, 2001, the Corporation had reserved approximately 33.8
million common shares to be issued in connection with certain stock plans and
the conversion of certain debt and equity securities.
NOTE 19 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
agreements entered into with any of the agencies.
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 result in certain mandatory and
possibly additional discretionary actions by regulators that, if undertaken,
could have a 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.
80
<PAGE>
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 2001 2000 2001 2000
=======================================================================
Risk-based capital
Tier I
PNC $4,599 $5,367 7.8% 8.6%
PNC Bank, N.A. 4,704 5,055 8.7 8.7
Total
PNC 6,958 7,845 11.8 12.6
PNC Bank, N.A. 6,581 7,012 12.1 12.1
Leverage
PNC 4,599 5,367 6.8 8.0
PNC Bank, N.A. 4,704 5,055 7.6 8.2
=======================================================================
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, 2001, the Corporation and each bank
subsidiary met the "well capitalized" capital ratio requirements.
The principal source of parent company revenue and cash flow is the
dividends it receives from PNC Bank. The bank's dividend level may be impacted
by its capital needs, supervisory policies, corporate policies, contractual
restrictions and other factors. Also, there are legal limitations on the ability
of national banks to pay dividends or make other capital distributions. PNC Bank
was not permitted to pay dividends to the parent company as of December 31, 2001
without prior approval from banking regulators as a result of the repositioning
charges taken in 2001 and prior dividends. Under these limitations, PNC Bank's
capacity to pay dividends without prior regulatory approval can be restored
through retention of earnings. Management expects PNC Bank's dividend capacity
relative to such legal limitations to be restored during 2002 from retained
earnings. The parent company currently has available funds to pay dividends at
current rates through 2002.
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. Such extensions of credit, with limited exceptions, must be fully
collateralized by certain specified assets. In certain circumstances, federal
regulatory authorities may impose more restrictive limitations.
Federal Reserve Board regulations require depository institutions to
maintain cash reserves with the Federal Reserve Bank. During 2001, subsidiary
banks maintained reserves which averaged $127 million.
NOTE 20 FINANCIAL DERIVATIVES
Effective January 1, 2001, the Corporation implemented SFAS No. 133. As a result
of the adoption of this statement, the Corporation recognized, in the first
quarter of 2001, an after-tax loss from the cumulative effect of a change in
accounting principle of $5 million reported in the consolidated income statement
and an after-tax accumulated other comprehensive loss of $4 million. The impact
of the adoption of this standard related to the residential mortgage banking
business is reflected in the results of discontinued operations.
Earnings adjustments resulting from cash flow and fair value hedge
ineffectiveness were not significant to the results of operations of the
Corporation during 2001.
During the next twelve months, the Corporation expects to reclassify to
earnings $118 million of pretax net gains, or $77 million after tax, on cash
flow hedge derivatives currently reported in accumulated other comprehensive
income. These net gains are anticipated to result from net cash flows on receive
fixed interest rate swaps and would mitigate reductions in interest income
recognized on the related floating rate commercial loans.
The Corporation generally has established agreements with its major
derivative dealer counterparties that provide for exchanges of marketable
securities or cash to collateralize either party's positions. At December 31,
2001 the Corporation held cash and U.S. government securities with a fair value
of $190 million to collateralize net gains with counterparties.
At December 31, 2000, the Corporation had financial derivatives used for
risk management with notional amounts totaling $15.7 billion. These derivatives
had a net positive fair
81
<PAGE>
value of $92 million at December 31, 2000. Included in these amounts were credit
default swaps, with notional amounts of $4.4 billion and negative fair value of
$2 million, no longer considered to be derivatives under SFAS No. 133, due to
their particular structure.
In addition, at December 31, 2000 the Corporation had financial derivatives
for customer-related and other purposes with notional amounts totaling $31.3
billion and $1.2 billion, respectively. These derivatives had net fair values of
negative $12 million and positive $12 million, respectively. Total positive and
negative fair value positions within the customer-related derivatives were $273
million and $285 million, respectively. Total positive and negative fair value
positions for derivatives held for other purposes were $13 million and $1
million, respectively.
NOTE 21 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 on 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 ("post-retirement benefits") through various plans.
A reconciliation of the changes in the benefit obligation for qualified and
nonqualified pension plans and post-retirement benefit plans as well as the
change in plan assets for the qualified pension plan is as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------
Qualified and Post-retirement
Nonqualified Pensions Benefits
------------------------------ --------------------------
December 31 - in millions 2001 2000 2001 2000
============================================================================================================================
<S> <C> <C> <C> <C>
Benefit obligation at beginning of year $ 856 $ 840 $ 203 $ 198
Service cost 32 32 2 2
Interest cost 66 65 14 14
Actuarial loss 41 7 12 7
Settlements (20)
Participant contributions 4 4
Benefits paid (75) (68) (24) (22)
- ----------------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year $ 920 $ 856 $ 211 $ 203
- ----------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at beginning of year $ 952 $ 939
Actual loss on plan assets (89) (29)
Employer contribution 140 130
Settlements (20)
Benefits paid (75) (68)
- --------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $ 928 $ 952
- --------------------------------------------------------------------------------------------
Funded status $ 8 $ 96 $(211) $(203)
Unrecognized net actuarial loss (gain) 289 65 (58) 38
Unrecognized prior service credit (3) (5) 54 (63)
- ----------------------------------------------------------------------------------------------------------------------------
Net amount recognized on the balance sheet $ 294 $ 156 $(215) $(228)
- ----------------------------------------------------------------------------------------------------------------------------
Prepaid pension cost $ 294 $ 156
Additional minimum liability (21) (18)
Intangible asset 3 2
Accumulated other comprehensive loss 18 16
- --------------------------------------------------------------------------------------------
Net amount recognized on the balance sheet $ 294 $ 156
============================================================================================================================
</TABLE>
The accrued pension benefit liability above includes $39 million and $34 million
for the nonqualified plans at December 31, 2001 and 2000, respectively. The
accumulated benefit obligation for pension plans with accumulated benefit
obligations in excess of plan assets (the nonqualified plans) were $60 million
and $53 million as of December 31, 2001 and December 31, 2000, respectively. The
nonqualified plans had no plan assets at either date.
Plan assets primarily consist of listed common stocks, U.S. government and
agency securities and various mutual funds managed by BlackRock from which
BlackRock and PFPC receive compensation for providing investment advisory,
custodial and transfer agency services. Plan assets are managed by BlackRock and
do not include common or preferred stock of the Corporation.
82
<PAGE>
The components of net periodic pension and post-retirement benefit cost were as
follows:
<TABLE>
<CAPTION>
--------------------------------------- ------------------------------------
Qualified and Nonqualified Pensions Post-retirement Benefits
--------------------------------------- ------------------------------------
Year ended December 31 - in millions 2001 2000 1999 2001 2000 1999
============================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 32 $ 32 $ 24 $ 2 $ 2 $ 2
Interest cost 66 65 58 14 14 12
Expected return on plan assets (97) (93) (75)
Transition amount amortization (4) (5)
Curtailment gain (3)
Amortization of prior service cost (1) (1) (1) (6) (6) (6)
Recognized net actuarial loss 2 2
Losses due to settlements 7
- ----------------------------------------------------------------------------------------------------------------------------
Net periodic cost $ 2 $ 6 $ 3 $ 7 $ 10 $ 8
============================================================================================================================
</TABLE>
Weighted-average assumptions were as follows:
-------------------------------------
Qualified and Nonqualified Pensions
-------------------------------------
Year ended December 31 2001 2000 1999
==================================================================
Discount rate 7.25% 7.50% 7.75%
Rate of compensation
increase 4.50 4.50 4.50
Expected return on plan
assets 9.50 9.50 9.50
==================================================================
---------------------------------------
Post-retirement Benefits
---------------------------------------
Year ended December 31 2001 2000 1999
==================================================================
Discount rate 7.25% 7.50% 7.75%
Expected health care
cost trend rate
Medical pre-65 7.00 7.00 7.00
Medical post-65 8.00 8.00 8.00
Dental 7.00 7.00 7.00
==================================================================
The health care cost trend rate declines until it stabilizes at 5.50% beginning
in 2005. A one-percentage-point change in assumed health care cost trend rates
would have the following effects:
--------------------
Year ended December 31, 2001 - in millions Increase Decrease
===================================================================
Effect on total service and interest cost $ 1 $(1)
Effect on post-retirement benefit
obligation 9 (9)
===================================================================
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 in treasury or by the Corporation's employee stock
ownership plan ("ESOP"). The Corporation also maintains a nonqualified
supplemental savings plan for certain employees.
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 $8 million in 2001 and $9
million in 2000 and 1999. To satisfy additional debt service requirements, PNC
contributed $1 million in 2001 and $9 million in 1999. No contributions were
made in 2000. As of December 31, 2001 the ESOP's borrowings have been paid off
or fully extinguished.
As the ESOP's borrowings were repaid, shares were 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.
83
<PAGE>
COMPONENTS OF ESOP SHARES
-----------------------
As of or for the year ended December 31
In thousands 2001 2000
=====================================================================
Unallocated 364
Allocated 4,134 4,316
Released for allocation 364 348
Retired (490) (530)
- ---------------------------------------------------------------------
Total 4,008 4,498
=====================================================================
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 $28 million, $30 million and $17 million for
2001, 2000 and 1999, respectively.
NOTE 22 STOCK-BASED COMPENSATION PLANS
The Corporation has a long-term incentive award plan ("Incentive Plan") that
provides for the granting of incentive stock options, nonqualified stock
options, stock appreciation rights, performance units, restricted stock and
other incentive shares to executives and directors. 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. Of this amount, no more than 20% is
available for restricted stock and other incentive share awards.
As of December 31, 2001 no incentive stock options, stock appreciation
rights or performance unit awards were outstanding.
NONQUALIFIED STOCK OPTIONS
Options are granted at exercise prices not less than the market value of common
stock on the date of grant. Generally, options granted in 2001, 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 previously owned shares of common stock at
market value on the exercise date.
A summary of stock option activity follows:
--------------------------------------------
Per Option
-----------------------------
Weighted-
Average
Exercise
Shares in thousands Exercise Price Price Shares
=====================================================================
January 1, 1999 $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 (496)
-------
December 31, 2000 21.63 - 76.00 46.25 11,798
Granted 53.74 - 74.70 73.14 3,996
Exercised 21.63 - 59.31 43.46 (2,737)
Terminated 42.19 - 74.59 53.22 (580)
-------
DECEMBER 31, 2001 21.75 - 76.00 55.15 12,477
=====================================================================
Information about stock options outstanding at December 31, 2001 follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------- --------------------------------
Options Outstanding Options Exercisable
-------------------------------------------------------------- --------------------------------
December 31, 2001
Shares in thousands Shares Weighted-average Weighted-average remaining Shares Weighted-average
Range of exercise prices exercise price contractual life (in years) exercise price
===========================================================================================================================
<S> <C> <C> <C> <C> <C>
$21.75 - $32.99 829 $28.96 3.2 829 $28.96
33.00 - 49.99 3,478 42.69 7.5 1,211 43.04
50.00 - 76.00 8,170 63.12 7.8 3,239 54.73
------------- ----------
Total 12,477 $55.15 7.4 5,279 $48.01
===========================================================================================================================
</TABLE>
Options granted in 2001 include options for 52,000 shares granted to
non-employee directors.
The weighted-average grant-date fair value of options granted in 2001, 2000
and 1999 was $15.87, $9.86 and $10.15 per option, respectively. At December 31,
2000 and 1999 options for 5,834,898 and 7,682,745 shares of common stock,
respectively, were exercisable at a weighted-average price of $45.96 and $42.05,
respectively.
There were no options granted in excess of market value in 2001 or 2000.
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. Shares of common stock
available for the granting of options and other awards under the Incentive Plan
and the predecessor plans were 10,584,683 at December 31, 2001, 2000 and 1999.
84
<PAGE>
INCENTIVE SHARE AND RESTRICTED STOCK 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 was
subject to the market price of PNC's common stock equaling or exceeding
specified levels for defined periods. In 2001, 104,250 of these shares were
issued. The remaining shares expired and will not be issued under this award.
The restricted period ends July 1, 2003. During the restricted period, the
recipient receives dividends and can vote the shares. Generally, if the
recipient leaves the Corporation before the end of the restricted period, the
shares will be forfeited.
In 2000, 606,000 incentive shares of common stock were granted to certain
senior executives pursuant to the Incentive Plan. One-half of any shares of
restricted stock issued pursuant to these awards will vest after three years and
the remainder after four years. Shares awarded under this grant will be offset
on a share-for-share basis by shares received, if any, by the executive from the
1998 grant.
There were 39,000 and 66,000 incentive shares forfeited during 2001 and
2000, respectively. No shares were forfeited in 1999.
In addition, 33,600, 53,100 and 37,500 shares of restricted stock were
granted to certain key employees in 2001, 2000 and 1999, respectively. These
shares vest 25% after three years, 25% after four years and 50% after five
years. There were 13,000 shares of restricted stock granted to non-employee
directors in 2001. One half of these shares vest after one year and the
remainder after two years. In 2000, 245,000 shares of restricted stock were
granted to senior executives with a three-year vesting period.
Compensation expense recognized for incentive share and restricted stock
awards totaled $10 million, $8 million and $12 million in 2001, 2000 and 1999,
respectively.
EMPLOYEE STOCK PURCHASE PLAN
The Corporation's employee stock purchase plan ("ESPP") has approximately 2.6
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
==========================================================
2001 395,217 $55.57 and $49.26
2000 504,988 42.82 and 45.53
1999 406,740 43.99 and 47.39
==========================================================
PRO FORMA EFFECTS
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 INCOME FROM CONTINUING OPERATIONS AND EPS
-------------------------
Year ended December 31 Reported Pro forma
===========================================================
Income from continuing
operations (in millions)
2001 $377 $344
2000 1,214 1,196
1999 1,202 1,194
- -----------------------------------------------------------
Diluted earnings per share
2001 $1.26 $1.14
2000 4.09 4.02
1999 3.94 3.92
===========================================================
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.
OPTION PRICING ASSUMPTIONS
---------------------------------
Year ended December 31 2001 2000 1999
============================================================
Risk-free interest rate 4.9% 6.6% 5.2%
Dividend yield 3.2 3.1 3.6
Volatility 25.7 21.8 22.1
Expected life 5 yrs. 5 yrs. 6 yrs.
============================================================
85
<PAGE>
NOTE 23 INCOME TAXES
The components of income taxes were as follows:
-----------------------------------
Year ended December 31
In millions 2001 2000 1999
=========================================================================
Current
Federal $ 195 $ 226 $ 454
State 40 32 35
- -------------------------------------------------------------------------
Total current 235 258 489
Deferred
Federal (51) 363 102
State 3 13 (5)
- -------------------------------------------------------------------------
Total deferred (48) 376 97
- -------------------------------------------------------------------------
Total $ 187 $ 634 $ 586
=========================================================================
Significant components of deferred tax assets and liabilities are as follows:
---------------------
December 31 - in millions 2001 2000
===========================================================================
Deferred tax assets
Allowance for credit losses $ 225 $ 250
Compensation and benefits 31 85
Net unrealized securities losses 75 19
Loan valuations related to
institutional lending
repositioning 330
Other 163 104
- ---------------------------------------------------------------------------
Total deferred tax assets 824 458
- ---------------------------------------------------------------------------
Deferred tax liabilities
Leasing 1,182 824
Depreciation 53 37
Other 89 102
- ---------------------------------------------------------------------------
Total deferred tax liabilities 1,324 963
- ---------------------------------------------------------------------------
Net deferred tax liability $ 500 $ 505
===========================================================================
A reconciliation between the statutory and effective tax rates follows:
--------------------------------------
Year ended December 31 2001 2000 1999
==========================================================================
Statutory tax rate 35.0% 35.0% 35.0%
Increases (decreases) resulting
from
State taxes 4.9 1.6 1.1
Tax-exempt interest (1.8) (.6) (.7)
Goodwill 3.0 .9 .9
Life insurance (3.5) (1.0) (1.0)
Tax credits (7.6) (1.8) (1.4)
Other 3.2 .2 (1.1)
- --------------------------------------------------------------------------
Effective tax rate 33.2% 34.3% 32.8%
==========================================================================
NOTE 24 LEGAL PROCEEDINGS
Several putative class action complaints have been filed against the
Corporation, certain present and former officers or directors and its
independent auditors for 2001 alleging violations of federal securities laws
relating to disclosures and seeking unquantified damages on behalf of purchasers
of the Corporation's common stock during specified periods. Management believes
there are substantial defenses to the lawsuits and intends to defend them
vigorously. The impact of the final disposition of these lawsuits cannot be
assessed at this time.
In January 2001, PNC sold its residential mortgage banking business. Certain
closing date purchase price adjustments aggregating approximately $300 million
pretax are currently in dispute between the parties. The Corporation has
established a receivable of approximately $140 million to reflect additional
purchase price it believes is due from the buyer. The buyer has taken the
position that the purchase price it has already paid should be reduced by
approximately $160 million. The Corporation has established specific reserves
related to a portion of its recorded receivable. The purchase agreement requires
that an independent public accounting firm determine the final adjustments. The
buyer also has filed a lawsuit against the Corporation seeking compensatory
damages with respect to certain of the disputed matters that the Corporation
believes are covered by the process provided in the purchase agreement,
unquantified punitive damages and declaratory and other relief. Management
intends to assert the Corporation's positions vigorously. Management believes
that, net of available reserves, an adverse outcome, expected to be recorded in
discontinued operations, could be material to net income in the period in which
recorded, but that the final disposition of this matter will not be material to
the Corporation's financial position.
The Corporation, in the normal course of business, is subject to various
other pending and threatened lawsuits in which claims for monetary damages are
asserted. Management does not anticipate that the ultimate aggregate liability,
if any, arising out of such other lawsuits will have a material adverse effect
on the Corporation's financial position.
At the present time, management is not in a position to determine whether
any pending or threatened litigation will have a material adverse effect on the
Corporation's results of operations in any future reporting period.
The staffs of the Securities and Exchange Commission and the Federal Reserve
Board have informed PNC that they are conducting inquiries with respect to the
transactions with subsidiaries of a third party financial institution described
in Note 3 Restatements. PNC is cooperating with these inquiries.
86
<PAGE>
NOTE 25 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 2001 2000 1999
===============================================================================================================================
CALCULATION OF BASIC EARNINGS PER COMMON SHARE
<S> <C> <C> <C>
Income from continuing operations $377 $1,214 $1,202
Less: Preferred dividends declared (a) 13 19 19
- -------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations applicable to basic earnings per common share 364 1,195 1,183
Income from discontinued operations applicable to basic earnings per common
share 5 65 62
Cumulative effect of accounting change applicable to basic earnings per common
share (5)
- -------------------------------------------------------------------------------------------------------------------------------
Net income applicable to basic earnings per common share $364 $1,260 $1,245
Basic weighted-average common shares outstanding (in thousands) 286,726 289,958 296,886
Basic earnings per common share from continuing operations $1.27 $4.12 $3.98
Basic earnings per common share from discontinued operations .02 .23 .21
Basic earnings per common share from cumulative effect of accounting change (.02)
- -------------------------------------------------------------------------------------------------------------------------------
Basic earnings per common share $1.27 $4.35 $4.19
- -------------------------------------------------------------------------------------------------------------------------------
CALCULATION OF DILUTED EARNINGS PER COMMON SHARE
Income from continuing operations $377 $1,214 $1,202
Less: Dividends declared on nonconvertible Series F preferred stock (a) 13 18 18
- -------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations applicable to diluted earnings per common
share 364 1,196 1,184
Income from discontinued operations applicable to diluted earnings per common
share 5 65 62
Cumulative effect of accounting change applicable to diluted earnings per
common share (5)
- -------------------------------------------------------------------------------------------------------------------------------
Net income applicable to diluted earnings per common share $364 $1,261 $1,246
Basic weighted-average common shares outstanding (in thousands) 286,726 289,958 296,886
Weighted-average common shares to be issued using average market price and
assuming:
Conversion of preferred stock Series A and B 106 118 131
Conversion of preferred stock Series C and D 870 986 1,072
Conversion of debentures 17 20 24
Exercise of stock options 1,661 1,531 1,529
Incentive share awards 368 173 383
- -------------------------------------------------------------------------------------------------------------------------------
Diluted weighted-average common shares outstanding (in thousands) 289,748 292,786 300,025
Diluted earnings per common share from continuing operations $1.26 $4.09 $3.94
Diluted earnings per common share from discontinued operations .02 .22 .21
Diluted earnings per common share from cumulative effect of accounting change (.02)
- -------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per common share $1.26 $4.31 $4.15
===============================================================================================================================
</TABLE>
(a) Adjustment for year ended December 31, 2001 includes $1 million of cost
incurred due to tender offer of Series F preferred stock.
87
<PAGE>
NOTE 26 SEGMENT REPORTING
PNC operates seven major businesses engaged in regional community banking,
corporate banking, real estate finance, asset-based lending, wealth management,
asset management and global fund services.
Business results are presented based on PNC's management accounting
practices and the Corporation's management structure. There is no comprehensive,
authoritative body of guidance for management accounting equivalent to generally
accepted accounting principles; therefore, PNC's business results are not
necessarily comparable with similar information for any other financial services
institution. Financial results are presented, to the extent practicable, as if
each business operated on a stand-alone basis.
The management accounting process uses various balance sheet and income
statement assignments and transfers to measure performance of the businesses.
Methodologies change from time to time as management accounting practices are
enhanced and businesses change. Securities available for sale or borrowings and
related net interest income are assigned based on the net asset or liability
position of each business. Capital is assigned based on management's assessment
of inherent risks and equity levels at independent companies providing similar
products and services. The allowance for credit losses is allocated based on
management's assessment of risk inherent in the loan portfolios. Support areas
not directly aligned with the businesses are allocated primarily based on the
utilization of services.
Total business financial results differ from consolidated results from
continuing operations primarily due to differences between management accounting
practices and generally accepted accounting principles, equity management
activities, minority interest in income of consolidated entities, residual asset
and liability management activities, unallocated reserves, eliminations and
unassigned items, the impact of which is reflected in the "Other" category.
The impact of the institutional lending repositioning and other strategic
actions that occurred during 2001, 2000 and 1999 is reflected in the business
results.
BUSINESS SEGMENT PRODUCTS AND SERVICES
Regional Community Banking provides deposit, branch-based brokerage, electronic
banking and credit products and services to retail customers as well as deposit,
credit, treasury management and capital markets products and services to small
businesses primarily within PNC's geographic region.
Corporate Banking provides credit, equipment leasing, treasury management
and capital markets products and services primarily to mid-sized corporations
and government entities within PNC's geographic region.
PNC Real Estate Finance provides credit, capital markets, treasury
management, commercial mortgage loan servicing and other financial products and
services to developers, owners and investors in commercial real estate. PNC's
commercial real estate financial services platform provides processing services
through Midland Loan Services, Inc., a leading third party provider of loan
servicing and technology to the commercial real estate finance industry, and
national syndication of affordable housing equity through Columbia Housing
Partners, LP.
PNC Business Credit provides asset-based lending, capital markets and
treasury management products and services to middle market customers nationally.
PNC Business Credit's lending services include loans secured by accounts
receivable, inventory, machinery and equipment, and other collateral, and its
customers include manufacturing, wholesale, distribution, retailing and service
industry companies.
PNC Advisors provides a full range of tailored investment products and
services to affluent individuals and families, including full-service brokerage
through J.J.B. Hilliard, W.L. Lyons, Inc. and investment advisory services to
the ultra-affluent through Hawthorn. PNC Advisors also serves as investment
manager and trustee for employee benefit plans and charitable and endowment
assets.
BlackRock is one of the largest publicly traded investment management firms
in the United States with approximately $239 billion of assets under management
at December 31, 2001. BlackRock manages assets on behalf of institutions and
individuals worldwide through a variety of fixed income, liquidity and equity
mutual funds, separate accounts and alternative investment products. Mutual
funds include the flagship fund families, BlackRock Funds and BlackRock
Provident Institutional Funds. In addition, BlackRock provides risk management
and investment system services to institutional investors under the BlackRock
Solutions name.
PFPC is the largest full-service mutual fund transfer agent and second
largest provider of mutual fund accounting and administration services in the
United States, providing a wide range of fund services to the investment
management industry. PFPC also provides processing solutions to the
international marketplace through its Ireland and Luxembourg operations.
88
<PAGE>
<TABLE>
<CAPTION>
RESULTS OF BUSINESSES
---------------------------------------------------------------------------------------------------
Regional PNC Real PNC
Year ended December 31 Community Corporate Estate Business PNC
In millions Banking Banking Finance Credit Advisors BlackRock PFPC Other Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
2001
INCOME STATEMENT
Net interest income $1,460 $501 $116 $104 $128 $11 $(66) $8 $2,262
Noninterest income 758 32 89 (8) 607 533 726 (194) 2,543
- -----------------------------------------------------------------------------------------------------------------------------------
Total revenue 2,218 533 205 96 735 544 660 (186) 4,805
Provision for credit losses 50 733 44 29 2 45 903
Depreciation and amortization 71 13 22 2 17 26 45 77 273
Other noninterest expense 1,169 374 136 29 487 337 554 (21) 3,065
- -----------------------------------------------------------------------------------------------------------------------------------
Pretax earnings 928 (587) 3 36 229 181 61 (287) 564
Income taxes 332 (212) (35) 14 86 74 25 (97) 187
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings $596 $(375) $38 $22 $143 $107 $36 $(190) $377
- -----------------------------------------------------------------------------------------------------------------------------------
Inter-segment revenue $11 $4 $61 $16 $6 $(98)
- -----------------------------------------------------------------------------------------------------------------------------------
AVERAGE ASSETS $40,285 $16,685 $5,290 $2,463 $3,330 $684 $1,771 $(153) $70,355
- -----------------------------------------------------------------------------------------------------------------------------------
2000
INCOME STATEMENT
Net interest income $1,408 $582 $118 $99 $136 $7 $(46) $(140) $2,164
Noninterest income 619 254 108 20 656 477 656 101 2,891
- -----------------------------------------------------------------------------------------------------------------------------------
Total revenue 2,027 836 226 119 792 484 610 (39) 5,055
Provision for credit losses 45 79 (7) 12 5 2 136
Depreciation and amortization 71 13 20 2 14 20 49 70 259
Other noninterest expense 1,000 381 125 28 497 314 483 (16) 2,812
- -----------------------------------------------------------------------------------------------------------------------------------
Pretax earnings 911 363 88 77 276 150 78 (95) 1,848
Income taxes 321 122 4 28 103 63 31 (38) 634
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings $590 $241 $84 $49 $173 $87 $47 $(57) $1,214
- -----------------------------------------------------------------------------------------------------------------------------------
Inter-segment revenue $3 $5 $79 $13 $5 $(105)
- -----------------------------------------------------------------------------------------------------------------------------------
Average Assets $38,958 $17,746 $5,889 $2,271 $3,500 $537 $1,578 $(1,988) $68,491
- -----------------------------------------------------------------------------------------------------------------------------------
1999
INCOME STATEMENT
Net interest income $1,411 $534 $132 $71 $130 $(8) $6 $68 $2,344
Noninterest income 667 85 67 11 608 381 251 380 2,450
- -----------------------------------------------------------------------------------------------------------------------------------
Total revenue 2,078 619 199 82 738 373 257 448 4,794
Provision for credit losses 61 16 9 11 7 59 163
Depreciation and amortization 96 18 22 2 18 18 12 110 296
Other noninterest expense 1,002 381 118 23 483 252 175 113 2,547
- -----------------------------------------------------------------------------------------------------------------------------------
Pretax earnings 919 204 50 46 230 103 70 166 1,788
Income taxes 326 59 17 88 44 26 26 586
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings $593 $145 $50 $29 $142 $59 $44 $140 $1,202
- -----------------------------------------------------------------------------------------------------------------------------------
Inter-segment revenue $6 $2 $(1) $81 $10 $3 $(101)
- -----------------------------------------------------------------------------------------------------------------------------------
AVERAGE ASSETS $37,502 $18,041 $7,133 $1,759 $3,353 $448 $308 $(630) $67,914
===================================================================================================================================
</TABLE>
Gains on the sales of the credit card business, the BlackRock IPO and Concord
stock totaling $298 million in 1999 are included in the "Other" category. Also
in 1999, costs related to efficiency initiatives of $48 million and a
contribution to the PNC Foundation of $30 million are included in the "Other"
category.
Differences between management accounting practices and generally accepted
accounting principles, divested and exited businesses, equity management
activities, minority interest in income of consolidated entities, residual asset
and liability management activities, eliminations and unassigned items comprise
the remainder of the "Other" category.
89
<PAGE>
NOTE 27 COMPREHENSIVE INCOME
The Corporation's other comprehensive income primarily consists of unrealized
gains or losses on securities available for sale and cash flow hedge derivatives
and minimum pension liability adjustments. The income effects allocated to each
component of other comprehensive income (loss) are as follows:
-------------------------------------
Tax
Year ended December 31 Pretax Benefit After-tax
In millions Amount (Expense) Amount
===========================================================================
2001
Unrealized securities
losses $ (86) $ 30 $ (56)
Less: Reclassification
adjustment for losses
realized in net income (8) 3 (5)
- ---------------------------------------------------------------------------
Net unrealized
securities losses (78) 27 (51)
- ---------------------------------------------------------------------------
SFAS No. 133 transition
adjustment (6) 2 (4)
Unrealized gains on cash
flow hedge derivatives 102 (36) 66
Less: Reclassification
adjustment for losses
realized in net income (55) 19 (36)
- ---------------------------------------------------------------------------
Net unrealized gains on
cash flow hedge
derivatives 151 (53) 98
Minimum pension
liability adjustment (2) 1 (1)
Other 3 (1) 2
- ---------------------------------------------------------------------------
Other comprehensive
income from
continuing operations $ 74 $ (26) $ 48
- ---------------------------------------------------------------------------
2000
Unrealized securities
gains $ 124 $ (40) $ 84
Less: Reclassification
adjustment for losses
realized in net income (3) 1 (2)
- ---------------------------------------------------------------------------
Net unrealized
securities gains 127 (41) 86
Minimum pension
liability adjustment 2 (1) 1
Other 3 (1) 2
- ---------------------------------------------------------------------------
Other comprehensive
income from continuing
operations $ 132 $ (43) $ 89
- ---------------------------------------------------------------------------
1999
Unrealized securities
losses $(186) $ 64 $(122)
Less: Reclassification
adjustment for losses
realized in net income (28) 10 (18)
- ---------------------------------------------------------------------------
Net unrealized
securities losses (158) 54 (104)
Minimum pension
liability adjustment (8) 3 (5)
Other 2 (1) 1
- ---------------------------------------------------------------------------
Other comprehensive
loss from continuing
operations $(164) $ 56 $(108)
===========================================================================
The accumulated balances related to each component of other comprehensive income
(loss) are as follows:
-------------------
December 31 - in millions 2001 2000
===========================================================
Net unrealized securities losses $(86) $(35)
Net unrealized gains on cash flow
hedge derivatives 98
Minimum pension liability adjustment (12) (11)
Other 5 3
-----------------------------------------------------------
Accumulated other comprehensive
income (loss) from continuing
operations $5 $(43)
===========================================================
90
<PAGE>
NOTE 28 FAIR VALUE OF FINANCIAL INSTRUMENTS
<TABLE>
<CAPTION>
----------------------------------- -----------------------------------
2001 2000
----------------------------------- -----------------------------------
CARRYING FAIR Carrying Fair
December 31 - in millions AMOUNT VALUE Amount Value
==========================================================================================================================
ASSETS
<S> <C> <C> <C> <C>
Cash and short-term assets $ 6,200 $ 6,200 $ 5,041 $ 5,041
Securities 13,908 13,905 5,902 5,902
Loans held for sale 4,189 4,189 1,655 1,655
Net loans (excludes leases) 32,941 33,588 46,066 46,872
Commercial mortgage servicing rights 199 240 156 267
Financial derivatives (a)
Interest rate risk management 278 278
Commercial mortgage banking risk management 5 5
Customer/other derivatives 497 497
LIABILITIES
Demand, savings and money market deposits 34,531 34,531 30,686 30,686
Time deposits 12,773 12,942 16,978 17,101
Borrowed funds 12,390 12,677 11,822 12,043
Financial derivatives (a)
Interest rate risk management 16 16
Commercial mortgage banking risk management 4 4
Customer/other derivatives 476 476
OFF-BALANCE-SHEET
Unfunded loan commitments (12) (12) (11) (11)
Letters of credit (10) (10) (10) (10)
Financial derivatives (a)
Interest rate risk management 63 104
Commercial mortgage banking risk management (2) (10)
Credit-related activities (b) (2)
==========================================================================================================================
</TABLE>
(a) Effective January 1, 2001, the Corporation implemented SFAS No. 133. The
statement requires the Corporation to recognize all derivative instruments
as either assets or liabilities on the balance sheet at fair value.
Financial derivatives are reported at fair value in other assets or other
liabilities.
(b) Due to the structure of these contracts, they are no longer considered
financial derivatives under SFAS No. 133.
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
The fair value of securities 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.
91
<PAGE>
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. These fair values are based on assumptions
as to prepayment speeds, discount rate and the weighted-average life of the
related commercial loans.
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 assuming 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 assuming
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 based on the discounted value of the expected
net cash flows. These fair values represent the amounts the Corporation would
receive or pay to terminate the contracts, assuming current interest rates.
NOTE 29 UNUSED LINE OF CREDIT
At December 31, 2001, 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.
NOTE 30 SUBSEQUENT EVENTS
In January 2002, PNC Business Credit acquired a portion of the U.S. asset-based
lending business of NBOC. As a result of this acquisition, PNC Business Credit
established six new marketing offices and enhanced its presence as one of the
premier asset-based lenders for the middle market customer segment. At the
acquisition date, credit exposure acquired was approximately $2.6 billion
including $1.5 billion of loan outstandings. None of the loans were
nonperforming at acquisition.
Additionally, PNC Business Credit agreed to service a portion of NBOC's
remaining U.S. asset-based loan portfolio ("serviced portfolio") for a period of
eighteen months. The serviced portfolio consisted of approximately $670 million
of credit exposure including $463 million of outstandings as of the acquisition
date. At closing, $138 million of these outstandings were classified as
nonperforming. The serviced portfolio's credit exposure and outstandings are
expected to be reduced through managed liquidation and runoff during the
eighteen-month servicing period. At the end of the servicing term, NBOC has the
right to transfer the then remaining serviced portfolio to PNC Business Credit.
PNC Business Credit established a liability of $112 million in 2002 as part of
the allocation of the purchase price to reflect this obligation. The amount of
this liability will be assessed quarterly with any changes recognized in
earnings. During the servicing term, NBOC will be responsible for realized
credit losses with respect to the serviced portfolio to a maximum of $50
million. If the right to transfer is exercised, the Corporation is responsible
for realized credit losses on the serviced portfolio that may occur during the
eighteen-month period in excess of certain NBOC specific reserves related to
those assets, when applicable (available only on specified credits), and the $50
million first loss position. PNC Business Credit management currently expects
the amounts indicated above to be adequate to cover potential losses in
connection with the serviced portfolio.
On January 3, 2002, the Board of Directors authorized the Corporation to
purchase up to 35 million shares of its common stock through February 29, 2004.
These shares may be purchased in the open market or privately negotiated
transactions. This authorization terminated any prior authorization. The extent
and timing of any share repurchases will depend on a number of factors
including, among others, progress in disposing of loans held for sale,
regulatory capital considerations, alternative uses of capital and receipt of
regulatory approvals if then required.
92
<PAGE>
NOTE 31 PARENT COMPANY
Summarized financial information of the parent company is as follows:
STATEMENT OF INCOME
-----------------------------------
Year ended December 31 - in millions 2001 2000 1999
==========================================================================
OPERATING REVENUE
Dividends from:
Bank subsidiaries $1,116 $ 690 $1,139
Nonbank subsidiaries 60 55 80
Interest income 6 9 9
Noninterest income 2 1 4
- --------------------------------------------------------------------------
Total operating revenue 1,184 755 1,232
- --------------------------------------------------------------------------
OPERATING EXPENSE
Interest expense 50 54 86
Other expense 6 (6) 52
- --------------------------------------------------------------------------
Total operating expense 56 48 138
- --------------------------------------------------------------------------
Income before income taxes and
equity in undistributed net
income of subsidiaries 1,128 707 1,094
Income tax benefits (17) (21) (47)
- --------------------------------------------------------------------------
Income before equity in
undistributed net income of
subsidiaries 1,145 728 1,141
Bank subsidiaries (531) 386 (7)
Nonbank subsidiaries (237) 165 130
- --------------------------------------------------------------------------
Net income $ 377 $1,279 $1,264
==========================================================================
BALANCE SHEET
-----------------------
December 31 - in millions 2001 2000
===========================================================================
ASSETS
Cash and due from banks $ 1 $ 1
Securities available for sale 94 53
Investments in:
Bank subsidiaries 5,324 5,640
Nonbank subsidiaries 1,555 1,656
Other assets 152 160
- --------------------------------------------------------------------------
Total assets $7,126 $7,510
- --------------------------------------------------------------------------
LIABILITIES
Borrowed funds $ 100
Nonbank affiliate borrowings $1,086 522
Accrued expenses and other liabilities 217 232
- ---------------------------------------------------------------------------
Total liabilities 1,303 854
- ---------------------------------------------------------------------------
SHAREHOLDERS' EQUITY 5,823 6,656
- ---------------------------------------------------------------------------
Total liabilities and shareholders' equity $7,126 $7,510
===========================================================================
Borrowed funds at December 31, 2000 were repaid 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' commercial mortgage servicing operations,
the parent company has committed to maintain such affiliates' net worth above
minimum requirements.
During 2001, 2000 and 1999, the parent company received net income tax
refunds of $37 million, $36 million and $44 million, respectively. Such refunds
represent the parent company's portion of consolidated income taxes. During
2001, 2000 and 1999, the parent company paid interest of $49 million, $56
million and $96 million, respectively.
STATEMENT OF CASH FLOWS
----------------------------------
Year ended December 31 - in millions 2001 2000 1999
=============================================================================
OPERATING ACTIVITIES
Net income $ 377 $1,279 $1,264
Adjustments to reconcile net
income to net cash provided
(used) by operating
activities:
Equity in undistributed
net earnings of
subsidiaries 768 (551) (123)
Other 44 (24) (14)
- ----------------------------------------------------------------------------
Net cash provided by
operating activities 1,189 704 1,127
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INVESTING ACTIVITIES
Net change in short-term
investments with subsidiary
bank 16 (7)
Net capital (contributed to)
returned from subsidiaries (237) 258 631
Securities available for sale
Sales and maturities 1,206 372 1,592
Purchases (1,247) (425) (1,565)
Cash paid in acquisitions (2)
Other (14) (13) (17)
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Net cash (used) provided by
investing activities (292) 208 632
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FINANCING ACTIVITIES
Borrowings from nonbank
subsidiary 763 314 687
Repayments on borrowings from
nonbank subsidiary (190) (440) (1,080)
Acquisition of treasury stock (681) (428) (803)
Cash dividends paid to
shareholders (569) (546) (520)
Issuance of stock 181 189 141
Series F preferred stock
tender offer/maturity (301)
Repayments on borrowings (100) (200)
Other