<PAGE> 1
THE PNC FINANCIAL SERVICES GROUP, INC.
Quarterly Report on Form 10-Q
For the quarterly period ended September 30, 2000
Page 1 represents a portion of the third quarter 2000 Financial Review which
is not required by the Form 10-Q report and is not "filed" as part of the Form
10-Q.
The Quarterly Report on Form 10-Q and cross reference index is on page 39.
<PAGE> 2
FORWARD-LOOKING STATEMENTS
This report and other documents filed by the Corporation with the Securities and
Exchange Commission ("SEC") include forward-looking statements within the
meaning of the Private Securities Litigation Reform Act with respect to the
Corporation's future financial or business performance or conditions. In
addition, the Corporation may make other oral and written forward-looking
statements. Forward-looking statements are typically identified by words or
phrases such as "believe," "expect," "anticipate," "intend," "estimate,"
"position," "target," "assume," "achievable," "potential," "strategy," "goal,"
"plan," "aspiration," "outlook," "continue," "remain," "maintain," "trend" and
variations of such words and similar expressions, or future or conditional verbs
such as "will," "would," "should," "could," "may" or similar expressions.
The Corporation cautions that forward-looking statements are subject to numerous
assumptions, risks and uncertainties, which change over time. Actual results
could differ materially from those anticipated in forward-looking statements and
future results could differ materially from historical performance.
Forward-looking statements speak only as of the date they are made and the
Corporation assumes no duty to update forward-looking statements.
The forward-looking statements assume that the closing of the sale of PNC's
residential mortgage banking business will occur as anticipated. The impact of
this sale could depend on a number of factors such as the nature and effect of
closing adjustments and the amount of capital made available for redeployment
after the sale.
In addition to these factors and those mentioned elsewhere in this report, the
following factors, among others, could cause actual results to differ materially
from forward-looking statements or historical performance: changes in asset
quality and credit risk; the inability to sustain revenue and earnings growth;
changes in interest rates and financial and capital markets; inflation; changes
in values of assets under management and assets serviced; relative investment
performance of assets under management; customer acceptance of PNC products and
services; customer borrowing, repayment, investment, and deposit practices;
customer disintermediation; valuation of debt and equity investments; the
introduction, withdrawal, success and timing of business initiatives and
strategies; decisions PNC makes with respect to the redeployment of available
capital, the extent and cost of any share repurchases, and decisions related to
the reduction of balance sheet leverage and potential investments in PNC
businesses; competitive conditions; the inability to realize cost savings or
revenue enhancements, implement integration plans and other consequences
associated with mergers, acquisitions and divestitures; economic conditions; and
the impact, extent and timing of technological changes, capital management
activities, and actions of the Federal Reserve Board and legislative and
regulatory actions and reforms. Further, an increase in the number of customer
or counterparty delinquencies, bankruptcies, or defaults could result in, among
other things, a higher loan loss provision and reduced profitability.
Some of the above factors are described in more detail in the "Risk Factors"
section, and factors relating to credit, interest rate, liquidity, trading
activities and financial derivatives are discussed in the "Risk Management"
section of this report. Other factors are described elsewhere in this report and
in the Corporation's 1999 Annual Report on Form 10-K filed with the SEC.
THE PNC FINANCIAL SERVICES GROUP, INC.
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1
<PAGE> 3
CONSOLIDATED FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Three months ended September 30 Nine months ended September 30
------------------------------------- ------------------------------------
2000 1999 1999 2000 1999 1999
Dollars in millions, except per share data Core Reported Core Reported
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FINANCIAL PERFORMANCE
Revenue from continuing operations
Net interest income (taxable-equivalent basis) $534 $578 $578 $1,644 $1,798 $1,798
Noninterest income 700 544 571 2,156 1,609 1,825
Total revenue from continuing operations 1,234 1,122 1,149 3,800 3,407 3,623
Income from continuing operations 299 282 299 900 850 915
Discontinued operations 23 21 21 45 45 45
Net income 322 303 320 945 895 960
Cash earnings from continuing operations (a) 328 300 317 986 906 972
Cash earnings from discontinued operations (a) 24 22 22 46 46 46
Total cash earnings (a) 352 322 339 1,032 952 1,018
Per common share
DILUTED EARNINGS
Continuing operations 1.01 .93 .99 3.03 2.77 2.99
Discontinued operations .08 .07 .07 .15 .15 .15
Net income 1.09 1.00 1.06 3.18 2.92 3.14
DILUTED CASH EARNINGS (a)
Continuing operations 1.11 .99 1.05 3.32 2.96 3.18
Discontinued operations .08 .07 .07 .16 .15 .15
Net income 1.19 1.06 1.12 3.48 3.11 3.33
Cash dividends declared .45 .41 .41 1.35 1.23 1.23
SELECTED RATIOS
FROM CONTINUING OPERATIONS
Return on
Average common shareholders' equity 19.99% 20.28% 21.52% 20.67% 20.16% 21.73%
Average assets 1.72 1.67 1.77 1.74 1.66 1.78
Net interest margin 3.54 3.78 3.78 3.63 3.86 3.86
Noninterest income to total revenue 56.73 48.48 49.70 56.74 47.23 50.37
Efficiency (b) 56.79 55.01 53.73 57.32 53.92 54.23
FROM NET INCOME
Return on
Average common shareholders' equity 21.54 21.81 23.07 21.72 21.24 22.81
Average assets (c) 1.67 1.63 1.72 1.67 1.59 1.71
Net interest margin 3.27 3.59 3.59 3.38 3.70 3.70
Noninterest income to total revenue 59.23 51.02 52.08 58.82 49.39 52.18
Efficiency (b) 54.50 54.48 53.34 55.87 53.48 53.78
</TABLE>
<TABLE>
<CAPTION>
September 30 June 30 March 31 December 31 September 30
2000 2000 2000 1999 1999
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (d)
Assets $69,884 $68,885 $68,474 $69,286 $67,395
Loans, net of unearned income 49,791 50,281 50,259 49,673 51,093
Deposits 47,494 46,381 45,767 45,802 44,196
Common shareholders' equity 6,071 5,844 5,726 5,633 5,558
Book value per common share 21.01 20.22 19.68 19.23 18.90
CAPITAL RATIOS
Leverage (c) 6.87% 6.72% 6.67% 6.61% 7.74%
Common shareholders' equity to total assets (d) 8.69 8.48 8.36 8.13 8.25
ASSET QUALITY RATIOS (d)
Nonperforming assets to total loans, loans held for sale
and foreclosed assets .68% .67% .65% .61% .65%
Allowance for credit losses to total loans 1.36 1.34 1.34 1.36 1.32
Allowance for credit losses to nonaccrual loans 219.16 217.04 224.67 231.62 220.98
Net charge-offs to average loans .24 .27 .25 .23 .22
(a) Excluding amortization of goodwill
(b) Excluding amortization and distributions on capital securities
(c) Calculated on a regulatory asset basis including discontinued operations
(d) Continuing operations
====================================================================================================================================
</TABLE>
THE PNC FINANCIAL SERVICES GROUP, INC.
-----
2
<PAGE> 4
FINANCIAL REVIEW
This Financial Review should be read in conjunction with The PNC Financial
Services Group, Inc. and subsidiaries' ("Corporation" or "PNC") unaudited
Consolidated Financial Statements included herein and the Financial Review and
audited Consolidated Financial Statements included in the Corporation's 1999
Annual Report.
OVERVIEW
THE PNC FINANCIAL SERVICES GROUP, INC.
The Corporation is one of the largest diversified financial services companies
in the United States, operating regional banking, corporate banking, real estate
finance, asset-based lending, private banking, asset management and global fund
processing services, which provides products and services nationally and in
PNC's primary geographic markets in Pennsylvania, New Jersey, Delaware, Ohio and
Kentucky.
Financial services organizations today are challenged to demonstrate that they
can generate sustainable and consistent earnings growth in an increasingly
competitive and volatile environment. PNC has responded to these challenges by
transitioning to a diversified national financial services organization driven
by businesses that are increasingly national in scope and less balance sheet
dependent.
Increasing contributions from fee-based businesses including asset management,
processing and private banking have strengthened PNC's revenue and earnings mix.
In addition, the Corporation seeks to enhance consolidated value by leveraging
technology, information, branding, marketing and financial resources across all
businesses.
As part of this transition, the Corporation implemented a number of initiatives
designed to reshape the traditional bank franchise as well as grow
non-traditional, largely fee-based businesses with greater growth potential.
These include the sale of the credit card business, exiting certain
non-strategic wholesale lending businesses and the continued downsizing of the
indirect automobile lending portfolio. PNC also acquired Investor Services Group
("ISG") in December 1999. The combination of ISG with PFPC, the Corporation's
global fund processing services subsidiary, created one of the nation's leading
full-service processors for pooled investment products. On May 31, 2000, PFPC
completed the acquisition of Automated Business Development Corp. ("ABD"), the
leading provider of Blue Sky compliance services to the mutual fund industry.
On October 2, 2000, PNC announced that it reached a definitive agreement to sell
its residential mortgage banking business to Washington Mutual, F.A. for $605
million in cash, subject to closing adjustments. The transaction is expected to
be completed in the first quarter of 2001, subject to regulatory approvals and
customary closing conditions, and is anticipated to result in an after-tax gain
of approximately $250 million. PNC expects the sale to be modestly dilutive to
core earnings in 2001. The capital made available by the sale of the mortgage
business will be redeployed in a number of ways, which may include repurchasing
shares of common stock, continuing to reduce balance sheet leverage and making
targeted investments in high-growth businesses such as asset management and
processing.
The Corporation continues to pursue strategic opportunities to enhance
consolidated value, including the pending sale of its residential mortgage
banking business and subsequent redeployment of the capital.
SUMMARY FINANCIAL RESULTS
Consolidated net income for the first nine months of 2000 was $945 million or
$3.18 per diluted share, a 9% increase compared with core earnings per diluted
share for the prior-year period. Return on average common shareholders' equity
was 21.72% and return on average assets was 1.67% for the first nine months of
2000 compared with core returns of 21.24% and 1.59%, respectively, a year ago.
Cash earnings per diluted share, which exclude goodwill amortization, were $3.48
for the first nine months of 2000, a 12% increase compared with core cash
earnings per diluted share a year ago.
Reported earnings for the first nine months of 1999 were $960 million or $3.14
per diluted share. Core earnings per diluted share were $2.92 and core cash
earnings per diluted share were $3.11 in the first nine months of 1999. Core
earnings for the first nine months of 1999 excluded $358 million of gains on the
sales of the credit card business, certain retail branches and equity interests
in Electronic Payment Services, Inc. ("EPS") and Concord EFS, Inc. ("Concord")
stock that were partially offset by $142 million of valuation adjustments
associated with the decision to exit certain non-strategic wholesale lending
businesses, a $30 million contribution to the PNC Foundation and $98 million of
costs related to efficiency initiatives.
THE PNC FINANCIAL SERVICES GROUP, INC.
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3
<PAGE> 5
The residential mortgage banking business is reflected in discontinued
operations throughout the Corporation's financial statements and related notes
and statistical data. 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.
EFFECT OF DISCONTINUED OPERATIONS
<TABLE>
<CAPTION>
Nine months ended September 30 2000 1999 1999
Dollars in millions, except per share amounts Reported Core Reported
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Income from continuing operations $900 $850 $915
Discontinued operations 45 45 45
Total net income $945 $895 $960
Diluted EPS - continuing operations $3.03 $2.77 $2.99
Discontinued operations .15 .15 .15
Total diluted EPS $3.18 $2.92 $3.14
Cash diluted EPS - continuing
operations (a) $3.32 $2.96 $3.18
Discontinued operations (a) .16 .15 .15
Total cash diluted EPS (a) $3.48 $3.11 $3.33
================================================================================
</TABLE>
(a) Excluding amortization of goodwill
The remainder of the discussion and information in this Financial Review
reflects continuing operations, unless otherwise noted.
Earnings from continuing operations for the first nine months of 2000 of $900
million or $3.03 per diluted share increased 9% compared with core earnings per
diluted share for the first nine months of 1999. Return on average common
shareholders' equity and return on average assets, from continuing operations,
were 20.67% and 1.74%, respectively. The return on average common shareholders'
equity does not yet include the benefit of the redeployment of the capital
associated with the pending sale of the residential mortgage banking business.
The comparable core ratios for the first nine months of 1999 were 20.16% and
1.66%, respectively.
Taxable-equivalent net interest income was $1.644 billion for the first nine
months of 2000, a $154 million decrease compared with the first nine months of
1999. The net interest margin was 3.63% for the first nine months of 2000
compared with 3.86% for the first nine months of 1999. The decreases were
primarily due to funding costs related to the ISG acquisition, the downsizing of
certain credit-related businesses in 1999 and the effect of a higher interest
rate environment.
The provision for credit losses was $96 million for the first nine months of
2000 and net charge-offs were $95 million. The provision for credit losses and
net charge-offs were $133 million and $131 million, respectively, for the same
period in 1999. The declines were primarily due to the sale of the credit card
business in the first quarter of 1999, partially offset by higher commercial net
charge-offs.
Noninterest income of $2.156 billion for the first nine months of 2000 increased
$547 million or 34% compared with the first nine months of 1999, excluding
non-core items last year. The increase was primarily driven by strong growth in
certain fee-based businesses, the impact of the ISG acquisition and higher
equity management income. Excluding ISG, noninterest income increased 16%
compared with the prior-year period.
Noninterest expense was $2.319 billion and the efficiency ratio was 57.32% in
the first nine months of 2000 compared with $1.962 billion and 53.92%,
respectively, in the first nine months of 1999, excluding non-core items. The
increases were primarily due to the ISG acquisition. Excluding ISG, noninterest
expense increased 5% compared with the prior-year period commensurate with
growth in fee-based revenue.
Total assets were $69.9 billion at September 30, 2000 compared with $69.3
billion at December 31, 1999. Average earning assets were $60.1 billion for the
first nine months of 2000 compared with $61.6 billion for the first nine months
of 1999. The decrease was primarily due to the impact of downsizing certain
credit-related businesses in 1999.
Shareholders' equity totaled $6.4 billion at September 30, 2000. The regulatory
capital ratios, which are computed including assets of discontinued operations,
were 6.87% for leverage ratio, 7.58% for tier I and 11.37% for total risk-based
capital. During the first nine months of 2000, PNC repurchased 5.7 million
shares of common stock.
Overall asset quality remained relatively stable during the first nine months of
2000. The ratio of nonperforming assets to total loans, loans held for sale and
foreclosed assets was .68% at September 30, 2000 compared with .61% at December
31, 1999. Nonperforming assets were $354 million at September 30, 2000 compared
with $325 million at December 31, 1999.
The allowance for credit losses was $675 million and represented 1.36% of
period-end loans and 219% of nonaccrual loans at September 30, 2000. The
comparable ratios were 1.36% and 232%, respectively, at December 31, 1999. Net
charge-offs were $95 million or .25% of average loans for the first nine months
of 2000 compared with $131 million or .33%, respectively, for the first nine
months of 1999. The decreases were primarily due to the sale of the credit card
business in the first quarter of 1999, partially offset by higher commercial
net charge-offs.
THE PNC FINANCIAL SERVICES GROUP, INC.
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4
<PAGE> 6
FINANCIAL REVIEW
REVIEW OF BUSINESSES
PNC operates seven major businesses engaged in regional banking, corporate
banking, real estate finance, asset-based lending, private banking, asset
management and global fund processing services: Regional Banking, Corporate
Banking, PNC Real Estate Finance, PNC Business Credit, PNC Advisors, BlackRock
and PFPC.
Business results are presented based on PNC's management accounting practices
and the Corporation's current management structure. There is no comprehensive,
authoritative body of guidance for management accounting equivalent to generally
accepted accounting principles; therefore, PNC's business results are not
necessarily comparable with similar information for any other financial services
institution. Financial results are presented to the extent practicable as if
each business operated on a stand-alone basis.
The presentation of business results was changed during the first quarter of
2000 to reflect the Corporation's current operating strategy and recent
organizational changes. Middle market and equipment leasing activities
(previously included in Regional Banking) are reported in Corporate Banking. In
addition, PNC Real Estate Finance and PNC Business Credit are reported
separately within PNC Secured Finance. Regional real estate lending activities
(previously included in Regional Banking) are reported in PNC Real Estate
Finance. Business financial results for the first nine months of 2000 and 1999
are presented consistent with this structure.
The management accounting process uses various balance sheet and income
statement assignments and transfers to measure performance of the businesses.
Methodologies change from time to time as management accounting practices are
enhanced and businesses change. Securities or borrowings and related net
interest income are assigned based on the net asset or liability position of
each business. Capital is assigned based on management's assessment of inherent
risks and equity levels at independent companies providing similar products and
services. The allowance for credit losses is allocated to the businesses based
on 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 results from continuing operations
primarily due to differences between management accounting practices and
generally accepted accounting principles, divested and exited businesses, equity
management activities, minority interests, residual asset and liability
management activities, eliminations and unassigned items, the impact of which is
reflected in Other. The results of the residential mortgage banking business,
previously PNC Mortgage, are included in results from discontinued operations.
RESULTS OF BUSINESSES
<TABLE>
<CAPTION>
Revenue Return on
Earnings (Taxable-Equivalent Basis) Assigned Capital Average Assets (a)
-------------------------------------------------------------------------------
Nine months ended September 30 - dollars in millions 2000 1999 2000 1999 2000 1999 2000 1999
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PNC Bank
Regional Banking $430 $405 $1,497 $1,475 22% 21% $38,564 $37,574
Corporate Banking 190 168 633 532 21 19 16,318 15,611
--------------------------------------------------------------------------------------------- ------------------
Total PNC Bank 620 573 2,130 2,007 22 21 54,882 53,185
PNC Secured Finance
PNC Real Estate Finance 50 51 155 156 17 17 5,583 5,595
PNC Business Credit 37 20 86 58 33 23 2,230 1,698
--------------------------------------------------------------------------------------------- ------------------
Total PNC Secured Finance 87 71 241 214 22 19 7,813 7,293
Asset management
PNC Advisors 127 111 589 551 31 27 3,541 3,299
BlackRock 63 42 348 280 27 45 492 443
PFPC 31 34 515 170 20 42 1,578 257
--------------------------------------------------------------------------------------------- ------------------
Total asset management 221 187 1,452 1,001 28 32 5,611 3,999
--------------------------------------------------------------------------------------------- ------------------
Total businesses 928 831 3,823 3,222 23 22 68,306 64,477
Other (28) 19 (23) 185 221 3,678
--------------------------------------------------------------------------------------------- ------------------
Results from continuing operations - core 900 850 3,800 3,407 21 20 68,527 68,155
Gain on sale of credit card business 125 193
Gain on sale of equity interest in EPS 63 97
Branch gains 17 27
Gain on sale of Concord stock net of
PNC Foundation contribution 16 41
Wholesale lending repositioning (92) (142)
Costs related to efficiency initiatives (64)
--------------------------------------------------------------------------------------------- ------------------
Results from continuing operations - reported 900 915 3,800 3,623 21 22 68,527 68,155
Results from discontinued operations 45 45 226 299 13 13 459 461
--------------------------------------------------------------------------------------------- ------------------
Total consolidated - reported $945 $960 $4,026 $3,922 22 23 $68,986 $68,616
====================================================================================================================================
</TABLE>
(a) Discontinued operations average assets reported net of liabilities
THE PNC FINANCIAL SERVICES GROUP, INC.
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5
<PAGE> 7
REGIONAL BANKING
<TABLE>
<CAPTION>
Nine months ended September 30 - dollars in millions 2000 1999
-------------------------------------------------------------------------------
<S> <C> <C>
INCOME STATEMENT
Net interest income $1,058 $1,067
Noninterest income 439 408
-------------------------------------------------------------------------------
Total revenue 1,497 1,475
Provision for credit losses 33 47
Noninterest expense 796 791
-------------------------------------------------------------------------------
Pretax earnings 668 637
Income taxes 238 232
-------------------------------------------------------------------------------
Earnings $430 $405
-------------------------------------------------------------------------------
AVERAGE BALANCE SHEET
Loans
Consumer
Home equity $5,360 $5,151
Indirect 1,281 2,054
Education 98 1,102
Other consumer 775 708
-------------------------------------------------------------------------------
Total consumer 7,514 9,015
Commercial 3,676 3,728
Residential mortgage 11,538 11,263
Other 1,397 1,235
-------------------------------------------------------------------------------
Total loans 24,125 25,241
Securities available for sale 5,547 5,665
Loans held for sale 1,316 242
Assigned assets and other assets 7,576 6,426
-------------------------------------------------------------------------------
Total assets $38,564 $37,574
-------------------------------------------------------------------------------
Deposits
Noninterest-bearing demand $4,570 $5,085
Interest-bearing demand 5,408 4,803
Money market 9,994 8,863
Savings 2,030 2,385
Certificates 13,641 13,352
-------------------------------------------------------------------------------
Total net deposits 35,643 34,488
Other liabilities 319 549
Assigned capital 2,602 2,537
-------------------------------------------------------------------------------
Total funds $38,564 $37,574
-------------------------------------------------------------------------------
PERFORMANCE RATIOS
Return on assigned capital 22% 21%
Noninterest income to total revenue 29 28
Efficiency 51 52
===============================================================================
</TABLE>
Regional Banking provides credit, deposit, branch-based brokerage and electronic
banking products and services to retail customers as well as credit, treasury
management and capital markets products and services to small businesses
primarily within PNC's geographic region.
Regional Banking's strategic focus is on driving sustainable revenue growth
while aggressively managing the revenue/expense relationship. Regional Banking
utilizes knowledge-based marketing capabilities to analyze customer demographic
information, transaction patterns and delivery preferences to develop customized
banking packages focused on improving customer satisfaction and profitability.
Regional Banking has also invested heavily in building a sales culture and
infrastructure while improving efficiency. Capital investments have been
redistributed strategically with a greater proportion going towards the
development of alternative delivery capabilities consistent with customer
preferences.
Regional Banking contributed 46% of total business earnings for the first nine
months of 2000 compared with 49% for the first nine months of 1999. Earnings
increased $25 million or 6% to $430 million for the first nine months of 2000
and performance ratios improved. Excluding the impact of downsizing the indirect
automobile lending portfolio and the sale of certain branches in the third
quarter of 1999, earnings increased 9% in the comparison.
Total revenue was $1.497 billion for the first nine months of 2000 compared with
$1.475 billion for the same period last year. The increase was primarily due to
a $31 million or 8% increase in noninterest income that was driven by higher
consumer service and brokerage fees, partially offset by lower net interest
income due to the downsizing of the indirect automobile lending portfolio and
the comparative impact of branch sales in 1999.
The provision for credit losses for the first nine months of 2000 decreased $14
million or 30% compared with the prior-year period. The decrease was primarily
due to lower net charge-offs related to the downsizing of the indirect
automobile lending portfolio.
Consumer loans declined in the comparison primarily due to the continued
downsizing of the indirect automobile lending portfolio and the decision to sell
education loans in repayment, which are included in loans held for sale.
Interest-bearing demand and money market deposits increased $1.7 billion or 13%
compared with the prior-year period primarily due to the impact of a number of
consumer marketing initiatives that reflect PNC's focus on deepening customer
relationships.
THE PNC FINANCIAL SERVICES GROUP, INC.
-----
6
<PAGE> 8
FINANCIAL REVIEW
CORPORATE BANKING
<TABLE>
<CAPTION>
Nine months ended September 30 - dollars in millions 2000 1999
-------------------------------------------------------------------------------
<S> <C> <C>
INCOME STATEMENT
Credit-related revenue $304 $266
Noncredit revenue 329 266
-------------------------------------------------------------------------------
Total revenue 633 532
Provision for credit losses 50 13
Noninterest expense 291 268
-------------------------------------------------------------------------------
Pretax earnings 292 251
Income taxes 102 83
-------------------------------------------------------------------------------
Earnings $190 $168
-------------------------------------------------------------------------------
AVERAGE BALANCE SHEET
Loans
Middle market $5,613 $5,699
Specialized industries 3,731 3,750
Large corporate 2,918 2,538
Leasing 1,769 1,286
Other 252 468
-------------------------------------------------------------------------------
Total loans 14,283 13,741
Other assets 2,035 1,870
-------------------------------------------------------------------------------
Total assets $16,318 $15,611
-------------------------------------------------------------------------------
Net deposits $4,571 $4,446
Assigned funds and other liabilities 10,523 9,994
Assigned capital 1,224 1,171
-------------------------------------------------------------------------------
Total funds $16,318 $15,611
-------------------------------------------------------------------------------
PERFORMANCE RATIOS
Return on assigned capital 21% 19%
Noncredit revenue to total revenue 52 50
Efficiency 46 50
===============================================================================
</TABLE>
Corporate Banking provides specialized credit, equipment leasing, treasury
management and capital markets products and services to large and mid-sized
corporations, institutions and government entities primarily within PNC's
geographic region.
The strategic focus for Corporate Banking is to emphasize higher-margin
noncredit products and services, especially treasury management and capital
markets, as well as disciplined balance sheet growth.
Corporate Banking made the decision to exit certain non-strategic wholesale
lending businesses during 1999. These activities are excluded from business
results in both periods presented and included in Other. Management continues to
evaluate opportunities to reduce lending exposure and improve the risk/return
characteristics of this business.
Corporate Banking contributed 21% of total business earnings for the first nine
months of 2000 compared with 20% for the first nine months of 1999. Earnings
increased $22 million or 13% to $190 million for the first nine months of 2000
and performance ratios improved.
Total revenue of $633 million for the first nine months of 2000 increased $101
million or 19% compared with the same period last year. Average loans and
credit-related revenue increased in the period-to-period comparison primarily
driven by loans to large corporate customers that utilize higher-margin
noncredit products and services and the expansion of equipment leasing.
Noncredit revenue includes noninterest income and the benefit of compensating
balances received in lieu of fees. Noncredit revenue increased $63 million or
24% compared with the first nine months of 1999 primarily driven by increases in
treasury management and capital markets fees, as well as income associated with
equity investments. Noncredit revenue comprised 52% of total revenue for the
first nine months of 2000 compared with 50% in the same period last year,
reflecting the emphasis on sales of fee-based products.
The provision for credit losses was $50 million for the first nine months of
2000 compared with $13 million for the first nine months of 1999. The higher
provision reflects an increase in net charge-offs associated with the impact of
a slowing economy on the overall asset quality of this business. Management
expects this trend to continue throughout the remainder of 2000.
The increase in noninterest expense in the period-to-period comparison was
associated with growth in noncredit products and services.
Treasury management and capital markets products offered through Corporate
Banking are sold by several businesses across the Corporation and related
profitability is included in the results of those businesses. Consolidated
revenue from treasury management was $253 million for the first nine months of
2000, a 12% increase compared with the first nine months of 1999. Consolidated
revenue from capital markets was $99 million for the first nine months of 2000,
a 31% increase compared with the same period last year.
THE PNC FINANCIAL SERVICES GROUP, INC.
-----
7
<PAGE> 9
PNC REAL ESTATE FINANCE
<TABLE>
<CAPTION>
Nine months ended September 30 - dollars in millions 2000 1999
-------------------------------------------------------------------------------
<S> <C> <C>
INCOME STATEMENT
Net interest income $87 $87
Noninterest income
Net commercial mortgage banking 45 44
Other 23 25
-------------------------------------------------------------------------------
Total noninterest income 68 69
-------------------------------------------------------------------------------
Total revenue 155 156
Provision for credit losses
Noninterest expense 102 91
-------------------------------------------------------------------------------
Pretax earnings 53 65
Income taxes 3 14
-------------------------------------------------------------------------------
Earnings $50 $51
-------------------------------------------------------------------------------
AVERAGE BALANCE SHEET
Loans
Commercial - real estate related $2,021 $2,210
Commercial real estate 2,427 2,538
-------------------------------------------------------------------------------
Total loans 4,448 4,748
Commercial mortgages held for sale 180 123
Other assets 955 724
-------------------------------------------------------------------------------
Total assets $5,583 $5,595
-------------------------------------------------------------------------------
Deposits $260 $289
Assigned funds and other liabilities 4,940 4,912
Assigned capital 383 394
-------------------------------------------------------------------------------
Total funds $5,583 $5,595
-------------------------------------------------------------------------------
PERFORMANCE RATIOS
Return on assigned capital 17% 17%
Noninterest income to total revenue 44 44
Efficiency 53 46
===============================================================================
</TABLE>
PNC Real Estate Finance provides credit products, capital markets financing,
treasury management, commercial mortgage loan servicing and other products and
services to developers, owners and investors in commercial real estate. PNC's
commercial real estate financial services platform includes Midland Loan
Services, Inc. ("Midland"), a leading national servicer of commercial mortgage
loans and Columbia Housing Partners, LP, a leading national syndicator of
affordable housing equity, among other businesses.
On October 27, 2000, Univest Financial Group LLC ("Univest") merged into
Midland. Univest is a privately held provider of technology and data management
services to the commercial real estate finance industry. The combined company
will be a leading provider of web-enabled loan servicing and asset
administration solutions for commercial real estate portfolio lenders, financial
institutions and commercial mortgage-backed securities.
Over the past several years, through customer segmentation and strategic
acquisitions, PNC Real Estate Finance has redeployed capital historically
assigned to lending activities in PNC's primary geographic markets to fee-based
businesses focused on loan servicing and securitization on a national basis.
PNC Real Estate Finance made the decision to exit the cyclical mortgage
warehouse lending business and certain non-strategic commercial real estate
portfolios at the end of 1999. These activities are excluded from business
results in both periods presented and included in Other. Management continues to
evaluate opportunities to reduce lending exposure and improve the risk/return
characteristics of this business.
PNC Real Estate Finance contributed 5% of total business earnings for the first
nine months of 2000 compared with 6% for the same period last year. Earnings
were essentially flat in the year-to-year comparison, despite a 6% decrease in
average loans. The reduction in loans reflects management's strategy to reduce
balance sheet leverage in this business.
Total revenue was $155 million for the first nine months of 2000 compared with
$156 million in the prior-year period. Increases in treasury management and
commercial mortgage servicing fees were more than offset by lower commercial
mortgage-backed securitization gains.
There was no provision for credit losses for the first nine months of 2000 and
1999 due to net recoveries in both periods.
Noninterest expense was $102 million for the first nine months of 2000 compared
with $91 million in the same period last year. The efficiency ratio for the
first nine months of 2000 was 53% compared with 46% in the same period last
year. The increases were primarily due to passive losses on affordable housing
equity investments and investments in technology to support the loan servicing
platform. The increase in passive losses on low income housing investments was
more than offset by related tax credits.
COMMERCIAL MORTGAGE SERVICING PORTFOLIO
<TABLE>
<CAPTION>
In billions 2000 1999
-------------------------------------------------------------------------------
<S> <C> <C>
January 1 $45 $39
Acquisitions/additions 10 13
Repayments/transfers (5) (9)
-------------------------------------------------------------------------------
September 30 $50 $43
===============================================================================
</TABLE>
At September 30, 2000, the commercial mortgage servicing portfolio was $50
billion, a 16% increase compared with September 30, 1999.
THE PNC FINANCIAL SERVICES GROUP, INC.
-----
8
<PAGE> 10
FINANCIAL REVIEW
PNC BUSINESS CREDIT
<TABLE>
<CAPTION>
Nine months ended September 30 - dollars in millions 2000 1999
--------------------------------------------------------------------------------
<S> <C> <C>
INCOME STATEMENT
Net interest income $74 $51
Noninterest income 12 7
--------------------------------------------------------------------------------
Total revenue 86 58
Provision for credit losses 7 8
Noninterest expense 22 18
--------------------------------------------------------------------------------
Pretax earnings 57 32
Income taxes 20 12
--------------------------------------------------------------------------------
Earnings $37 $20
--------------------------------------------------------------------------------
AVERAGE BALANCE SHEET
Loans $2,158 $1,667
Other assets 72 31
--------------------------------------------------------------------------------
Total assets $2,230 $1,698
--------------------------------------------------------------------------------
Deposits $62 $46
Assigned funds and other liabilities 2,020 1,537
Assigned capital 148 115
--------------------------------------------------------------------------------
Total funds $2,230 $1,698
--------------------------------------------------------------------------------
PERFORMANCE RATIOS
Return on assigned capital 33% 23%
Efficiency 24 29
================================================================================
</TABLE>
PNC Business Credit provides asset-based lending, capital markets and treasury
management products and services to middle market customers on a national basis.
PNC Business Credit's lending services include loans secured by accounts
receivable, inventory, machinery and equipment, and other collateral, and its
clients include manufacturing, wholesale, distribution, retailing and service
industry companies.
PNC Business Credit's strategic focus is to build scale through the disciplined
expansion of existing offices as well as the addition of new marketing
locations.
PNC Business Credit contributed 4% of total business earnings for the first nine
months of 2000 compared with 2% for the first nine months of 1999. Earnings
increased $17 million or 85% in the period-to-period comparison to $37 million
for the first nine months of 2000.
Revenue was $86 million for the first nine months of 2000, a $28 million or 48%
increase compared with the first nine months of 1999 primarily due to the impact
of higher loan outstandings associated with business expansion.
Noninterest expense was $22 million and the efficiency ratio improved to 24% for
the first nine months of 2000 compared with $18 million and 29%, respectively,
in the same period last year. The return on assigned capital improved to 33% for
the first nine months of 2000 due to strong revenue growth and improved
efficiency.
Management expects the provision for credit losses to increase throughout the
remainder of 2000 reflecting a larger loan portfolio and the effects of a
slowing economy.
THE PNC FINANCIAL SERVICES GROUP, INC.
-----
9
<PAGE> 11
PNC ADVISORS
<TABLE>
<CAPTION>
Nine months ended September 30 - dollars in millions 2000 1999
-------------------------------------------------------------------------------
<S> <C> <C>
INCOME STATEMENT
Net interest income $102 $98
Noninterest income
Investment management and trust 307 292
Brokerage 132 108
Other 48 53
-------------------------------------------------------------------------------
Total noninterest income 487 453
-------------------------------------------------------------------------------
Total revenue 589 551
Provision for credit losses 3 5
Noninterest expense 385 366
-------------------------------------------------------------------------------
Pretax earnings 201 180
Income taxes 74 69
-------------------------------------------------------------------------------
Earnings $127 $111
-------------------------------------------------------------------------------
AVERAGE BALANCE SHEET
Loans
Residential mortgage $969 $958
Consumer 960 937
Commercial 623 615
Other 547 357
-------------------------------------------------------------------------------
Total loans 3,099 2,867
Other assets 442 432
-------------------------------------------------------------------------------
Total assets $3,541 $3,299
-------------------------------------------------------------------------------
Deposits $2,048 $2,223
Assigned funds and other liabilities 943 528
Assigned capital 550 548
-------------------------------------------------------------------------------
Total funds $3,541 $3,299
-------------------------------------------------------------------------------
PERFORMANCE RATIOS
Return on assigned capital 31% 27%
Noninterest income to total revenue 83 82
Efficiency 65 66
===============================================================================
</TABLE>
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"). PNC Advisors also serves
as investment manager and trustee for employee benefit plans and charitable and
endowment assets.
PNC Advisors strives to be the "financial advisor of choice" in the growing
high-net-worth market, providing a full range of high-quality, customized and
predominantly fee-based investment products and services. PNC Advisors continues
to expand Hilliard Lyons throughout the Corporation's geographic region, which
includes some of the nation's wealthiest metropolitan areas.
PNC Advisors contributed 14% of total business earnings for the first nine
months of 2000 and 1999. Earnings of $127 million for the first nine months of
2000 increased $16 million or 14% compared with the same period last year.
Revenue increased $38 million or 7% in the period-to period comparison. The
increase was primarily driven by higher brokerage revenue, resulting from the
expansion of Hilliard Lyons' distribution network, significant activity in the
equity markets, and higher investment management sales. Noninterest expense
increased 5% in the period-to-period comparison to support revenue growth.
ASSETS UNDER MANAGEMENT (a)
<TABLE>
<CAPTION>
September 30 - in billions 2000 1999
----------------------------------------------------------------
<S> <C> <C>
Personal investment management and trust $51 $50
Institutional trust 19 16
----------------------------------------------------------------
Total $70 $66
================================================================
</TABLE>
(a) Assets under management do not include brokerage assets administered.
Brokerage assets administered by PNC Advisors increased $3 billion in the
period-to-period comparison to $28 billion at September 30, 2000, reflecting
increased asset gathering at Hilliard Lyons.
THE PNC FINANCIAL SERVICES GROUP, INC.
------
10
<PAGE> 12
FINANCIAL REVIEW
BLACKROCK
<TABLE>
<CAPTION>
Nine months ended September 30 - dollars in millions 2000 1999
-------------------------------------------------------------------------------
<S> <C> <C>
INCOME STATEMENT
Investment advisory and administrative fees $330 $265
Other income 18 15
-------------------------------------------------------------------------------
Total revenue 348 280
Operating expense 179 132
Fund administration
and servicing costs - affiliates 58 60
Amortization 8 7
-------------------------------------------------------------------------------
Total expense 245 199
Operating income 103 81
Nonoperating income (expense) 4 (8)
-------------------------------------------------------------------------------
Pretax earnings 107 73
Income taxes 44 31
-------------------------------------------------------------------------------
Earnings $63 $42
-------------------------------------------------------------------------------
PERIOD-END BALANCE SHEET
Intangible assets $195 $197
Other assets 297 246
-------------------------------------------------------------------------------
Total assets $492 $443
-------------------------------------------------------------------------------
Borrowings $153
Other liabilities $148 142
Shareholders' equity 344 148
-------------------------------------------------------------------------------
Total funds $492 $443
-------------------------------------------------------------------------------
PERFORMANCE DATA
Return on equity 27% 45%
Operating margin (a) 35.5 36.9
Diluted earnings per share $.97 $.77
================================================================================
</TABLE>
(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 $191 billion of assets under management at September 30,
2000. BlackRock manages assets on behalf of institutions and individuals through
a variety of fixed income, liquidity, equity and alternative investment separate
accounts and mutual funds, including its flagship fund families, BlackRock Funds
and Provident Institutional Funds. In addition, BlackRock provides risk
management and technology services to a growing number of institutional
investors under the BlackRock Solutions name.
BlackRock contributed 7% of total business earnings for the first nine months of
2000 compared with 5% for the first nine months of 1999. Earnings of $63 million
for the first nine months of 2000 increased 49% compared with the same period
last year. Total revenue for the first nine months of 2000 increased $68 million
or 24% compared with the first nine months of 1999 primarily due to strong
growth in investment advisory and administrative fees resulting from higher
assets under management. New asset management mandates represented $36 billion
or 84% of the $43 billion increase in assets under management. The increase in
operating expense in the period-to-period comparison supported revenue growth.
ASSETS UNDER MANAGEMENT
<TABLE>
<CAPTION>
September 30 - in billions 2000 1999
----------------------------------------------------------------
<S> <C> <C>
Separate accounts
Fixed income (a) $100 $69
Liquidity 16 17
Equity 7 3
----------------------------------------------------------------
Total separate accounts 123 89
Mutual funds
Fixed income 14 13
Liquidity 38 33
Equity 16 13
----------------------------------------------------------------
Total mutual funds 68 59
----------------------------------------------------------------
Total assets under management $191 $148
----------------------------------------------------------------
Proprietary mutual funds
BlackRock Funds $28 $25
Provident Institutional Funds 28 22
----------------------------------------------------------------
Total proprietary mutual funds $56 $47
================================================================
</TABLE>
(a) Includes alternative investment products.
BlackRock, Inc. is approximately 70% owned by PNC and is listed on the New York
Stock Exchange under the symbol BLK. Additional information about BlackRock is
available in its filings with the SEC and may be obtained electronically at the
SEC's home page at www.sec.gov.
THE PNC FINANCIAL SERVICES GROUP, INC.
------
11
<PAGE> 13
PFPC
<TABLE>
<CAPTION>
Nine months ended September 30 - dollars in millions 2000 1999
--------------------------------------------------------------------------------
<S> <C> <C>
INCOME STATEMENT
Revenue $515 $170
Operating expense 380 114
--------------------------------------------------------------------------------
Operating income 135 56
Debt financing 60
Amortization 24 2
--------------------------------------------------------------------------------
Pretax earnings 51 54
Income taxes 20 20
--------------------------------------------------------------------------------
Earnings $31 $34
--------------------------------------------------------------------------------
AVERAGE BALANCE SHEET
Intangible assets $964
Other assets 614 $257
--------------------------------------------------------------------------------
Total assets $1,578 $257
--------------------------------------------------------------------------------
Deposits $139 $130
Assigned funds and other liabilities 1,231 18
Assigned capital 208 109
--------------------------------------------------------------------------------
Total funds $1,578 $257
--------------------------------------------------------------------------------
PERFORMANCE RATIOS
Return on assigned capital 20% 42%
Operating margin 26 33
================================================================================
</TABLE>
Providing a wide range of global fund processing services to the investment
management community, PFPC is the largest full-service mutual fund transfer
agent and second largest provider of mutual fund accounting and administration
services in the United States. As an extension of its domestic services, PFPC
also provides customized processing services to the international marketplace
through its Dublin, Ireland operation.
On December 1, 1999, PFPC acquired ISG, one of the nation's leading providers of
back-office services to mutual funds and retirement plans. The acquisition added
key related businesses, including retirement plan servicing, to PFPC's expanding
operations. The integration of ISG into PFPC continues as planned and, as
expected, the transaction is anticipated to be accretive to PNC in the fourth
quarter of 2000.
On May 31, 2000, PFPC completed the acquisition of ABD, the leading provider of
Blue Sky compliance services to the mutual fund industry. The acquisition was
valued at $20 million and accounted for as a purchase.
PFPC contributed 3% of total business earnings for the first nine months of 2000
compared with 4% for the first nine months of 1999. Earnings decreased $3
million in the period-to-period comparison primarily due to the impact of the
ISG acquisition. Excluding ISG, earnings increased 24% in the period-to-period
comparison.
Revenue for the first nine months of 2000 increased $345 million compared with
the first nine months of 1999. The acquisition of ISG accounted for $304 million
of the increase in revenue. Excluding ISG, revenue increased 24% driven by
existing client growth, new business and market appreciation. Operating expense
increased in the period-to-period comparison and performance ratios were
impacted as a result of the ISG acquisition and infrastructure costs associated
with business expansion. Excluding ISG, noninterest expense increased 21%
commensurate with fee-based revenue growth.
SERVICING STATISTICS
<TABLE>
<CAPTION>
September 30 2000 1999
----------------------------------------------------------------
<S> <C> <C>
Accounting/administration
assets ($ in billions) $460 $246
Custody assets ($ in billions) 434 353
Shareholder accounts (in millions) 43 3
================================================================
</TABLE>
The increases in accounting/administration assets serviced and shareholder
accounts were primarily due to the ISG acquisition.
THE PNC FINANCIAL SERVICES GROUP, INC.
------
12
<PAGE> 14
FINANCIAL REVIEW
CONSOLIDATED INCOME STATEMENT REVIEW
NET INTEREST INCOME ANALYSIS
<TABLE>
<CAPTION>
Taxable-equivalent basis Average Balances Interest Income/Expense Average Yields/Rates
Nine months ended September 30 ------------------------ ----------------------- ------------------------
Dollars in millions 2000 1999 Change 2000 1999 Change 2000 1999 Change
--------------------------------------------------------------------- ----------------------- ------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets
Loans held for sale $2,681 $1,118 $1,563 $163 $62 $101 8.10% 7.36% 74 bp
Securities available for sale 6,105 5,994 111 292 269 23 6.38 5.99 39
Loans, net of unearned income
Consumer 9,210 10,612 (1,402) 589 647 (58) 8.55 8.16 39
Credit card 899 (899) 100 (100) 14.90 NM
Residential mortgage 12,519 12,236 283 668 644 24 7.11 7.01 10
Commercial 21,878 23,340 (1,462) 1,383 1,344 39 8.31 7.59 72
Commercial real estate 2,689 3,394 (705) 179 198 (19) 8.73 7.70 103
Lease financing 3,082 2,489 593 168 132 36 7.25 7.06 19
Other 670 504 166 42 27 15 8.40 7.38 102
--------------------------------------------------------------------- -----------------------
Total loans, net of unearned income 50,048 53,474 (3,426) 3,029 3,092 (63) 8.01 7.67 34
Other 1,278 1,038 240 71 39 32 7.39 4.94 245
--------------------------------------------------------------------- -----------------------
Total interest-earning assets/
interest income 60,112 61,624 (1,512) 3,555 3,462 93 7.84 7.46 38
Noninterest-earning assets 8,415 6,531 1,884
Investment in discontinued operations 459 461 (2)
---------------------------------------------------------------------
Total assets $68,986 $68,616 $370
=====================================================================
Interest-bearing liabilities
Deposits
Demand and money market $18,389 $16,711 $1,678 472 358 114 3.43 2.86 57
Savings 2,088 2,450 (362) 27 30 (3) 1.73 1.61 12
Retail certificates of deposit 14,591 14,291 300 603 530 73 5.52 4.96 56
Other time 633 1,816 (1,183) 31 75 (44) 6.45 5.53 92
Deposits in foreign offices 1,437 837 600 67 31 36 6.12 4.96 116
--------------------------------------------------------------------- -----------------------
Total interest-bearing deposits 37,138 36,105 1,033 1,200 1,024 176 4.31 3.79 52
Borrowed funds 14,422 15,508 (1,086) 711 640 71 6.49 5.45 104
--------------------------------------------------------------------- -----------------------
Total interest-bearing liabilities/
interest expense 51,560 51,613 (53) 1,911 1,664 247 4.92 4.29 63
----------------------- -------------------------
Noninterest-bearing liabilities, capital
securities and shareholders' equity 17,426 17,003 423
---------------------------------------------------------------------
Total liabilities, capital
securities and shareholders' equity $68,986 $68,616 $370
=====================================================================
Interest rate spread 2.92 3.17 (25)
Impact of noninterest-bearing sources .71 .69 2
-------------------------
Net interest income/margin $1,644 $1,798 $(154) 3.63% 3.86% (23) bp
===================================================================================================================================
</TABLE>
NM - not meaningful
NET INTEREST INCOME Changes in net interest income and margin result from the
interaction between the volume and composition of earning assets, related yields
and associated funding costs. Accordingly, portfolio size, composition and
yields earned and funding costs can have a significant impact on net interest
income and margin.
Taxable-equivalent net interest income was $1.644 billion for the first nine
months of 2000, a $154 million decrease compared with the first nine months of
1999. The net interest margin was 3.63% for the first nine months of 2000
compared with 3.86% for the first nine months of 1999. The decreases were
primarily due to funding costs related to the ISG acquisition, the downsizing of
certain credit-related businesses in 1999 and the effect of a higher interest
rate environment.
The Corporation expects net interest income and margin to continue to be under
pressure throughout the remainder of 2000.
As a result of the sale of the credit card business and the exit and downsizing
of certain credit-related businesses in 1999, loans represented 83% of average
earning assets for the first nine months of 2000 compared with 87% for the
prior-year period. Average loans held for sale increased $1.6 billion in the
period-to-period comparison, reflecting the decision during the fourth quarter
of 1999 to exit certain non-strategic wholesale lending businesses. Securities
available for sale represented 10% of average earning assets for the first nine
months of 2000 and 1999.
THE PNC FINANCIAL SERVICES GROUP, INC.
------
13
<PAGE> 15
Funding cost is affected by the volume and composition of funding sources as
well as related rates paid thereon. Average deposits comprised 66% and 65% of
total sources of funds for the first nine months of 2000 and 1999, respectively,
with the remainder primarily comprised of wholesale funding obtained at
prevailing market rates. The average loan to deposit ratio declined to 111% for
the first nine months of 2000 compared with 120% for the first nine months of
1999.
Average demand and money market deposits increased $1.7 billion or 10% to $18.4
billion for the first nine months of 2000, primarily reflecting the impact of
strategic marketing initiatives to grow more valuable transaction accounts,
while other time deposits decreased in the period-to-period comparison. Average
borrowed funds for the first nine months of 2000 decreased $1.1 billion compared
with the first nine months of 1999 as lower bank notes more than offset
increases in federal funds purchased, subordinated debt and other borrowed
funds.
PROVISION FOR CREDIT LOSSES The provision for credit losses was $96 million for
the first nine months of 2000 compared with $133 million for the first nine
months of 1999. Net charge-offs were $95 million or .25% of average loans for
the first nine months of 2000 compared with $131 million or .33%, respectively,
for the first nine months of 1999. The decreases were primarily due to the sale
of the credit card business in the first quarter of 1999, partially offset by
higher commercial net charge-offs.
NONINTEREST INCOME Noninterest income was $2.156 billion for the first nine
months of 2000 and represented 57% of total revenue. On a comparable basis,
noninterest income increased $547 million or 34%, excluding $358 million of
gains on the sale of the credit card business, certain retail branches, equity
interests in EPS and Concord and $142 million of valuation adjustments
associated with the decision to exit certain non-strategic wholesale lending
businesses in 1999. The increase was primarily driven by strong growth in
certain fee-based businesses, the benefit of the ISG acquisition and higher
equity management income. Excluding ISG, noninterest income increased 16%
compared with the prior-year period.
Asset management fees of $590 million for the first nine months of 2000
increased $85 million or 17% primarily driven by new business. Assets under
management were $239 billion at September 30, 2000, a 24% increase compared with
September 30, 1999. Fund servicing fees were $487 million for the first nine
months of 2000, a $325 million increase compared with the prior-year period
primarily driven by the ISG acquisition. Excluding ISG, fund servicing fees
increased 22% due to existing client growth, new business and market
appreciation.
Brokerage fees of $192 million for the first nine months of 2000 increased $31
million or 19% reflecting the expansion of Hilliard Lyons' distribution network
and the impact of significant activity in the equity markets. Consumer services
revenue of $153 million for the first nine months of 2000 increased 7% compared
with the prior-year period excluding credit card fees. The increase was
primarily due to higher consumer transaction volume.
Corporate services revenue of $248 million for the first nine months of 2000
increased 7% compared with the prior-year period, excluding the impact of the
valuation adjustments last year. The increase was primarily driven by higher
treasury management and capital markets fees that were partially offset by a
lower level of commercial mortgage-backed securitization gains.
Equity management income was $132 million for the first nine months of 2000
compared with $48 million in the prior-year period. Equity investments are
carried at estimated fair value and, accordingly, revenue related to these
investments may be affected by market volatility.
Net securities gains were $4 million for the first nine months of 2000 compared
with $44 million for the first nine months of 1999. The net securities gains in
1999 substantially all related to the gain from the sale of Concord stock.
Other noninterest income of $200 million for the first nine months of 2000
increased $22 million or 12% compared with the prior-year period, excluding
non-core items last year.
NONINTEREST EXPENSE Noninterest expense was $2.319 billion for the first nine
months of 2000 compared with $1.962 billion for the first nine months of 1999,
excluding non-core items. The efficiency ratio was 57.3% for the first nine
months of 2000 compared with 53.9% for the prior-year period, also excluding
non-core items. The increases were primarily related to the ISG acquisition and
higher expenses commensurate with fee-based revenue growth. Excluding ISG,
noninterest expense increased 5% commensurate with fee-based revenue growth.
Average full-time equivalent employees totaled approximately 24,900 and 22,800
for the first nine months of 2000 and 1999, respectively. The increase was
primarily due to the ISG acquisition, partially offset by the impact of
efficiency initiatives in traditional banking businesses and the sale of the
credit card business in the first quarter of 1999.
THE PNC FINANCIAL SERVICES GROUP, INC.
------
14
<PAGE> 16
FINANCIAL REVIEW
CONSOLIDATED BALANCE SHEET REVIEW
LOANS Loans outstanding of $49.8 billion at September 30, 2000 increased $118
million from year-end 1999 as increases in home equity and lease financing were
mostly offset by lower automobile and commercial loans. Total outstandings and
exposure designated for exit during 1999 totaled $3.7 billion and $10.5 billion,
respectively. At September 30, 2000, the remaining outstandings and exposure
associated with this initiative totaled $1.0 billion and $2.8 billion,
respectively. Loans that were designated for exit in 1999 and reclassified to
held for sale are excluded from the following table.
DETAILS OF LOANS
<TABLE>
<CAPTION>
September 30 December 31
In millions 2000 1999
----------------------------------------------------------------------
<S> <C> <C>
Consumer
Home equity $6,411 $6,059
Automobile 1,293 1,691
Other 1,470 1,598
----------------------------------------------------------------------
Total consumer 9,174 9,348
Residential mortgage 12,563 12,506
Commercial
Manufacturing 5,626 5,355
Retail/wholesale 4,579 4,301
Service providers 2,937 3,208
Real estate related 2,926 2,862
Communications 1,261 1,370
Health care 750 772
Financial services 871 1,300
Other 2,248 2,300
----------------------------------------------------------------------
Total commercial 21,198 21,468
Commercial real estate
Mortgage 695 761
Real estate project 1,981 1,969
----------------------------------------------------------------------
Total commercial real estate 2,676 2,730
Lease financing 4,498 3,663
Other 646 682
Unearned income (964) (724)
----------------------------------------------------------------------
Total, net of unearned income $49,791 $49,673
======================================================================
</TABLE>
Loan portfolio composition continued to be geographically diversified among
numerous industries and types of businesses.
NET UNFUNDED COMMITMENTS (a)
<TABLE>
<CAPTION>
September 30 December 31
In millions 2000 1999
-----------------------------------------------------------------------
<S> <C> <C>
Consumer $4,386 $4,603
Commercial 24,488 23,251
Commercial real estate 907 740
Lease financing 137 136
Other 259 1,513
-----------------------------------------------------------------------
Total $30,177 $30,243
=======================================================================
</TABLE>
(a) Excludes unfunded commitments related to loans designated for exit.
Commitments to extend credit represent arrangements to lend funds subject to
specified contractual conditions. Commercial commitments are reported net of
participations, assignments and syndications, primarily to financial
institutions, totaling $6.3 billion and $7.2 billion at September 30, 2000 and
December 31, 1999, respectively.
Net outstanding letters of credit totaled $3.9 billion and $4.6 billion at
September 30, 2000 and December 31, 1999, respectively, and consisted primarily
of standby letters of credit that commit the Corporation to make payments on
behalf of customers when certain specified future events occur. Unfunded
commitments and letters of credit related to loans designated for exit totaled
$1.8 billion at September 30, 2000 and $4.8 billion at December 31, 1999.
SECURITIES AVAILABLE FOR SALE The fair value of securities available for sale at
September 30, 2000 increased $530 million compared with the fair value at
December 31, 1999 primarily due to the purchase of mortgage-backed securities.
Securities represented 9% of total assets at September 30, 2000. The expected
weighted-average life of the securities decreased to 3 years and 9 months at
September 30, 2000 compared with 4 years and 7 months at year-end 1999.
DETAILS OF SECURITIES AVAILABLE FOR SALE
<TABLE>
<CAPTION>
Amortized Fair
In millions Cost Value
----------------------------------------------------------------
<S> <C> <C>
SEPTEMBER 30, 2000
Debt securities
U.S. Treasury and government agencies $240 $236
Mortgage-backed 4,514 4,407
Asset-backed 1,172 1,158
State and municipal 79 80
Other debt 46 46
Corporate stocks and other 563 563
----------------------------------------------------------------
Total securities available for sale $6,614 $6,490
================================================================
DECEMBER 31, 1999
Debt securities
U.S. Treasury and government agencies $411 $400
Mortgage-backed 3,918 3,769
Asset-backed 1,051 1,027
State and municipal 134 131
Other debt 40 39
Corporate stocks and other 590 594
----------------------------------------------------------------
Total securities available for sale $6,144 $5,960
================================================================
</TABLE>
THE PNC FINANCIAL SERVICES GROUP, INC.
------
15
<PAGE> 17
FUNDING SOURCES Total funding sources were $59.8 billion at September 30, 2000
and $60.0 billion at December 31, 1999. Increases in demand, savings, money
market and retail certificates of deposit that resulted from a number of
consumer banking initiatives offset decreases in deposits in foreign offices,
Federal Home Loan Bank ("FHLB") borrowings and bank notes and senior debt.
DETAILS OF FUNDING SOURCES
<TABLE>
<CAPTION>
September 30 December 31
In millions 2000 1999
----------------------------------------------------------------
<S> <C> <C>
Deposits
Demand, savings and money market $29,823 $27,823
Retail certificates of deposit 15,117 14,153
Other time 605 633
Deposits in foreign offices 1,949 3,193
----------------------------------------------------------------
Total deposits 47,494 45,802
Borrowed funds
Federal funds purchased 1,341 1,281
Repurchase agreements 602 402
Bank notes and senior debt 6,109 6,975
Federal Home Loan Bank borrowings 583 2,258
Subordinated debt 2,406 2,327
Other borrowed funds 1,258 986
----------------------------------------------------------------
Total borrowed funds 12,299 14,229
----------------------------------------------------------------
Total $59,793 $60,031
================================================================
</TABLE>
CAPITAL The access to and cost of funding new business initiatives including
acquisitions, the ability to engage in expanded business activities, the ability
to pay dividends, deposit insurance costs, and the level and nature of
regulatory oversight depend, in large part, on a financial institution's capital
strength. At September 30, 2000, the Corporation, including discontinued
operations, and each bank subsidiary were considered well capitalized based on
regulatory capital ratio requirements.
RISK-BASED CAPITAL (a)
<TABLE>
<CAPTION>
September 30 - dollars in millions 2000 1999
----------------------------------------------------------------
<S> <C> <C>
Capital components
Shareholders' equity
Common $6,071 $5,558
Preferred 312 313
Trust preferred capital securities 848 848
Goodwill and other (2,259) (1,305)
Net unrealized securities losses 164 228
----------------------------------------------------------------
Tier I risk-based capital 5,136 5,642
Subordinated debt 1,912 1,641
Eligible allowance for credit losses 668 674
----------------------------------------------------------------
Subtotal 7,716 7,957
Investment in unconsolidated finance
subsidiary (12)
----------------------------------------------------------------
Total risk-based capital $7,704 $7,957
================================================================
Assets
Risk-weighted assets and
off-balance-sheet instruments $67,734 $66,580
Average tangible assets 74,803 72,929
================================================================
Capital ratios
Tier I risk-based 7.58% 8.47%
Total risk-based 11.37 11.95
Leverage 6.87 7.74
================================================================
</TABLE>
(a) Including discontinued operations
The capital position is managed through balance sheet size and composition,
issuance of debt and equity instruments, treasury stock activities, dividend
policies and retention of earnings.
During the first nine months of 2000, PNC repurchased 5.7 million shares of
common stock. On February 17, 2000, the Board of Directors authorized the
Corporation to purchase up to 10 million shares of common stock through
February 28, 2001. Approximately 7.4 million shares remain under this
authorization.
THE PNC FINANCIAL SERVICES GROUP, INC.
------
16
<PAGE> 18
FINANCIAL REVIEW
RISK MANAGEMENT
In the normal course of business, the Corporation assumes various types of risk,
which include, among others, credit, interest rate, liquidity, trading
activities and financial derivatives. To manage these risks, PNC has risk
management processes designed to provide for risk identification, measurement,
monitoring and control.
CREDIT RISK Credit risk represents the possibility that a borrower or
counterparty may not perform in accordance with contractual terms. Credit risk
is inherent in the financial services business and results from extending credit
to customers, purchasing securities and entering into off-balance-sheet
financial derivative transactions. The Corporation seeks to manage credit risk
through, among other things, diversification, limiting exposure to any single
industry or customer, requiring collateral, selling participations to third
parties, and purchasing credit-related derivatives.
NONPERFORMING ASSETS BY TYPE
<TABLE>
<CAPTION>
September 30 December 31
Dollars in millions 2000 1999
------------------------------------------------------------------
<S> <C> <C>
Nonaccrual loans
Commercial $261 $219
Residential mortgage 26 48
Commercial real estate
Real estate project 4 13
Mortgage 12 8
Consumer 3 2
Lease financing 2 1
------------------------------------------------------------------
Total nonaccrual loans 308 291
Foreclosed and other assets
Residential mortgage 8 7
Commercial real estate 4 5
Other 34 22
------------------------------------------------------------------
Total foreclosed and other assets 46 34
------------------------------------------------------------------
Total nonperforming assets $354 $325
Nonaccrual loans to total loans .62% .59%
Nonperforming assets to total loans,
loans held for sale and foreclosed
assets .68 .61
Nonperforming assets to total assets .51 .47
==================================================================
</TABLE>
The above table excludes $18 million and $13 million of equity management assets
at September 30, 2000 and December 31, 1999, respectively, that are carried at
estimated fair value. The amount of nonperforming loans that were current as to
principal and interest was $26 million at September 30, 2000 and $42 million at
December 31, 1999. There were no troubled debt restructured loans outstanding as
of either period end.
CHANGE IN NONPERFORMING ASSETS
<TABLE>
<CAPTION>
In millions 2000 1999
----------------------------------------------------------------
<S> <C> <C>
January 1 $325 $319
Transferred from accrual 291 288
Returned to performing (3) (3)
Principal reductions (125) (181)
Sales (31) (20)
Charge-offs and other (103) (57)
----------------------------------------------------------------
September 30 $354 $346
================================================================
</TABLE>
ACCRUING LOANS PAST DUE 90 DAYS OR MORE
<TABLE>
<CAPTION>
Amount Percent of Loans
--------------------------------------------------------
September 30 December 31 September 30 December 31
Dollars in millions 2000 1999 2000 1999
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Consumer $22 $25 .24% .27%
Residential mortgage 26 24 .21 .19
Commercial 32 30 .15 .14
Commercial real estate 11 5 .41 .18
Lease financing 7 2 .20 .07
--------------------------------------------------
Total $98 $86 .20 .17
===============================================================================
</TABLE>
ALLOWANCE FOR CREDIT LOSSES In determining the adequacy of the allowance for
credit losses, the Corporation makes specific allocations to impaired loans and
to pools of watchlist and nonwatchlist loans for various credit risk factors.
Allocations to loan pools are developed by business segment and risk rating and
are based on historical loss trends and management's judgment concerning those
trends and other relevant factors. Those factors may include, among other
things, actual versus estimated losses, current regional and national economic
conditions, business segment and portfolio concentrations, industry competition
and consolidation, and the impact of government regulations. Consumer and
residential mortgage loan allocations are made at a total portfolio level based
on historical loss experience adjusted for portfolio activity and current
economic conditions.
While PNC's commercial and consumer pool reserve methodologies strive to reflect
all risk factors, there continues to be a certain element of risk associated
with, but not limited to, potential estimation or judgmental errors. Unallocated
reserves provide coverage for such risks. While allocations are made to specific
loans and pools of loans, the total reserve is available for all credit losses.
Senior management's Reserve Adequacy Committee provides oversight for the
allowance evaluation process including quarterly evaluations, and methodology
and estimation changes. The results of the evaluations are reported to the
Credit Committee of the Board of Directors.
THE PNC FINANCIAL SERVICES GROUP, INC.
------
17
<PAGE> 19
The provision for credit losses for the first nine months of 2000 and the
evaluation of the allowance for credit losses as of September 30, 2000 reflected
changes in loan portfolio composition and changes in asset quality. The
unallocated portion of the allowance for credit losses represented 20% of the
total allowance and .27% of total loans at September 30, 2000 and December 31,
1999.
ROLLFORWARD OF ALLOWANCE FOR CREDIT LOSSES
<TABLE>
<CAPTION>
In millions 2000 1999
----------------------------------------------------------------
<S> <C> <C>
January 1 $674 $753
Charge-offs (131) (173)
Recoveries 36 42
----------------------------------------------------------------
Net charge-offs (95) (131)
Provision for credit losses 96 133
Divestitures (81)
----------------------------------------------------------------
September 30 $675 $674
================================================================
</TABLE>
The allowance as a percent of nonaccrual loans from continuing operations and
period-end loans was 219% and 1.36%, respectively, at September 30, 2000. The
comparable year-end 1999 amounts were 232% and 1.36%, respectively.
CHARGE-OFFS AND RECOVERIES
<TABLE>
<CAPTION>
Nine months ended Percent of
September 30 Net Average
Dollars in millions Charge-offs Recoveries Charge-offs Loans
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
2000
Consumer $34 $16 $18 .26%
Residential mortgage 4 1 3 .03
Commercial 86 14 72 .44
Commercial real estate 2 4 (2) (.10)
Lease financing 5 1 4 .17
----------------------------------------------------------------------
Total $131 $36 $95 .25
----------------------------------------------------------------------------------
1999
Consumer $49 $20 $29 .37%
Credit card 60 2 58 8.63
Residential mortgage 7 1 6 .07
Commercial 48 17 31 .18
Commercial real estate 4 1 3 .12
Lease financing 5 1 4 .21
----------------------------------------------------------------------
Total $173 $42 $131 .33
==================================================================================
</TABLE>
The actual level of net charge-offs and the provision for credit losses in
future periods can be affected by many business and economic factors and may
differ from current or historical experience.
INTEREST RATE RISK Interest rate risk arises primarily through the Corporation's
traditional business activities of extending loans and accepting deposits. Many
factors, including economic and financial conditions, movements in market
interest rates and consumer preferences affect the spread between interest
earned on assets and interest paid on liabilities. In managing interest rate
risk, the Corporation seeks to minimize its reliance on a particular interest
rate scenario as a source of earnings while maximizing net interest income and
net interest margin. To further these objectives, the Corporation uses
securities purchases and sales, long-term and short-term funding, financial
derivatives and other capital markets instruments.
Interest rate risk is centrally managed by Asset and Liability Management. The
Corporation actively measures and monitors components of interest rate risk
including term structure or repricing risk, yield curve or nonparallel rate
shift risk, basis risk and options risk. Senior management's Corporate Asset and
Liability Committee provides strategic direction to Asset and Liability
Management and, in doing so, reviews capital markets activities and interest
rate risk exposures. The Finance Committee of the Board of Directors is
responsible for overseeing the Corporation's interest rate risk management
process.
The Corporation measures and manages both the short-term and long-term effects
of changing interest rates. An income simulation model is used to measure the
sensitivity of net interest income to changing interest rates over the next
twenty-four month period. An economic value of equity model is used to measure
the sensitivity of the value of existing on-balance-sheet and off-balance-sheet
positions to changing interest rates.
The income simulation model is the primary tool used to measure the direction
and magnitude of changes in net interest income resulting from changes in
interest rates. Forecasting net interest income and its sensitivity to changes
in interest rates requires that the Corporation make assumptions about the
volume and characteristics of new business and the behavior of existing
positions. These business assumptions are based on the Corporation's experience,
business plans and published industry experience. Key assumptions employed in
the model include prepayment speeds on mortgage-related assets and consumer
loans, loan volumes and pricing, deposit volumes and pricing, the expected life
and repricing characteristics of nonmaturity loans and deposits, and
management's financial and capital plans.
THE PNC FINANCIAL SERVICES GROUP, INC.
------
18
<PAGE> 20
FINANCIAL REVIEW
Because these assumptions are inherently uncertain, the model cannot precisely
estimate net interest income or precisely predict the effect of higher or lower
interest rates on net interest income. Actual results will differ from simulated
results due to the timing, magnitude and frequency of interest rate changes, the
difference between actual experience and the assumed volume and characteristics
of new business and behavior of existing positions, and changes in market
conditions and management strategies, among other factors.
The Corporation's interest rate risk management policies provide that net
interest income should not decrease by more than 3% if interest rates gradually
increase or decrease from current rates by 100 basis points over a twelve-month
period. At September 30, 2000, if interest rates were to gradually increase by
100 basis points over the next twelve months, the model indicated that net
interest income would decrease by .5%. If interest rates were to gradually
decrease by 100 basis points over the next twelve months, the model indicated
that net interest income would increase by .7%.
The Corporation models additional interest rate scenarios covering a wider range
of rate movements to identify yield curve, term structure and basis risk
exposures. These scenarios are developed based on historical rate relationships
or management's expectations regarding the future direction and level of
interest rates. Depending on market conditions and other factors, these
scenarios may be modeled more or less frequently. Such analyses are used to
identify inherent risk and develop appropriate strategies.
An economic value of equity model is used by the Corporation to value all
current on-balance-sheet and off-balance-sheet positions under a range of
instantaneous interest rate changes. The resulting change in the value of equity
is the measure of overall long-term interest rate risk inherent in the
Corporation's existing on-balance-sheet and off-balance-sheet positions. The
Corporation uses the economic value of equity model to complement the net
interest income simulation modeling process.
The Corporation's risk management policies provide that the change in economic
value of equity should not decline by more than 1.5% of the book value of assets
for a 200 basis point instantaneous increase or decrease in interest rates.
Based on the results of the economic value of equity model at September 30,
2000, if interest rates were to instantaneously increase by 200 basis points,
the model indicated that the economic value of existing on-balance-sheet and
off-balance-sheet positions would decline by .8% of assets. If interest rates
were to instantaneously decrease by 200 basis points, the model indicated that
the economic value of existing on-balance-sheet and off-balance-sheet positions
would increase by .4% of assets.
LIQUIDITY RISK Liquidity represents the Corporation's ability to obtain
cost-effective funding to meet the needs of customers as well as the
Corporation's financial obligations. Liquidity is centrally managed by Asset and
Liability Management, with oversight provided by the Corporate Asset and
Liability Committee and the Finance Committee of the Board of Directors.
Access to capital markets funding sources is a key factor affecting liquidity
management. Access to such markets is in part based on the Corporation's credit
ratings, which are influenced by a number of factors including capital ratios,
credit quality, and earnings. Additional factors that impact liquidity include
the maturity structure of existing assets, liabilities, and off-balance-sheet
positions, the level of liquid securities and loans available for sale, and the
Corporation's ability to securitize and sell various types of loans.
Liquidity can also be provided through the sale of liquid assets, which consist
of short-term investments, loans held for sale and securities available for
sale. At September 30, 2000, such assets totaled $10.3 billion with $3.6 billion
pledged as collateral for borrowing, trust and other commitments. Liquidity can
also be obtained through secured advances from the FHLB, of which PNC is a
member. These borrowings are generally secured by residential mortgages and
mortgage-backed securities. At September 30, 2000, approximately $5.1 billion of
residential mortgages were available as collateral for borrowings from the FHLB.
Funding can also be obtained through alternative forms of borrowing, including
federal funds purchased, repurchase agreements and short-term and long-term debt
issuances.
THE PNC FINANCIAL SERVICES GROUP, INC.
------
19
<PAGE> 21
Liquidity for the parent company and subsidiaries is also generated through the
issuance of securities in public or private markets and lines of credit. At
September 30, 2000, the Corporation had unused capacity under effective shelf
registration statements of approximately $1.4 billion of debt and equity
securities and $400 million of trust preferred capital securities. In addition,
the Corporation had an unused line of credit of $500 million.
The principal source of parent company revenue and cash flow is dividends from
subsidiary banks. PNC Bancorp, Inc. is a wholly-owned subsidiary of the parent
company and is the holding company for all bank subsidiaries. There are legal
limitations on the ability of bank subsidiaries to pay dividends and make other
distributions to PNC Bancorp, Inc. and in turn the parent company. Without
regulatory approval, the amount available for dividend payments to PNC Bancorp,
Inc. by all bank subsidiaries, which includes discontinued operations, was $645
million at September 30, 2000. Dividends may also be impacted by capital needs,
regulatory requirements, corporate policies, contractual restrictions and other
factors.
Management believes the Corporation has sufficient liquidity to meet current
obligations to borrowers, depositors, debt holders and others. The impact of
replacing maturing liabilities is reflected in the income simulation model in
the overall asset and liability management process.
TRADING ACTIVITIES Most of PNC's trading activities are designed to provide
capital markets services for customers. The performance of PNC's trading
operations is predominantly based on providing services to customers and not on
positioning the Corporation's portfolio for gains from market movements.
Risk associated with trading, capital markets and foreign exchange activities is
managed using a value-at-risk approach that combines interest rate risk, foreign
exchange rate risk, spread risk and volatility risk. Exposure is measured as the
potential loss due to a two standard deviation, one-day move. The combined
period-end value-at-risk of all trading operations using this measurement was
less than $500 thousand at September 30, 2000.
THE PNC FINANCIAL SERVICES GROUP, INC.
------
20
<PAGE> 22
FINANCIAL REVIEW
FINANCIAL DERIVATIVES A variety of off-balance-sheet financial derivatives are
used as part of the overall risk management process to manage the interest rate,
market and credit risk inherent in the Corporation's business activities.
Interest rate swaps and purchased interest rate caps and floors are the primary
instruments used for interest rate risk management. Interest rate swaps are
agreements to exchange fixed and floating interest rate payments calculated on a
notional principal amount. The floating rate is based on a money market index,
primarily short-term LIBOR. Purchased interest rate caps and floors are
agreements where, for a fee, the counterparty agrees to pay the Corporation the
amount, if any, by which a specified market interest rate exceeds or is less
than a defined rate applied to a notional amount, respectively.
Forward contracts provide for the delivery of financial instruments at a
specified future date and at a specified price or yield. Such contracts are
primarily used to manage risk positions associated with certain student lending
activities.
Credit-related derivatives provide, for a fee, an assumption of a portion of the
credit risk associated with the underlying financial instruments. Such contracts
are primarily used to manage credit risk and regulatory capital associated with
commercial lending activities.
Financial derivatives involve, to varying degrees, interest rate, market and
credit risk in excess of the amount on the balance sheet, but less than the
notional amount of the contract. For interest rate swaps, caps and floors, only
periodic cash payments and, with respect to caps and floors, premiums, are
exchanged. Therefore, cash requirements and exposure to credit risk are
significantly less than the notional value.
During the first nine months of 2000, financial derivatives used in interest
rate risk management decreased net interest income by $38 million compared with
a $44 million increase in the prior-year period.
The following table sets forth changes in the notional value of
off-balance-sheet financial derivatives used for risk management during the
first nine months of 2000.
FINANCIAL DERIVATIVES ACTIVITY
<TABLE>
<CAPTION>
Weighted-
Average
2000 - dollars in millions January 1 Additions Maturities Terminations September 30 Maturity
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest rate risk management
Interest rate swaps
Receive fixed $7,413 $368 $(1,275) $(1,000) $5,506 2 yrs. 7 mos.
Pay fixed 5 5 2 mos.
Basis swaps 1,650 773 (179) 2,244 3 yrs. 7 mos.
Interest rate caps 474 (111) (17) 346 3 yrs. 11 mos.
Interest rate floors 3,311 (35) (14) 3,262 1 yr. 8 mos.
-------------------------------------------------------------------------------------------------------------------
Total interest rate risk management 12,853 1,141 (1,600) (1,031) 11,363
Commercial mortgage banking risk management
Interest rate swaps 643 1,322 (210) (1,107) 648 7 yrs. 3 mos.
Student lending activities
Forward contracts 681 120 (3) (445) 353 1 yr. 8 mos.
Credit-related activities
Credit default swaps 4,315 154 (5) 4,464 11 mos.
-------------------------------------------------------------------------------------------------------------------
Total $18,492 $2,737 $(1,813) $(2,588) $16,828
==================================================================================================================================
</TABLE>
THE PNC FINANCIAL SERVICES GROUP, INC.
------
21
<PAGE> 23
The following table sets forth, by designated assets and liabilities, the
notional value and the estimated fair value of financial derivatives used for
risk management. Weighted-average interest rates presented are those expected to
be in effect based on the implied forward yield curve at September 30, 2000.
FINANCIAL DERIVATIVES
<TABLE>
<CAPTION>
Weighted-Average Interest Rates
Notional Estimated -------------------------------
September 30, 2000 - dollars in millions Value Fair Value Paid Received
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest rate risk management
Asset rate conversion
Interest rate swaps (1)
Receive fixed designated to loans $4,000 $2 6.65% 5.49%
Basis swaps designated to other earning assets 240 2 6.27 6.63
Interest rate caps designated to loans (2) 346 8 NM NM
Interest rate floors designated to loans (3) 3,262 (1) NM NM
---------------------------------------------------------------------------------------------------
Total asset rate conversion 7,848 11
Liability rate conversion
Interest rate swaps (1)
Receive fixed designated to:
Interest-bearing deposits 125 6.62 6.73
Borrowed funds 1,381 6.71 6.60
Pay fixed designated to borrowed funds 5 2 6.09 7.36
Basis swaps designated to borrowed funds 2,004 9 6.56 6.60
---------------------------------------------------------------------------------------------------
Total liability rate conversion 3,515 11
---------------------------------------------------------------------------------------------------
Total interest rate risk management 11,363 22
Commercial mortgage banking risk management
Pay fixed interest rate swaps designated to securities (1) 355 3 6.52 6.75
Pay fixed interest rate swaps designated to loans (1) 293 7 6.40 6.64
---------------------------------------------------------------------------------------------------
Total commercial mortgage banking risk management 648 10
Student lending activities
Forward contracts 353 NM NM
Credit-related activities
Credit default swaps 4,464 (2) NM NM
---------------------------------------------------------------------------------------------------
Total financial derivatives $16,828 $30
==================================================================================================================================
</TABLE>
(1) The floating rate portion of interest rate contracts is based on
money-market indices. As a percent of notional value, 56% were based on
1-month LIBOR, 42% on 3-month LIBOR and the remainder on other short-term
indices.
(2) Interest rate caps with notional values of $73 million, $110 million and
$160 million require the counterparty to pay the Corporation the excess, if
any, of 3-month LIBOR over a weighted-average strike of 6.05%, 1-month LIBOR
over a weighted-average strike of 5.66% and Prime over a weighted-average
strike of 8.77%, respectively. At September 30, 2000, 3-month LIBOR was
6.81%, 1-month LIBOR was 6.62% and Prime was 9.50%.
(3) Interest rate floors with notional values of $3.0 billion, require the
counterparty to pay the excess, if any, weighted-average strike of 4.63%
over 3-month LIBOR. At September 30, 2000, 3-month LIBOR was 6.81%.
NM - Not meaningful
THE PNC FINANCIAL SERVICES GROUP, INC.
------
22
<PAGE> 24
FINANCIAL REVIEW
OTHER DERIVATIVES To accommodate customer needs, PNC enters into
customer-related financial derivative transactions primarily consisting of
interest rate swaps, caps, floors and foreign exchange contracts. Risk exposure
from customer positions is managed through transactions with other dealers.
Additionally, the Corporation enters into other derivative transactions for risk
management purposes. These positions are recorded at estimated fair value and
changes in value are included in results of operations.
OTHER DERIVATIVES
<TABLE>
<CAPTION>
At September 30, 2000
--------------------------------------------------------------------
Positive Negative Average
Notional Fair Fair Net Asset Fair
In millions Value Value Value (Liability) Value (a)
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Customer-related
Interest rate
Swaps $12,864 $115 $(103) $12 $(2)
Caps/floors
Sold 5,232 (18) (18) (25)
Purchased 4,251 16 16 23
Foreign exchange 5,100 59 (46) 13 8
Other 3,167 73 (66) 7 4
-----------------------------------------------------------------------------------------------------------------------------------
Total customer-related 30,614 263 (233) 30 8
Other 1,209 12 (1) 11 6
-----------------------------------------------------------------------------------------------------------------------------------
Total other derivatives $31,823 $275 $(234) $41 $14
===================================================================================================================================
</TABLE>
(a) For the nine months ended September 30, 2000
THE PNC FINANCIAL SERVICES GROUP, INC.
------
23
<PAGE> 25
THIRD QUARTER 2000 VERSUS 1999
Earnings for the third quarter of 2000, including discontinued operations, were
$322 million or $1.09 per diluted share, a 9% increase compared with core
earnings per diluted share of $1.00 for the third quarter of 1999. Core earnings
for the prior-year quarter excluded $17 million of after-tax gains from the sale
of branches or 6 cents per diluted share. Reported earnings for the third
quarter of 1999 were $320 million or $1.06 per diluted share. Return on average
common shareholders' equity was 21.54% and return on average assets was 1.67%
for the third quarter of 2000 compared with 21.81% and 1.63%, respectively, on a
core basis for the third quarter of 1999.
Excluding discontinued operations, earnings for the third quarter of 2000 were
$299 million or $1.01 per diluted share, a 9% increase compared with core
diluted earnings per share for the third quarter of 1999. Cash earnings per
diluted share were $1.11 for the third quarter of 2000, up 12% compared with
core cash earnings per diluted share a year ago.
EFFECT OF DISCONTINUED OPERATIONS
ON THIRD QUARTER 2000 AND 1999 RESULTS
<TABLE>
<CAPTION>
Three months ended September 30 2000 1999 1999
Dollars in millions, except per share amounts Reported Core Reported
----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income from continuing operations $299 $282 $299
Discontinued operations 23 21 21
Total net income $322 $303 $320
Diluted EPS - continuing operations $1.01 $.93 $.99
Discontinued operations .08 .07 .07
Total diluted EPS $1.09 $1.00 $1.06
Cash diluted EPS - continuing
operations (a) $1.11 $.99 $1.05
Discontinued operations (a) .08 .07 .07
Total cash diluted EPS (a) $1.19 $1.06 $1.12
========================================================================================
</TABLE>
(a) Excluding amortization of goodwill
Return on average common shareholders' equity was 19.99% and return on average
assets was 1.72% for the third quarter of 2000 compared with 20.28% and 1.67%,
respectively, on a core basis for the third quarter of 1999.
Taxable-equivalent net interest income was $534 million for the third quarter of
2000, a $44 million decrease compared with the third quarter of 1999. The
decrease mainly resulted from funding costs related to the ISG acquisition,
downsizing of certain credit-related businesses in 1999 and the effect of a
higher interest rate environment in 2000. The net interest margin was 3.54% for
the third quarter of 2000 compared with 3.78% for the third quarter of 1999. The
narrowing of the net interest margin was primarily attributable to the ISG
acquisition and a higher proportion of interest-bearing deposits.
The provision for credit losses was $30 million in the third quarter of 2000 and
1999.
Noninterest income was $700 million for the third quarter of 2000 and
represented 57% of total revenue. Noninterest income increased $156 million or
29% compared with the prior-year quarter, excluding the $27 million of branch
gains in 1999. The increase was primarily driven by growth in fee-based revenue
and the benefit of the ISG acquisition, partially offset by lower equity
management income. Excluding ISG, noninterest income increased 11% in the
comparison.
Asset management fees of $208 million for the third quarter of 2000 increased
$33 million or 19% compared with the third quarter of 1999 primarily driven by
new business. Fund servicing fees of $168 million for the third quarter of 2000
increased $112 million compared with the third quarter of 1999 principally due
to the ISG acquisition. Excluding ISG, fund servicing fees increased $13 million
or 23% compared with the prior-year quarter due to existing client growth, new
business and market appreciation.
Brokerage fees of $61 million for the third quarter of 2000 increased $9 million
or 17% compared with the third quarter of 1999 reflecting the expansion of
Hilliard Lyons' distribution network and the impact of higher activity in the
equity markets. Consumer services revenue of $55 million for the third quarter
of 2000 increased $6 million or 12% compared with the prior-year quarter
primarily due to an increase in retail transaction volume.
Corporate services revenue of $86 million for the third quarter of 2000
increased 13% compared with the third quarter of 1999 primarily driven by higher
treasury management and capital markets fees and income from other investments.
THE PNC FINANCIAL SERVICES GROUP, INC.
------
24
<PAGE> 26
FINANCIAL REVIEW
Equity management income reflected a net loss of $3 million for the third
quarter of 2000 compared with $22 million of income in the third quarter of
1999. The lower income in the third quarter of 2000 resulted from fewer realized
gains and a decline in the estimated fair value of investments. Other
noninterest income of $68 million for the third quarter of 2000 increased $9
million compared with the prior-year quarter, excluding the branch gains from
1999.
Noninterest expense was $747 million and the efficiency ratio was 57% in the
third quarter of 2000 compared with $656 million and 55%, respectively, in the
third quarter of 1999 excluding non-core items. The increases were primarily
related to the ISG acquisition and higher expenses commensurate with fee-based
revenue growth. Excluding ISG, noninterest expense increased less than 1%
compared with the prior-year quarter as a result of aggressive expense
management.
Average earning assets were $59.7 billion for the third quarter of 2000 compared
with $60.5 billion for the third quarter of 1999. Average earning assets
declined primarily due to a decrease in average loans, which resulted from the
decision to exit certain non-strategic wholesale lending businesses and the
continued downsizing of the indirect automobile lending portfolio. Average
securities available for sale decreased $207 million compared with the
prior-year quarter. Average loans held for sale increased $484 million compared
with the prior-year quarter primarily as a result of the decision during the
fourth quarter of 1999 to exit certain non-strategic wholesale lending
businesses.
Average deposits were $45.9 billion and represented 66% of total sources of
funds for the third quarter of 2000 compared with $43.8 billion and 65%,
respectively, in the third quarter of 1999. The increase in deposits primarily
resulted from a number of consumer marketing initiatives.
Average borrowed funds were $13.5 billion for the third quarter of 2000 compared
with $14.9 billion for the third quarter of 1999.
The ratio of nonperforming assets to total loans, loans held for sale and
foreclosed assets was .68% at September 30, 2000 compared with .65% at September
30, 1999. Nonperforming assets were $354 million at September 30, 2000 compared
with $346 million at September 30, 1999.
The allowance for credit losses was $675 million and represented 1.36% of
period-end loans and 219% of nonaccrual loans at September 30, 2000. The
comparable ratios were 1.32% and 221%, respectively, at September 30, 1999. Net
charge-offs were $30 million or .24% of average loans in the third quarter of
2000 compared with $29 million or .22%, respectively, in the third quarter of
1999.
RISK FACTORS
The Corporation is subject to a number of risk factors, including among others,
those described below. These factors and others could impact the Corporation's
business, financial condition and results of operations.
BUSINESS AND ECONOMIC CONDITIONS The Corporation's business and results of
operations are sensitive to general business and economic conditions in the
United States. These conditions include the level and movement of interest
rates, inflation, monetary supply, fluctuations in both debt and equity capital
markets, and the strength of the U.S. economy, in general, and the regional
economies in which the Corporation conducts business. An economic downturn or
higher interest rates could decrease the demand for loans and other products and
services offered by the Corporation, increase usage of unfunded commitments or
increase the number of customers and counterparties who become delinquent, file
for protection under bankruptcy laws or default on their loans or other
obligations to the Corporation. An increase in the number of delinquencies,
bankruptcies or defaults could result in a higher level of net charge-offs that
could result in a higher loan loss provision. See "Risk Management - Credit
Risk" discussion in "Financial Review" for more information on credit risk.
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. See "Risk Management - Interest Rate Risk"
discussion in "Financial Review" for more information on interest rate risk.
MONETARY AND OTHER POLICIES The financial services industry is subject to
various monetary and other policies and regulations of the United States
government and its agencies, which include the Federal Reserve Board, the Office
of the Comptroller of Currency, the Federal Deposit Insurance Corporation, the
Office of Thrift Supervision and state regulators. The Corporation is
particularly affected by the policies of the Federal Reserve Board, which
regulates the supply of money and credit in the United States. The Federal
Reserve Board's policies influence the rates of interest that PNC charges on
loans and pays on interest-bearing deposits and can also affect the value of
on-balance-sheet and off-balance-sheet financial instruments. Those policies
also determine, to a significant extent, the cost to the Corporation of funds
for lending and investing.
THE PNC FINANCIAL SERVICES GROUP, INC.
------
25
<PAGE> 27
COMPETITION The Corporation operates in a highly competitive environment, both
in terms of the products and services offered and the geographic markets in
which PNC conducts business. This environment could become even more competitive
in the future. The Corporation competes with other local, regional and national
banks, thrifts, credit unions and other non-bank financial institutions, such as
investment banking firms, investment advisory firms, brokerage firms, investment
companies, venture capital firms, mutual fund complexes and insurance companies,
as well as other entities that offer financial services, and through alternative
delivery channels such as the World Wide Web. Technological advances and new
legislation, among other changes, have lowered barriers to entry and have made
it possible for non-bank institutions to offer products and services that
traditionally have been provided by banks. Many of the Corporation's competitors
benefit from fewer regulatory constraints and lower cost structures, allowing
for more competitive pricing of products and services.
The Gramm-Leach-Bliley Act ("the Act"), which was enacted on November 12, 1999,
permits affiliations among banks, securities firms and insurance companies. The
Act significantly changes the competitive environment in which the Corporation
conducts business. This environment could result in a loss of customers and
related revenue.
DISINTERMEDIATION Disintermediation is the process of eliminating the role of
the intermediary in completing a transaction. For the financial services
industry, this means eliminating or significantly reducing the role of banks and
other depository institutions in completing transactions that have traditionally
involved banks at one end or both ends of the transaction. Disintermediation
could result in, among others, the loss of customer deposits and decreases in
transactions that generate fee income.
ASSET MANAGEMENT PERFORMANCE Asset management revenues are primarily based on a
percentage of the value of assets under management and performance fees
expressed as a percentage of the returns realized on assets under management. A
decline in the prices of debt and equity instruments, among other things, could
cause asset management revenue to decline.
Investment performance is one of the most important factors for the growth 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 for remaining clients 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 sharp rise in interest rates or a sudden decline
in the debt and equity markets could influence an investor's decision whether to
invest or maintain an investment in a mutual fund. As a result, fluctuations may
occur in assets that the Corporation has under administration. A significant
investor migration from mutual fund investments could have a negative impact on
the Corporation's revenues by reducing the assets it administers. There has been
and continues to be merger, acquisition and consolidation activity in the
financial services industry. Mergers or consolidations of financial institutions
in the future could reduce the number of existing or potential fund servicing
clients.
ACQUISITIONS The Corporation expands its business in part by acquiring other
financial services companies. Factors pertaining to acquisitions that could
adversely affect the Corporation's business and earnings include, among others,
o expected cost savings or potential revenue enhancements that may not be
fully realized or realized within the expected time frame;
o customer loss or revenue loss following an acquisition that may be greater
than expected; and
o costs or difficulties related to the integration of businesses that may be
greater than expected.
THE PNC FINANCIAL SERVICES GROUP, INC.
------
26
<PAGE> 28
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Three months ended September 30 Nine months ended September 30
------------------------------- ------------------------------
In millions, except per share data 2000 1999 2000 1999
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans and fees on loans $1,025 $982 $3,018 $3,080
Securities available for sale 99 98 290 266
Loans held for sale 47 31 163 61
Other 30 14 71 39
----------------------------------------------------------------------------------------------------------------------------------
Total interest income 1,201 1,125 3,542 3,446
----------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Deposits 434 340 1,200 1,024
Borrowed funds 236 212 711 640
----------------------------------------------------------------------------------------------------------------------------------
Total interest expense 670 552 1,911 1,664
----------------------------------------------------------------------------------------------------------------------------------
Net interest income 531 573 1,631 1,782
Provision for credit losses 30 30 96 133
----------------------------------------------------------------------------------------------------------------------------------
Net interest income less provision for credit losses 501 543 1,535 1,649
----------------------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Asset management 208 175 590 505
Fund servicing 168 56 487 162
Service charges on deposits 50 53 150 154
Brokerage 61 52 192 161
Consumer services 55 49 153 166
Corporate services 86 76 248 97
Equity management (3) 22 132 48
Net securities gains 7 2 4 44
Other 68 86 200 488
----------------------------------------------------------------------------------------------------------------------------------
Total noninterest income 700 571 2,156 1,825
----------------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Staff expense 399 324 1,206 1,016
Net occupancy 50 47 151 176
Equipment 54 48 165 180
Amortization 27 20 83 69
Marketing 16 17 48 46
Distributions on capital securities 17 16 50 48
Other 184 184 616 555
----------------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 747 656 2,319 2,090
----------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes 454 458 1,372 1,384
Income taxes 155 159 472 469
----------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations 299 299 900 915
----------------------------------------------------------------------------------------------------------------------------------
Income from discontinued operations (less applicable income
taxes of $15, $12, $30 and $29) 23 21 45 45
----------------------------------------------------------------------------------------------------------------------------------
Net income $322 $320 $945 $960
----------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations applicable to diluted
earnings $294 $294 $886 $901
Net income applicable to diluted earnings 317 315 931 946
EARNINGS PER COMMON SHARE
Continuing operations
Basic $1.02 $1.00 $3.05 $3.02
Diluted 1.01 .99 3.03 2.99
Net income
Basic 1.10 1.07 3.21 3.17
Diluted 1.09 1.06 3.18 3.14
CASH DIVIDENDS DECLARED PER COMMON SHARE .45 .41 1.35 1.23
AVERAGE COMMON SHARES OUTSTANDING
Basic 289.0 294.5 290.2 298.0
Diluted 292.0 297.6 292.7 301.3
==================================================================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
THE PNC FINANCIAL SERVICES GROUP, INC.
------
27
<PAGE> 29
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
September 30 December 31
In millions, except par value 2000 1999
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $3,106 $3,080
Short-term investments 1,673 1,100
Loans held for sale 2,127 3,477
Securities available for sale 6,490 5,960
Loans, net of unearned income of $964 and $724 49,791 49,673
Allowance for credit losses (675) (674)
----------------------------------------------------------------------------------------------------------------------------------
Net loans 49,116 48,999
Goodwill and other amortizable assets 2,476 2,512
Investment in discontinued operations 347 263
Other 4,549 3,895
----------------------------------------------------------------------------------------------------------------------------------
Total assets $69,884 $69,286
==================================================================================================================================
LIABILITIES
Deposits
Noninterest-bearing $8,509 $8,161
Interest-bearing 38,985 37,641
----------------------------------------------------------------------------------------------------------------------------------
Total deposits 47,494 45,802
Borrowed funds
Federal funds purchased 1,341 1,281
Repurchase agreements 602 402
Bank notes and senior debt 6,109 6,975
Federal Home Loan Bank borrowings 583 2,258
Subordinated debt 2,406 2,327
Other borrowed funds 1,258 986
----------------------------------------------------------------------------------------------------------------------------------
Total borrowed funds 12,299 14,229
Other 2,860 2,461
----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 62,653 62,492
----------------------------------------------------------------------------------------------------------------------------------
Mandatorily redeemable capital securities of subsidiary trusts 848 848
SHAREHOLDERS' EQUITY
Preferred stock 7 7
Common stock - $5 par value
Authorized 450 shares
Issued 353 shares 1,764 1,764
Capital surplus 1,290 1,276
Retained earnings 6,545 6,006
Deferred benefit expense (18) (17)
Accumulated other comprehensive loss from continuing operations (92) (132)
Accumulated other comprehensive loss from discontinued operations (85) (135)
Common stock held in treasury at cost: 64 and 60 shares (3,028) (2,823)
----------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 6,383 5,946
----------------------------------------------------------------------------------------------------------------------------------
Total liabilities, capital securities and shareholders' equity $69,884 $69,286
==================================================================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
THE PNC FINANCIAL SERVICES GROUP, INC.
------
28
<PAGE> 30
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Nine months ended September 30 - in millions 2000 1999
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $945 $960
Income from discontinued operations (45) (45)
-------------------------------------------------------------------------------------------------------------------------------
Net income from continuing operations 900 915
Adjustments to reconcile net income from continuing operations
to net cash provided by operating activities
Provision for credit losses 96 133
Depreciation, amortization and accretion 252 266
Deferred income taxes 286 172
Net securities gains (6) (44)
Gain on sale of businesses (317)
Valuation adjustments 24 142
Change in
Loans held for sale 1,326 292
Other (1,129) (27)
-------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,749 1,532
-------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Net change in loans (425) 387
Repayment of securities available for sale 679 1,045
Sales
Securities available for sale 4,648 6,269
Loans 187 463
Foreclosed assets 18 26
Purchases
Securities available for sale (5,810) (8,595)
Loans (363)
Net cash (paid) received for divestitures (4) 2,975
Other (191) (69)
-------------------------------------------------------------------------------------------------------------------------------
Net cash (used) provided by investing activities (898) 2,138
-------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net change in
Noninterest-bearing deposits 348 (1,101)
Interest-bearing deposits 1,344 (466)
Federal funds purchased 60 82
Sale/issuance
Repurchase agreements 128,720 100,138
Bank notes and senior debt 2,848 2,416
Federal Home Loan Bank borrowings 1,781 2,028
Subordinated debt 593 254
Other borrowed funds 28,985 24,689
Capital securities 84
Common stock 118
Repayment/maturity
Repurchase agreements (128,520) (100,081)
Bank notes and senior debt (3,715) (4,826)
Federal Home Loan Bank borrowings (3,456) (1,553)
Subordinated debt (514) (4)
Other borrowed funds (28,683) (24,632)
Acquisition of treasury stock (327) (670)
Cash dividends paid (407) (383)
-------------------------------------------------------------------------------------------------------------------------------
Net cash used by financing activities (825) (4,025)
-------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND DUE FROM BANKS 26 (355)
Cash and due from banks at beginning of year 3,080 2,529
-------------------------------------------------------------------------------------------------------------------------------
Cash and due from banks at end of period $3,106 $2,174
===============================================================================================================================
CASH PAID FOR
Interest $1,946 $1,715
Income taxes 235 233
NON-CASH ITEMS
Transfer from loans to loans held for sale 2,142
Transfer from loans to other assets 18 30
===============================================================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
THE PNC FINANCIAL SERVICES GROUP, INC.
------
29
<PAGE> 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BUSINESS The PNC Financial Services Group, Inc. ("Corporation" or "PNC") is one
of the largest diversified financial services companies in the United States
operating regional banking, corporate banking, real estate finance, asset-based
lending, private banking, asset management and global fund processing services
businesses, which provides products and services nationally and in PNC's primary
geographic markets in Pennsylvania, New Jersey, Delaware, Ohio and Kentucky. The
Corporation is subject to intense competition from other financial services
companies and is subject to the regulations of certain federal and state
agencies and undergoes periodic examinations by those authorities.
ACCOUNTING POLICIES
BASIS OF FINANCIAL STATEMENT PRESENTATION The unaudited consolidated interim
financial statements include the accounts of PNC and its subsidiaries, most of
which are wholly owned. Such statements have been prepared in accordance with
accounting principles generally accepted in the United States. All significant
intercompany accounts and transactions have been eliminated.
In the opinion of management, the financial statements reflect all adjustments
of a normal recurring nature necessary for a fair statement of results for the
interim periods presented. Certain prior-period amounts have been reclassified
to conform with the current period presentation. These classifications did not
impact the Corporation's financial condition or results of operations.
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the amounts reported. Actual results
will differ from such estimates and the differences may be material to the
consolidated financial statements.
The notes included herein should be read in conjunction with the audited
consolidated financial statements included in The PNC Financial Services Group,
Inc.'s 1999 Annual Report.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," as amended, which is required to be adopted in years
after June 15, 2000. The Corporation will adopt the new statement effective
January 1, 2001. The statement will require the Corporation to recognize all
derivatives on the balance sheet at fair value.
Derivatives that are not designated as hedges must be adjusted to fair value
through earnings. If the derivative is designated as a hedge, depending on the
nature of the hedge, changes in derivatives' fair value will be either offset
against the changes in fair value or expected future cash flows of the hedged
assets, liabilities or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings.
The Corporation is and has been assessing its hedging methods and strategies in
light of the standard's requirements. The impact of adoption of the provisions
of the statement on PNC's financial position and results of operations will
depend on the financial position of the Corporation and the nature, purpose and
fair values of the derivatives in place as of January 1, 2001. A significant
portion of PNC's derivatives relate to residential mortgage banking risk
management activities, which are included in discontinued operations. Management
does not expect that the impact of adopting this standard will be material to
PNC's financial position or results of operations.
DISCONTINUED OPERATIONS
On October 2, 2000, the Corporation announced that it reached a definitive
agreement for Washington Mutual, F.A. to acquire the stock of PNC's residential
mortgage banking affiliates. The transaction is expected to close in the first
quarter of 2001, subject to regulatory approvals and customary closing
conditions, and PNC anticipates that the transaction will result in an after-tax
gain of approximately $250 million, subject to closing adjustments. Earnings for
the residential mortgage banking business for the nine months ended September
30, 2000 and 1999 were $45 million and are reflected as discontinued operations
throughout the Corporation's financial statements. Earnings and net assets of
the residential mortgage banking business are shown separately on one line in
the income statement and balance sheet, respectively, for all periods presented.
INVESTMENT IN DISCONTINUED OPERATIONS:
<TABLE>
<CAPTION>
September 30 December 31
In millions 2000 1999
----------------------------------------------------------------
<S> <C> <C>
Loans held for sale $2,438 $2,321
Securities available for sale 2,151 1,651
Loans, net of unearned income 743 373
Goodwill and other amortizable
assets 1,984 1,611
All other assets 448 434
----------------------------------------------------------------
Total assets 7,764 6,390
----------------------------------------------------------------
Deposits 1,049 866
Borrowed funds 6,073 5,118
Other liabilities 295 143
----------------------------------------------------------------
Total liabilities 7,417 6,127
----------------------------------------------------------------
Net assets $347 $263
================================================================
</TABLE>
THE PNC FINANCIAL SERVICES GROUP, INC.
------
30
<PAGE> 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The notional and fair value of financial derivatives used for residential
mortgage banking risk management were $13.2 billion and $57 million,
respectively, at September 30, 2000. The comparable amounts at December 31, 1999
were $9.3 billion and $28 million, respectively. The weighted-average maturity
of financial derivatives used for residential mortgage banking risk management
was 3 years and 4 months at September 30, 2000.
The remaining Notes to Consolidated Financial Statements and Statistical Data
reflect continuing operations, except for Earnings per Share, which reflects the
impact of discontinued operations.
CASH FLOWS
During the first nine months of 2000, acquisition activity that affected cash
flows consisted of $22 million of acquired assets, $2 million of acquired
liabilities and cash payments totaling $3 million. During the first nine months
of 1999, divestiture activity that affected cash flows consisted of $3.2 billion
of divested assets and cash receipts of $3.0 billion in cash and due from banks.
TRADING ACTIVITIES
PNC engages in trading activities as part of the Corporation's risk management
strategies and for "market making" in equity securities. Additionally, PNC
participates in derivatives and foreign exchange trading as an accommodation to
customers.
Net trading income for the first nine months of 2000 totaled $68 million
compared with net trading income of $53 million for the prior-year period that
were included in noninterest income as follows:
<TABLE>
<CAPTION>
Nine months ended September 30 - in millions 2000 1999
----------------------------------------------------------------
<S> <C> <C>
Corporate services $7
Equity management 2
Other income
Securities trading 32 $37
Derivatives trading 11 4
Foreign exchange 16 12
----------------------------------------------------------------
Net trading income $68 $53
================================================================
</TABLE>
SECURITIES AVAILABLE FOR SALE
<TABLE>
<CAPTION>
Unrealized
Amortized ------------------------------- Fair
In millions Cost Gains Losses Value
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SEPTEMBER 30, 2000
Debt securities
U.S. Treasury and government agencies $240 $(4) $236
Mortgage-backed 4,514 $10 (117) 4,407
Asset-backed 1,172 6 (20) 1,158
State and municipal 79 2 (1) 80
Other debt 46 46
-------------------------------------------------------------------------------------------------------------------------------
Total debt securities 6,051 18 (142) 5,927
Corporate stocks and other 563 6 (6) 563
-------------------------------------------------------------------------------------------------------------------------------
Total securities available for sale $6,614 $24 $(148) $6,490
===============================================================================================================================
DECEMBER 31, 1999
Debt securities
U.S. Treasury and government agencies $411 $(11) $400
Mortgage-backed 3,918 $2 (151) 3,769
Asset-backed 1,051 (24) 1,027
State and municipal 134 2 (5) 131
Other debt 40 (1) 39
-------------------------------------------------------------------------------------------------------------------------------
Total debt securities 5,554 4 (192) 5,366
Corporate stocks and other 590 9 (5) 594
-------------------------------------------------------------------------------------------------------------------------------
Total securities available for sale $6,144 $13 $(197) $5,960
===============================================================================================================================
</TABLE>
THE PNC FINANCIAL SERVICES GROUP, INC.
------
31
<PAGE> 33
The fair value of securities available for sale at September 30, 2000 increased
$530 million compared with December 31, 1999. Securities represented 9% of total
assets at September 30, 2000. The expected weighted-average life of securities
available for sale decreased to 3 years and 9 months at September 30, 2000
compared with 4 years and 7 months at year-end 1999.
Net securities gains of $6 million and $44 million for the first nine months of
2000 and 1999, respectively, were reported as follows:
<TABLE>
<CAPTION>
Nine months ended September 30 - in millions 2000 1999
------------------------------------------------------------------------
<S> <C> <C>
Net securities gains $4 $44
Corporate services 2
------------------------------------------------------------------------
Total $6 $44
========================================================================
</TABLE>
Net securities gains were $4 million for the first nine months of 2000. Net
securities gains were $44 million for the first nine months of 1999,
substantially all related to the gain from the sale of Concord EFS, Inc. stock.
Net securities gains of $2 million for the first nine months of 2000, related to
commercial mortgage banking activities, were included in corporate services
revenue.
NONPERFORMING ASSETS
Nonperforming assets were as follows:
<TABLE>
<CAPTION>
September 30 December 31
In millions 2000 1999
------------------------------------------------------------------
<S> <C> <C>
Nonaccrual loans $308 $291
Foreclosed and other assets 46 34
------------------------------------------------------------------
Total nonperforming assets $354 $325
==================================================================
</TABLE>
The above table excludes $18 million and $13 million of equity management assets
at September 30, 2000 and December 31, 1999, respectively, that are carried at
estimated fair value.
ALLOWANCE FOR CREDIT LOSSES
Changes in the allowance for credit losses were as follows:
<TABLE>
<CAPTION>
In millions 2000 1999
------------------------------------------------------------------
<S> <C> <C>
Allowance at January 1 $674 $753
Charge-offs
Consumer (34) (49)
Credit card (60)
Residential mortgage (4) (7)
Commercial (86) (48)
Commercial real estate (2) (4)
Lease financing (5) (5)
------------------------------------------------------------------
Total charge-offs (131) (173)
Recoveries
Consumer 16 20
Credit card 2
Residential mortgage 1 1
Commercial 14 17
Commercial real estate 4 1
Lease financing 1 1
------------------------------------------------------------------
Total recoveries 36 42
------------------------------------------------------------------
Net charge-offs
Consumer (18) (29)
Credit card (58)
Residential mortgage (3) (6)
Commercial (72) (31)
Commercial real estate 2 (3)
Lease financing (4) (4)
------------------------------------------------------------------
Total net charge-offs (95) (131)
Provision for credit losses 96 133
Divestitures (81)
------------------------------------------------------------------
Allowance at September 30 $675 $674
==================================================================
</TABLE>
FINANCIAL DERIVATIVES
FAIR VALUE OF FINANCIAL DERIVATIVES The notional and fair values of financial
derivatives used for risk management were as follows:
<TABLE>
<CAPTION>
Positive Negative
Notional Fair Notional Fair
In millions Value Value Value Value
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
SEPTEMBER 30, 2000
Interest rate
Swaps $4,903 $51 $2,852 $(36)
Caps 346 8
Floors 3,000 262 (1)
---------------------------------------------------------------------
Total interest rate
risk management 8,249 59 3,114 (37)
Commercial mortgage
banking risk
management 296 20 352 (10)
Forward contracts 353
Credit default swaps 4,464 (2)
---------------------------------------------------------------------
Total $8,898 $79 $7,930 $(49)
=====================================================================
DECEMBER 31, 1999
Interest rate
Swaps $3,666 $46 $5,402 $(108)
Caps 474 12
Floors 3,000 1 311 (1)
---------------------------------------------------------------------
Total interest rate
risk management 7,140 59 5,713 (109)
Commercial mortgage
banking risk
management 643 51
Forward contracts 681
Credit default swaps 60 4,255 (4)
---------------------------------------------------------------------
Total $8,524 $110 $9,968 $(113)
=====================================================================
</TABLE>
THE PNC FINANCIAL SERVICES GROUP, INC.
------
32
<PAGE> 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OTHER DERIVATIVES The following schedule sets forth information relating to
positions associated with customer-related and other derivatives.
<TABLE>
<CAPTION>
At September 30, 2000
-------------------------------------------------------------
Positive Negative Average
Notional Fair Fair Net Asset Fair
In millions Value Value Value (Liability) Value (a)
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Customer-related
Interest rate
Swaps $12,864 $115 $(103) $12 $(2)
Caps/floors
Sold 5,232 (18) (18) (25)
Purchased 4,251 16 16 23
Foreign exchange 5,100 59 (46) 13 8
Other 3,167 73 (66) 7 4
-------------------------------------------------------------------------------------------------------------------
Total customer-related 30,614 263 (233) 30 8
Other 1,209 12 (1) 11 6
-------------------------------------------------------------------------------------------------------------------
Total other derivatives $31,823 $275 $(234) $41 $14
===================================================================================================================
</TABLE>
(a) For the nine months ended September 30, 2000
<TABLE>
<CAPTION>
At December 31, 1999
------------------------------------------------------------- 1999
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 $17,103 $110 $(116) $(6) $(13)
Caps/floors
Sold 3,440 (25) (25) (20)
Purchased 3,337 22 22 18
Foreign exchange 3,310 47 (36) 11 7
Other 2,161 22 (9) 13 3
-------------------------------------------------------------------------------------------------------------------
Total customer-related 29,351 201 (186) 15 (5)
Other 1,238 6 6 4
-------------------------------------------------------------------------------------------------------------------
Total other derivatives $30,589 $207 $(186) $21 $(1)
===================================================================================================================
</TABLE>
LITIGATION
The Corporation and persons to whom the Corporation may have indemnification
obligations, in the normal course of business, are subject to various pending
and threatened lawsuits in which claims for monetary damages are asserted.
Management, after consultation with legal counsel, does not at the present time
anticipate the ultimate aggregate liability, if any, arising out of such
lawsuits will have a material adverse effect on the Corporation's financial
condition. At the present time, management is not in a position to determine
whether any such pending or threatened litigation will have a material adverse
effect on the Corporation's results of operations in any future reporting
period.
COMPREHENSIVE INCOME
Comprehensive income from continuing operations was $345 million for the third
quarter of 2000 and $940 million for the first nine months of 2000, compared
with $271 million and $811 million, respectively, in 1999. The increases were
primarily due to a higher valuation on securities available for sale.
THE PNC FINANCIAL SERVICES GROUP, INC.
------
33
<PAGE> 35
EARNINGS PER SHARE
The following table sets forth basic and diluted earnings per share
calculations.
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
------------------- ------------------
In millions, except share and per share data 2000 1999 2000 1999
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CALCULATION OF BASIC EARNINGS PER COMMON SHARE
Income from continuing operations $299 $299 $900 $915
Less: Preferred dividends declared 5 5 14 15
-----------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations applicable to basic earnings per common share $294 $294 $886 $900
-----------------------------------------------------------------------------------------------------------------------------------
Basic weighted-average common shares outstanding (in thousands) 288,958 294,497 290,213 298,047
-----------------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS FROM CONTINUING OPERATIONS PER COMMON SHARE $1.02 $1.00 $3.05 $3.02
===================================================================================================================================
Income from discontinued operations applicable to basic earnings per common share $23 $21 $45 $45
-----------------------------------------------------------------------------------------------------------------------------------
Basic weighted-average common shares outstanding (in thousands) 288,958 294,497 290,213 298,047
-----------------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS FROM DISCONTINUED OPERATIONS PER COMMON SHARE $.08 $.07 $.16 $.15
===================================================================================================================================
Net income $322 $320 $945 $960
Less: Preferred dividends declared 5 5 14 15
-----------------------------------------------------------------------------------------------------------------------------------
Net income applicable to basic earnings per common share $317 $315 $931 $945
-----------------------------------------------------------------------------------------------------------------------------------
Basic weighted-average common shares outstanding (in thousands) 288,958 294,497 290,213 298,047
-----------------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER COMMON SHARE $1.10 $1.07 $3.21 $3.17
===================================================================================================================================
CALCULATION OF DILUTED EARNINGS PER COMMON SHARE
Income from continuing operations $299 $299 $900 $915
Less: Dividends declared on nonconvertible preferred stock Series F 5 5 14 14
-----------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations applicable to diluted earnings per common share $294 $294 $886 $901
-----------------------------------------------------------------------------------------------------------------------------------
Basic weighted-average common shares outstanding (in thousands) 288,958 294,497 290,213 298,047
Weighted-average common shares to be issued using average market price and assuming:
Conversion of preferred stock Series A and B 118 132 120 134
Conversion of preferred stock Series C and D 974 1,064 1,005 1,080
Conversion of debentures 19 24 20 24
Exercise of stock options 1,906 1,472 1,215 1,602
Incentive share awards 55 379 163 381
-----------------------------------------------------------------------------------------------------------------------------------
Diluted weighted-average common shares outstanding (in thousands) 292,030 297,568 292,736 301,268
-----------------------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS FROM CONTINUING OPERATIONS PER COMMON SHARE $1.01 $.99 $3.03 $2.99
===================================================================================================================================
Income from discontinued operations applicable to diluted earnings per common share $23 $21 $45 $45
-----------------------------------------------------------------------------------------------------------------------------------
Diluted weighted-average common shares outstanding (in thousands) 292,030 297,568 292,736 301,268
-----------------------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS FROM DISCONTINUED OPERATIONS PER COMMON SHARE $.08 $.07 $.15 $.15
===================================================================================================================================
Net income $322 $320 $945 $960
Less: Dividends declared on nonconvertible preferred stock Series F 5 5 14 14
-----------------------------------------------------------------------------------------------------------------------------------
Net income applicable to diluted earnings per common share 317 315 931 946
-----------------------------------------------------------------------------------------------------------------------------------
Diluted weighted-average common shares outstanding (in thousands) 292,030 297,568 292,736 301,268
-----------------------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER COMMON SHARE $1.09 $1.06 $3.18 $3.14
===================================================================================================================================
</TABLE>
THE PNC FINANCIAL SERVICES GROUP, INC.
------
34
<PAGE> 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEGMENT REPORTING
PNC operates seven major businesses engaged in regional banking, corporate
banking, real estate finance, asset-based lending, private banking, asset
management and global fund processing services: Regional Banking, Corporate
Banking, PNC Real Estate Finance, PNC Business Credit, PNC Advisors, BlackRock,
and PFPC.
Business results are presented based on PNC's management accounting practices
and the Corporation's current management structure. There is no comprehensive,
authoritative body of guidance for management accounting equivalent to generally
accepted accounting principles; therefore, PNC's business results are not
necessarily comparable with similar information for any other financial services
institution. Financial results are presented to the extent practicable as if
each business operated on a stand-alone basis.
The presentation of business results was changed during the first quarter of
2000 to reflect the Corporation's current operating strategy and recent
organizational changes. Middle market and equipment leasing activities
(previously included in Regional Banking) are reported in Corporate Banking. In
addition, PNC Real Estate Finance and PNC Business Credit are reported
separately within PNC Secured Finance. Regional real estate lending activities
(previously included in Regional Banking) are reported in PNC Real Estate
Finance. Business financial results for the first nine months of 2000 and 1999
are presented consistent with this structure.
The management accounting process uses various balance sheet and income
statement assignments and transfers to measure performance of the businesses.
Methodologies change from time to time as management accounting practices are
enhanced and businesses change. Securities or borrowings and related net
interest income are assigned based on the net asset or liability position of
each business. Capital is assigned based on management's assessment of inherent
risks and equity levels at independent companies providing similar products and
services. The allowance for credit losses is allocated to the businesses based
on 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 results from continuing operations
primarily due to differences between management accounting practices and
generally accepted accounting principles, divested and exited businesses, equity
management activities, minority interests, residual asset and liability
management activities, eliminations and unassigned items, the impact of which is
reflected in Other.
BUSINESS SEGMENT PRODUCTS AND SERVICES
Regional Banking provides credit, deposit, branch-based brokerage and electronic
banking products and services to retail customers as well as credit, treasury
management and capital markets products and services to small businesses
primarily within PNC's geographic region.
Corporate Banking provides specialized credit, equipment leasing, treasury
management and capital markets products and services to large and mid-sized
corporations, institutions and government entities primarily within PNC's
geographic region.
PNC Real Estate Finance provides credit products, capital markets financing,
treasury management, commercial mortgage loan servicing and other products and
services to developers, owners and investors in commercial real estate.
PNC Business Credit provides asset-based lending, capital markets and treasury
management products and services to middle market customers on a national basis.
PNC Business Credit's lending services include loans secured by accounts
receivable, inventory, machinery and equipment, and other collateral, and its
clients 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. 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 $191 billion of assets under management at September 30,
2000. BlackRock manages assets on behalf of institutions and individuals through
a variety of fixed income, liquidity, equity and alternative investment separate
accounts and mutual funds, including its flagship fund families, BlackRock Funds
and Provident Institutional Funds. In addition, BlackRock provides risk
management and technology services to a growing number of institutional
investors under the BlackRock Solutions name.
Providing a wide range of global fund processing services to the investment
management community, PFPC is the largest full-service mutual fund transfer
agent and second largest provider of mutual fund accounting and administration
services in the United States. As an extension of its domestic services, PFPC
also provides customized processing services to the international marketplace
through its Dublin, Ireland operation.
THE PNC FINANCIAL SERVICES GROUP, INC.
------
35
<PAGE> 37
RESULTS OF BUSINESSES
<TABLE>
<CAPTION>
PNC
Real PNC
Three months ended September 30 Regional Corporate Estate Business PNC
In millions Banking Banking Finance Credit Advisors BlackRock PFPC Other Total
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
2000
INCOME STATEMENT
Net interest income (a) $355 $145 $28 $25 $34 $2 $(12) $(43) $534
Noninterest income 151 68 24 4 157 127 169 700
------------------------------------------------------------------------------------------------------------------------------------
Total revenue 506 213 52 29 191 129 157 (43) 1,234
Provision for credit losses 11 12 5 2 30
Depreciation and amortization 21 3 4 1 4 5 12 16 66
Other noninterest expense 241 92 31 7 123 86 120 (19) 681
------------------------------------------------------------------------------------------------------------------------------------
Pretax earnings 233 106 17 16 64 38 25 (42) 457
Income taxes 84 36 5 23 15 10 (15) 158
------------------------------------------------------------------------------------------------------------------------------------
Earnings $149 $70 $17 $11 $41 $23 $15 $(27) $299
====================================================================================================================================
Inter-segment revenue $1 $1 $3 $22 $(27)
====================================================================================================================================
Average assets $39,320 $16,729 $5,541 $2,343 $3,470 $607 $1,560 $(987) $68,583
====================================================================================================================================
1999
INCOME STATEMENT
Net interest income (a) $358 $115 $27 $18 $31 $(2) $3 $28 $578
Noninterest income 141 63 21 3 155 100 56 32 571
------------------------------------------------------------------------------------------------------------------------------------
Total revenue 499 178 48 21 186 98 59 60 1,149
Provision for credit losses 14 (1) 7 5 5 30
Depreciation and amortization 23 3 5 1 4 5 2 11 54
Other noninterest expense 235 89 26 5 119 65 38 25 602
------------------------------------------------------------------------------------------------------------------------------------
Pretax earnings 227 87 17 8 58 28 19 19 463
Income taxes 81 24 3 4 22 12 7 11 164
------------------------------------------------------------------------------------------------------------------------------------
Earnings $146 $63 $14 $4 $36 $16 $12 $8 $299
====================================================================================================================================
Inter-segment revenue $1 $2 $24 $(27)
====================================================================================================================================
Average assets $37,379 $15,566 $5,522 $1,777 $3,289 $522 $245 $2,306 $66,606
====================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Nine months ended September 30
In millions
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
2000
INCOME STATEMENT
Net interest income (a) $1,058 $417 $87 $74 $102 $4 $(34) $(64) $1,644
Noninterest income 439 216 68 12 487 348 489 97 2,156
------------------------------------------------------------------------------------------------------------------------------------
Total revenue 1,497 633 155 86 589 352 455 33 3,800
Provision for credit losses 33 50 7 3 3 96
Depreciation and amortization 63 10 14 2 11 15 38 42 195
Other noninterest expense 733 281 88 20 374 230 366 32 2,124
------------------------------------------------------------------------------------------------------------------------------------
Pretax earnings 668 292 53 57 201 107 51 (44) 1,385
Income taxes 238 102 3 20 74 44 20 (16) 485
------------------------------------------------------------------------------------------------------------------------------------
Earnings $430 $190 $50 $37 $127 $63 $31 $(28) $900
====================================================================================================================================
Inter-segment revenue $2 $4 $10 $63 $(79)
====================================================================================================================================
Average assets $38,564 $16,318 $5,583 $2,230 $3,541 $492 $1,578 $221 $68,527
====================================================================================================================================
1999
INCOME STATEMENT
Net interest income (a) $1,067 $347 $87 $51 $98 $(8) $8 $148 $1,798
Noninterest income 408 185 69 7 453 280 162 261 1,825
------------------------------------------------------------------------------------------------------------------------------------
Total revenue 1,475 532 156 58 551 272 170 409 3,623
Provision for credit losses 47 13 8 5 60 133
Depreciation and amortization 65 10 15 2 11 14 5 114 236
Other noninterest expense 726 258 76 16 355 185 111 127 1,854
------------------------------------------------------------------------------------------------------------------------------------
Pretax earnings 637 251 65 32 180 73 54 108 1,400
Income taxes 232 83 14 12 69 31 20 24 485
------------------------------------------------------------------------------------------------------------------------------------
Earnings $405 $168 $51 $20 $111 $42 $34 $84 $915
====================================================================================================================================
Inter-segment revenue $4 $1 $7 $63 $(75)
====================================================================================================================================
Average assets $37,574 $15,611 $5,595 $1,698 $3,299 $443 $257 $3,678 $68,155
====================================================================================================================================
</TABLE>
(a) Taxable-equivalent basis
THE PNC FINANCIAL SERVICES GROUP, INC.
------
36
<PAGE> 38
STATISTICAL INFORMATION
CONSOLIDATED AVERAGE BALANCE SHEET AND NET INTEREST ANALYSIS
<TABLE>
<CAPTION>
Nine months ended September 30
---------------------------------------------------------------------
2000 1999
---------------------------------------------------------------------
Dollars in millions Average Average Average Average
Taxable-equivalent basis Balances Interest Yields/Rates Balances Interest Yields/Rates
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets
Loans held for sale $2,681 $163 8.10% $1,118 $62 7.36%
Securities available for sale
U.S. Treasury and government
agencies and corporations 1,748 77 5.89 1,965 81 5.55
Other debt 3,752 185 6.56 3,361 157 6.21
Other 605 30 6.68 668 31 6.16
---------------------------------------------------------------------------------- --------------------
Total securities available for sale 6,105 292 6.38 5,994 269 5.99
Loans, net of unearned income
Consumer 9,210 589 8.55 10,612 647 8.16
Credit card 899 100 14.90
Residential mortgage 12,519 668 7.11 12,236 644 7.01
Commercial 21,878 1,383 8.31 23,340 1,344 7.59
Commercial real estate 2,689 179 8.73 3,394 198 7.70
Lease financing 3,082 168 7.25 2,489 132 7.06
Other 670 42 8.40 504 27 7.38
---------------------------------------------------------------------------------- --------------------
Total loans, net of unearned income 50,048 3,029 8.01 53,474 3,092 7.67
Other 1,278 71 7.39 1,038 39 4.94
---------------------------------------------------------------------------------- --------------------
Total interest-earning
assets/interest income 60,112 3,555 7.84 61,624 3,462 7.46
Noninterest-earning assets
Investment in discontinued operations 459 461
Allowance for credit losses (684) (699)
Cash and due from banks 2,665 1,998
Other assets 6,434 5,232
------------------------------------------------------------------------ ---------
Total assets $68,986 $68,616
------------------------------------------------------------------------ ---------
LIABILITIES, CAPITAL SECURITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities
Interest-bearing deposits
Demand and money market $18,389 472 3.43 $16,711 358 2.86
Savings 2,088 27 1.73 2,450 30 1.61
Retail certificates of deposit 14,591 603 5.52 14,291 530 4.96
Other time 633 31 6.45 1,816 75 5.53
Deposits in foreign offices 1,437 67 6.12 837 31 4.96
---------------------------------------------------------------------------------- --------------------
Total interest-bearing deposits 37,138 1,200 4.31 36,105 1,024 3.79
Borrowed funds
Federal funds purchased 2,115 99 6.13 1,574 59 4.90
Repurchase agreements 737 32 5.68 635 23 4.71
Bank notes and senior debt 6,675 325 6.41 8,943 348 5.14
Federal Home Loan Bank borrowings 1,648 78 6.18 1,681 68 5.29
Subordinated debt 2,405 134 7.44 1,983 112 7.52
Other borrowed funds 842 43 6.71 692 30 5.78
---------------------------------------------------------------------------------- --------------------
Total borrowed funds 14,422 711 6.49 15,508 640 5.45
---------------------------------------------------------------------------------- --------------------
Total interest-bearing liabilities/interest expense 51,560 1,911 4.92 51,613 1,664 4.29
Noninterest-bearing liabilities and shareholders' equity
Demand and other noninterest-bearing deposits 8,098 8,292
Accrued expenses and other liabilities 2,440 2,004
Mandatorily redeemable capital securities of subsidiary
trusts 848 848
Shareholders' equity 6,040 5,859
------------------------------------------------------------------------ ---------
Total liabilities, capital securities and shareholders'
equity $68,986 $68,616
------------------------------------------------------------------------------------------------------------------------------------
Interest rate spread 2.92 3.17
Impact of noninterest-bearing sources .71 .69
------------------------------------------------------------------------------------------------------------------------------------
Net interest income/margin $1,644 3.63% $1,798 3.86%
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Nonaccrual loans are included in loans, net of unearned income. The impact of
financial derivatives used in interest rate risk management is included in the
interest income/expense and average yields/rates of the related assets and
liabilities. Average balances of securities available for sale are based on
amortized historical cost (excluding SFAS No. 115 adjustments to fair value).
THE PNC FINANCIAL SERVICES GROUP, INC.
------
37
<PAGE> 39
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Third Quarter 2000 Second Quarter 2000 Third Quarter 1999
------------------------------------------------------------------------------------------------------------------------------------
Average Average Average Average Average Average
Balances Interest Yields/Rates Balances Interest Yields/Rates Balances Interest Yields/Rates
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$2,151 $47 8.77% $2,577 $52 8.11% $1,667 $31 7.53%
1,662 25 5.97 1,648 25 6.11 2,067 29 5.70
3,934 65 6.65 3,742 62 6.58 3,705 59 6.33
583 9 6.08 619 11 7.02 614 11 6.89
--------------------------- ----------------------- -------------------------
6,179 99 6.41 6,009 98 6.50 6,386 99 6.18
9,174 201 8.72 9,209 198 8.63 10,164 207 8.09
12,405 222 7.16 12,571 223 7.09 12,158 213 7.01
21,800 472 8.47 22,042 464 8.33 22,630 444 7.68
2,688 61 8.85 2,682 59 8.74 3,389 67 7.67
3,238 58 7.24 3,049 55 7.19 2,543 44 7.02
646 14 8.64 676 14 8.50 561 11 7.55
--------------------------- ----------------------- -------------------------
49,951 1,028 8.13 50,229 1,013 8.03 51,445 986 7.57
1,445 30 8.05 1,276 22 7.01 1,033 14 5.14
--------------------------- ----------------------- -------------------------
59,726 1,204 7.98 60,091 1,185 7.86 60,531 1,130 7.38
515 448 466
(680) (689) (677)
2,848 2,837 1,946
6,689 6,418 4,788
---------- --------- ---------
$69,098 $69,105 $67,054
---------- --------- ---------
$18,914 175 3.68 $18,549 159 3.46 $17,273 127 2.93
2,020 9 1.81 2,107 9 1.75 2,345 10 1.59
14,776 217 5.85 14,403 195 5.45 14,114 174 4.89
619 10 6.55 641 10 6.44 1,022 15 5.99
1,342 23 6.50 1,483 24 6.25 1,066 14 5.16
--------------------------- ----------------------- -------------------------
37,671 434 4.58 37,183 397 4.30 35,820 340 3.77
1,904 32 6.51 2,162 34 6.28 1,828 24 5.07
846 14 5.84 769 11 5.56 603 7 4.65
6,290 108 6.75 6,762 110 6.40 7,823 103 5.28
1,105 20 7.16 1,514 24 6.35 1,826 26 5.62
2,419 45 7.44 2,420 45 7.45 2,031 41 7.48
954 17 7.18 795 14 6.89 792 11 5.18
--------------------------- ----------------------- -------------------------
13,518 236 6.85 14,422 238 6.54 14,903 212 5.59
--------------------------- ----------------------- -------------------------
51,189 670 5.18 51,605 635 4.92 50,723 552 4.30
8,239 8,357 7,976
2,637 2,290 1,775
848 848 848
6,185 6,005 5,732
---------- --------- ---------
$69,098 $69,105 $67,054
------------------------------------------------------------------------------------------------------------------------------------
2.80 2.94 3.08
.74 .69 .70
------------------------------------------------------------------------------------------------------------------------------------
$534 3.54% $550 3.63% $578 3.78%
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Loan fees for the nine months ended September 30, 2000 and September 30, 1999
were $89 million and $90 million, respectively. For each of the three months
ended September 30, 2000, June 30, 2000, and September 30, 1999 loan fees were
$29 million, $31 million, and $30 million, respectively.
THE PNC FINANCIAL SERVICES GROUP, INC.
------
38
<PAGE> 40
QUARTERLY REPORT ON FORM 10-Q
Securities and Exchange Commission
Washington, D.C. 20549
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the quarterly period ended September 30, 2000.
Commission File Number 1-9718
THE PNC FINANCIAL SERVICES GROUP, INC.
Incorporated in the Commonwealth of Pennsylvania
IRS Employer Identification No. 25-1435979
Address: One PNC Plaza
249 Fifth Avenue
Pittsburgh, Pennsylvania 15222-2707
Telephone: (412) 762-2000
As of October 27, 2000, The PNC Financial Services Group, Inc. had 289,314,470
shares of common stock ($5 par value) outstanding.
The PNC Financial Services Group, Inc. (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months and (2) has been subject to such filing requirements for the
past 90 days.
The following sections of the Financial Review set forth in the cross-reference
index are incorporated in the Quarterly Report on Form 10-Q.
<TABLE>
<CAPTION>
Cross-reference Page(s)
----------------------------------------------------------------
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1 Consolidated Statement of Income for the
three months and nine months ended
September 30, 2000 and 1999 27
Consolidated Balance Sheet as of
September 30, 2000 and
December 31, 1999 28
Consolidated Statement of Cash Flows for
the nine months ended September 30,
2000 and 1999 29
Notes to Consolidated Financial
Statements 30 - 36
Consolidated Average Balance Sheet and
Net Interest Analysis 37 - 38
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of
Operations 1, 3 - 26
Item 3 Quantitative and Qualitative
Disclosures About Market Risk 18 - 23, 31
----------------------------------------------------------------
</TABLE>
PART II OTHER FINANCIAL INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The following exhibit index lists Exhibits filed with this Quarterly Report on
Form 10-Q:
12.1 Computation of Ratio of Earnings to Fixed Charges
12.2 Computation of Ratio of Earnings to Fixed Charges and
Preferred Stock Dividends
27 Financial Data Schedule
99.1 Quarterly Proforma Income Statements Reflecting
Discontinued Operations
------------------------------------------------------------------
Copies of these Exhibits may be obtained electronically at the Securities and
Exchange Commission's home page at www.sec.gov. Copies may also be obtained
without charge by writing to Lynn Fox Evans, Director of Financial Reporting, at
corporate headquarters, by calling (412) 762-1553 or via e-mail at
[email protected].
The Corporation did not file any Reports on Form 8-K during the quarter ended
September 30, 2000.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on November 7, 2000, on its
behalf by the undersigned thereunto duly authorized.
THE PNC FINANCIAL SERVICES GROUP, INC.
By: /s/ Robert L. Haunschild
-----------------------------
Robert L. Haunschild
Senior Vice President and
Chief Financial Officer
THE PNC FINANCIAL SERVICES GROUP, INC.
------
39
<PAGE> 41
CORPORATE INFORMATION
CORPORATE HEADQUARTERS
The PNC Financial Services Group, Inc.
One PNC Plaza
249 Fifth Avenue
Pittsburgh, Pennsylvania 15222-2707
(412) 762-2000
STOCK LISTING
The PNC Financial Services Group, Inc. common stock is listed on the New York
Stock Exchange under the symbol PNC.
INTERNET INFORMATION
The PNC Financial Services Group, Inc.'s financial reports and information about
its products and services are available on the Internet at www.pnc.com.
FINANCIAL INFORMATION
The Annual Report on Form 10-K is filed with the Securities and Exchange
Commission ("SEC"). Copies of this document and other filings, including
Exhibits thereto, may be obtained electronically at the SEC's home page at
www.sec.gov. Copies may also be obtained without charge by writing to Lynn Fox
Evans, Director of Financial Reporting, at corporate headquarters, by calling
(412) 762-1553 or via e-mail at [email protected].
INQUIRIES
For financial services call 1-888-PNC-2265. Individual shareholders should
contact Shareholder Relations at (800) 982-7652.
Analysts and institutional investors should contact William H. Callihan, Vice
President, Investor Relations, at (412) 762-8257 or via e-mail at
[email protected].
News media representatives and others seeking general information should contact
R. Jeep Bryant, Director of Corporate Communications, at (412) 762-8221 or via
e-mail at [email protected].
COMMON STOCK PRICES/DIVIDENDS DECLARED
The table below sets forth by quarter the range of high and low sale and
quarter-end closing prices for The PNC Financial Services Group, Inc. common
stock and the cash dividends declared per common share.
<TABLE>
<CAPTION>
Cash
Dividends
High Low Close Declared
=====================================================================
<S> <C> <C> <C> <C>
2000 QUARTER
---------------------------------------------------------------------
First $48.500 $36.000 $45.063 $.45
Second 57.500 41.000 46.875 .45
Third 66.375 47.625 65.000 .45
---------------------------------------------------------------------
Total $1.35
=====================================================================
1999 QUARTER
---------------------------------------------------------------------
First $59.750 $47.000 $55.563 $.41
Second 60.125 54.375 57.625 .41
Third 58.063 49.688 52.688 .41
Fourth 62.000 43.000 44.500 .45
---------------------------------------------------------------------
Total $1.68
=====================================================================
</TABLE>
DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN
The PNC Financial Services Group, Inc. Dividend Reinvestment and Stock Purchase
Plan enables holders of common and preferred stock to purchase additional shares
of common stock conveniently and without paying brokerage commissions or service
charges. A prospectus and enrollment card may be obtained by writing to
Shareholder Relations at corporate headquarters.
REGISTRAR AND TRANSFER AGENT
The Chase Manhattan Bank
P.O. Box 590
Ridgefield Park, New Jersey 07660
(800) 982-7652
THE PNC FINANCIAL SERVICES GROUP, INC.
------
40
