PNC Bank 2002 Annual Report Download - page 37

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PNC ADVISORS
Year ended December 31
Taxable-equivalent basis
Dollars in millions 2002 2001
INCOME STATEMENT
Net interest income $100 $128
Noninterest income
Investment management and trust 334 393
Brokerage 131 130
Other 89 84
Total noninterest income 554 607
Operating revenue 654 735
Provision for credit losses 42
Noninterest expense 497 497
Goodwill amortization 7
Pretax earnings 153 229
Income taxes 56 86
Earnings $97 $143
AVERAGE BALANCE SHEET
Loans
Consumer $1,228 $1,103
Residential mortgage 501 848
Commercial 460 528
Other 320 384
Total loans 2,509 2,863
Other assets 420 467
Total assets $2,929 $3,330
Deposits $2,007 $2,058
Assigned funds and other liabilities 399 730
Assigned capital 523 542
Total funds $2,929 $3,330
PERFORMANCE RATIOS
Return on assigned capital 19% 26%
Noninterest income to operating revenue 85 83
Efficiency 76 68
OTHER INFORMATION
Total nonperforming assets $5 $4
Net charge-offs $4 $2
Brokerage assets administered (in billions) $32 $28
Full service brokerage offices 106 113
Financial consultants 615 681
Margin loans $260 $309
Average FTEs 3,351 3,598
ASSETS UNDER MANAGEMENT (a)(b)
Personal investment management and trust $41 $47
Institutional trust 913
Total $50 $60
ASSET TYPE (b)
Equity $26 $36
Fixed income 17 17
Liquidity 77
Total $50 $60
(a) Excludes brokerage assets administered
(b) At December 31 – in billions.
PNC Advisors provides a full range of tailored investment,
trust and private banking products and services to affluent
individuals and families, including full-service brokerage
through J.J.B. Hilliard, W.L. Lyons, Inc. (“Hilliard Lyons”) and
investment consulting and trust services to the ultra-affluent
through Hawthorn. PNC Advisors also serves as investment
manager and trustee for employee benefit plans and charitable
and endowment assets and provides defined contribution plan
services and investment options through its Vested Interest
product.
PNC Advisors continues to emphasize deepening
customer relationships through a focused retention program
and a broad array of products. The business was adversely
affected in 2002 by the depressed financial markets and the
impact on its clients. The business is addressing the industry-
wide issue of appropriate expense levels in light of the
challenging equity markets and loss of client wealth.
PNC Advisors earned $97 million in 2002 compared with
$143 million in 2001. The earnings decline was driven by
lower operating revenue and the impact of litigation costs.
Operating revenue for 2002 decreased $81 million
compared with the prior year. The run-off of residential
mortgages along with a narrower net interest margin, resulted
in a $28 million decline in net interest income. Investment
management and trust fees declined $59 million, resulting
from depressed financial market conditions, a net outflow of
customers, and the recognition of a positive revenue accrual
adjustment of $15 million in 2001.
PNC Advisors provides investment management services
directly, through funds and accounts managed by BlackRock
and through funds managed by unaffiliated investment
managers. In July 2002, the Corporation and BlackRock
entered into a revised agreement with respect to investment
management services. The agreement includes a reduction in
the rate of fees received from BlackRock based on current
market conditions and the impact of a reduction in the level of
PNC Advisors’ customer assets managed by BlackRock. This
agreement reduced PNC Advisors’ investment management
and trust fees by $6 million in 2002.
On January 14, 2003, an arbitration panel with the National
Association of Securities Dealers ruled against Hilliard Lyons
and some of its employees with respect to a claim filed by
First of Michigan Corporation (now Fahnestock & Co., Inc.)
arising out of Hilliard Lyons’ hiring of brokers and support
staff from First of Michigan in late 1997 and spring 1998. The
events underlying First of Michigan’s claims all occurred prior
to PNC’s acquisition of Hilliard Lyons in December 1998. The
award in favor of First of Michigan in the amount of $22
million (including $16 million in damages and $6 million in
interest and costs) resulted in a 2002 pretax charge at PNC
Advisors of $10 million, after taking into account the
application of related reserves and accruals.
Assets under management and related noninterest income
are closely tied to the performance of the equity markets.
Management expects that revenues in this business will
continue to be challenged until equity market conditions and
investment performance improve for a sustained period.
Assets under management decreased $10 billion primarily due
to the decline in the value of the equity component of
customers’ portfolios. Brokerage assets administered by
Hilliard Lyons were $32 billion at December 31, 2002
compared with $28 billion at December 31, 2001 and were
also impacted by weak equity market conditions.
During the second quarter of 2002, Hilliard Lyons acquired
from Regional Community Banking the branch-based
brokerage business that formerly operated under the PNC
Brokerage brand name. This business was combined with
Hilliard Lyons’ brokerage operations and now provides
services in the branch network under the PNC Investments
brand name. However, the revenue and expense related to the
branch-based brokerage business continues to be included in
the results of Regional Community Banking. Consolidated
revenue from brokerage was $195 million for 2002 compared
with $206 million for 2001.