PNC Bank 2002 Annual Report Download - page 39

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PFPC
Year ended December 31
Dollars in millions 2002 2001
INCOME STATEMENT
Fund servicing revenue $817 $846
Operating expense 669 644
Goodwill amortization 40
(Accretion)/amortization of
other intangibles, net (19) (15)
Operating income 167 177
Nonoperating income (a) 10 14
Debt financing 88 94
Facilities consolidation and other
charges (19) 36
Pretax earnings 108 61
Income taxes 43 25
Earnings $65 $36
AVERAGE BALANCE SHEET
Intangible assets $1,028 $1,065
Other assets 860 706
Total assets $1,888 $1,771
Assigned funds and other liabilities $1,680 $1,563
Assigned capital 208 208
Total funds $1,888 $1,771
PERFORMANCE RATIOS
Return on assigned capital 31% 17%
Operating margin 23 17
OTHER INFORMATION
Average FTEs 5,834 5,737
SERVICING STATISTICS (b)
Accounting/administration assets
Domestic $481 $514
Foreign 29 21
Total $510 $535
Custody assets $336 $357
Shareholder accounts (in millions) 51 49
(a) Net of nonoperating expense.
(b) At December 31. Dollars in billions.
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, offering a wide
range of fund services to the investment management
industry. PFPC also provides processing solutions to the
international marketplace through its Ireland and Luxembourg
operations.
The financial results for this business may be significantly
impacted by the net gain or loss of large clients or groups of
smaller clients and by shifts in client assets between higher and
lower margin products. During 2002, PFPC was adversely
impacted by depressed financial market conditions, a shift in
client assets from equity to fixed income products and client
attrition. Management is addressing the revenue/expense
relationship of this business given current conditions. PFPC is
focused on retaining its long-standing customers and has
recently won several pieces of new business, partially
offsetting the revenue impact of client attrition, including the
loss of one large transfer agency client that will occur in the
first quarter of 2003.
PFPC is also focusing technological resources on targeting
Web-based initiatives, streamlining operations and developing
flexible system architecture and client-focused servicing
solutions. To meet the growing needs of the European
marketplace, PFPC is also continuing to expand offshore.
PFPC earned $65 million in 2002 compared with $36
million in 2001. Earnings for 2002 improved compared with
the prior year due to a reduction in the facilities consolidation
reserve originally established in 2001, a one-time revenue
adjustment of $13 million related to the renegotiation of a
customer contract in 2002 and the cessation of goodwill
amortization expense in 2002. Excluding those items, earnings
declined due to lower fund servicing revenue and narrower
operating margins in this business.
In the fourth quarter of 2001, PFPC incurred $36 million
of pretax charges largely related to a plan to consolidate
certain facilities as a follow-up to the integration of the
Investor Services Group acquisition. The charges primarily
reflected termination costs related to exiting certain lease
agreements and the abandonment of related leasehold
improvements. During 2002, the facilities strategy was
modified and certain originally contemplated relocations will
not occur. PFPC also benefited in 2002 from the adoption of
the new goodwill accounting standard that reduced
amortization expense by $40 million compared with 2001.
These benefits were partially offset by higher staff-related
costs and $8 million of charges related to an equity
investment. The cost of integration, technology and
infrastructure investments, coupled with a shift in both
product and client mix, continued to exert pressure on
operating margins. Margins are expected to remain under
pressure at least until equity markets and investor sentiment
and demand improve for a sustained period.
Fund servicing revenue and operating expenses have been
adjusted in both periods presented to reflect the
reclassification of distribution and underwriting fees received
and passed through to external brokers under selling
agreements which had been previously presented on a net
basis. This reclassification had no impact on operating income.
Revenue of $817 million for 2002 decreased $29 million
compared with 2001, despite the one-time benefit of $13
million described above. The positive impact of new sales of
accounting/administration services and offshore growth could
not overcome revenue declines resulting from client attrition
and equity market declines that impacted both transfer agency
activity levels and net asset valuations.
Operating expense increased $25 million or 4% in the year-
to-year comparison primarily due to increased staff levels for
new product support. In the second half of 2002, PFPC began
a series of initiatives designed to improve efficiency. These
included such items as consolidating transfer agency
platforms, increasing automation and executing planned
facilities consolidation. PFPC’s goal is to achieve at least $50
million in run rate expense reductions over time before
considering the impact of reinvestment in technology and new
business. Accordingly, during 2002 the workforce was reduced
as average FTEs declined from 6,082 in January to 5,401 in
December.
Operating income for 2002 and 2001 included accretion of
a discounted client contract liability of $35 million and $30
million, respectively.
Accounting/administration net assets have decreased
compared with the 2001 period as the impact of depressed
financial markets and changes in domestic client mix have
more than offset successful offshore sales efforts. Custody
assets have declined primarily due to changes in client
relationships.