PNC Bank 2005 Annual Report Download - page 19

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ITEM 7 - MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIA L CONDITION AND
RESULTS OF OPERATIONS
EXECUTIVE SUMMARY
THE PNC FINANCIAL SERVICES GROUP, INC.
PNC is one of the largest diversified financial services
companies in the United States, operating businesses
engaged in retail banking, corporate and institutional
banking, asset management and global fund processing
services. We operate directly and through numerous
subsidiaries, providing many of our products and services
nationally and others in our primary geographic markets in
Pennsylvania, New Jersey, Delaware, Ohio, Kentucky and
the greater Washington, D.C. area. We also provide certain
asset management and global fund processing services
internationally.
KEY STRATEGIC GOALS
Our strategy to enhance shareholder value centers on
achieving revenue growth in our various businesses
underpinned by prudent management of risk, capital and
expenses. In each of our business segments, the primary
drivers of growth are the acquisition, expansion and
retention of customer relationships. We strive to achieve
such growth in our customer base by providing convenient
banking options, leading technological systems and a broad
range of asset management products and services. We also
intend to grow through appropriate and targeted acquisitions
and, in certain businesses, by expanding into new
geographical markets.
In recent years, we have managed our interest rate risk to
achieve a moderate risk profile with limited exposure to
earnings volatility resulting from interest rate fluctuations.
Our actions have created a balance sheet characterized by
strong asset quality and significant flexibility to take
advantage, where appropriate, of changing interest rates and
to adjust to changing market conditions.
On February 15, 2006, we announced that BlackRock and
Merrill Lynch had entered into a definitive agreement
pursuant to which Merrill Lynch will contribute its
investment management business to BlackRock in exchange
for newly issued BlackRock common and preferred stock.
Upon the closing of this transaction, which we expect to
occur on or around September 30, 2006, BlackRock’ s assets
under management will increase to almost $1 trillion and
Merrill Lynch will own an approximate 49% economic
interest in BlackRock. We will continue to own
approximately 44.5 million shares of BlackRock common
stock, representing an ownership interest of approximately
34%. In addition, upon closing, our investment in
BlackRock will increase resulting in an after-tax gain of
approximately $1.6 billion, subject to adjustments through
closing. This gain will significantly improve our capital
position.
This transaction must be approved by BlackRock
shareholders and is subject to obtaining appropriate
regulatory and other approvals. We currently control more
than 80% of the voting interest in BlackRock and will vote
our interest in support of the transaction. Additional
information on this transaction is included in Note 26
Subsequent Event in the Notes To Consolidated Financial
Statements in Item 8, in our Current Reports on Form 8-K
filed February 15, 2006 and February 22, 2006 and in
BlackRock’ s Current Reports on Form 8-K filed February
15, 2006 and February 22, 2006. To the extent that
statements we make in this Report about our expectations
for future results include results from BlackRock, those
expectations do not give any effect to the impact to PNC
from the change in accounting for PNC’ s interest in
BlackRock that would take place when BlackRock and
Merrill Lynch close this transaction.
On October 11, 2005, we acquired Harris Williams & Co.
(“Harris Williams”), one of the nation’ s largest firms
focused on providing merger and acquisition advisory and
related services to middle market companies, including
private equity firms and private and public companies. This
acquisition should provide opportunities for commercial
lending as well as wealth management and capital markets
business growth.
In May 2005, we successfully completed our acquisition of
Riggs National Corporation (“Riggs”), a Washington, D.C.-
based banking company. The transaction gives us a
substantial presence on which to build a market leading
franchise in the affluent Washington metropolitan area.
We include additional information on Riggs, as well as the
first quarter 2005 acquisition of SSRM Holdings, Inc.
(“SSRM”) by our majority-owned subsidiary, BlackRock,
Inc. (“BlackRock”), in Note 2 Acquisitions in the Notes To
Consolidated Financial Statements in Item 8 of this Report
and here by reference. We also note that the SSRM and
Harris Williams transactions were accretive to earnings in
2005 and we expect that the Riggs acquisition will be
accretive to earnings beginning in 2006.
THE ONE PNC INITIATIVE
The One PNC initiative, which began in January 2005, is an
ongoing, company-wide initiative with goals of moving
closer to the customer, improving our overall efficiency and
targeting resources to more value-added activities. PNC
expects to realize $400 million of total pretax earnings
benefit by 2007 from this initiative.
As a result of this intensive process, we have reorganized
our banking businesses to streamline and to better serve our
customer base. The initiative has resulted in a simplified and
a more centrally managed organization. As further described
in our Current Reports on Form 8-K dated September 30,
2005 and December 28, 2005, and in Note 21 Segment
Reporting in the Notes To Consolidated Financial
Statements in Item 8 of this Report, our banking businesses
have been reorganized into two units, Retail Banking and
Corporate & Institutional Banking, and we have aligned our
reporting accordingly.
PNC plans to achieve approximately $300 million of cost
savings initiatives through a combination of workforce
reduction and other efficiencies. Of the approximately 3,000
positions to be eliminated, approximately 1,800 had been