PNC Bank 2006 Annual Report Download - page 30

ITEM 7- MANAGEMENT ’ S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
E XECUTIVE S UMMARY
T HE PNC F INANCIAL S ERVICES G ROUP ,I NC .
PNC is one of the largest diversified financial services
companies in the United States based on assets, with
businesses engaged in retail banking, corporate and
institutional banking, asset management and global fund
processing services. We provide many of our products and
services nationally and others in our primary geographic
markets located in Pennsylvania; New Jersey; the greater
Washington, DC area, including Maryland and Virginia; Ohio;
Kentucky; and Delaware. We also provide certain global fund
processing services internationally.
K EY S TRATEGIC G OALS
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 fee-based
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 and
shape of the yield curve. Our actions have created a balance
sheet characterized by strong asset quality and flexibility to
adjust, where appropriate, to changing interest rates and
market conditions.
B LACK R OCK /MLIM T RANSACTION
On September 29, 2006, Merrill Lynch contributed its
investment management business to BlackRock in exchange
for 65 million shares of newly issued BlackRock common and
preferred stock. BlackRock accounted for the MLIM
transaction under the purchase method of accounting.
Immediately following the closing, PNC continued to own
approximately 44 million shares of BlackRock common stock,
representing an ownership interest of approximately 34% of
the combined company after the closing (as compared with
69% immediately prior to the closing). Although PNC’s share
ownership percentage declined, PNC’s investment in
BlackRock increased due to the increase in total equity
recorded by BlackRock as a result of the MLIM transaction.
Further information regarding the BlackRock/MLIM
transaction is included in the BlackRock discussion within the
Business Segments Review section of this Item 7.
M ERCANTILE B ANKSHARES A CQUISITION
On October 8, 2006, we entered into a definitive agreement
with Mercantile Bankshares Corporation (“Mercantile”) for
PNC to acquire Mercantile. Mercantile shareholders will be
entitled to .4184 shares of PNC common stock and $16.45 in
cash for each share of Mercantile, or in the aggregate
approximately 53 million shares of PNC common stock and
$2.1 billion in cash. Based on PNC’s recent stock prices, the
transaction is valued at approximately $6.0 billion in the
aggregate.
Mercantile is a bank holding company with approximately
$18 billion in assets that provides banking and investment and
wealth management services through 240 offices in Maryland,
Virginia, the District of Columbia, Delaware and southeastern
Pennsylvania. This transaction will enable us to significantly
expand our presence in the mid-Atlantic region, particularly
within the attractive Baltimore and Washington, DC markets.
Our Mercantile integration strategy development and planning
is progressing on track and has achieved several important
objectives, including identifying leadership personnel for
certain key positions within the Mercantile service territory.
Our priority for the integration is the retention of customers
and customer-facing staff. The transaction is subject to
customary closing conditions, including regulatory approvals,
and is expected to close in March 2007.
T HE O NE PNC I NITIATIVE
The One PNC initiative began in January 2005 and 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 annual pretax earnings
benefit by mid-2007 from this initiative.
PNC plans to achieve approximately $300 million of cost
savings through a combination of workforce reduction and
other efficiencies. Approximately 3,000 positions had been
eliminated through December 31, 2006. We recognized
employee severance and other implementation costs of $11
million in 2006 and $54 million in 2005. Estimated remaining
charges to be incurred in early 2007 are not significant. In
addition, PNC intends to achieve at least $100 million in net
revenue growth through the implementation of various pricing
and business growth enhancements driven by the One PNC
initiative. The initiative is progressing according to plan.
We realized a net pretax financial benefit from the One PNC
program of approximately $265 million in 2006. We achieved
an annualized run rate benefit of $320 million in the fourth
quarter of 2006.
K EY F ACTORS A FFECTING F INANCIAL P ERFORMANCE
Our financial performance is substantially affected by several
external factors outside of our control, including:
• General economic conditions,
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