Business Context and Reporting Period
Company: PNC Financial Services Group, Inc. (PNC Bank Corp.)
Reporting Period: Second Quarter and Six Months ended June 30, 1999
Business Overview: One of the largest diversified financial services companies in the U.S., operating retail banking, asset management, and wholesale businesses. The company is transitioning to a model of separate, focused business segments to compete nationally and in primary markets (PA, NJ, DE, OH, KY).
Key Financial Metrics
| Metric (Six Months Ended June 30) | 1999 ($ Millions) | 1998 ($ Millions) |
|---|---|---|
| Total Revenue | $2,671 | $2,356 |
| Net Income | $640 | $549 |
| Diluted EPS | $2.08 | $1.77 |
| Net Interest Income (Taxable-Equivalent) | $1,276 | $1,281 |
| Noninterest Income | $1,395 | $1,075 |
| Net Interest Margin | 3.75% | 3.88% |
| Efficiency Ratio | 54.01% | 56.65% |
| Return on Average Common Equity | 22.66% | 21.26% |
| Total Assets (June 30, 1999) | $75,558 | $77,207 (Dec 31, 1998) |
| Shareholders' Equity (June 30, 1999) | $5,755 | $6,043 (Dec 31, 1998) |
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased $315 million (13%) year-over-year, driven primarily by a $320 million increase in noninterest income.
- Profitability: Net income rose $91 million (17%). Excluding one-time items (gains on sales, valuation adjustments, efficiency costs), adjusted earnings were $592 million, a 15% increase in diluted EPS compared to the prior year.
- Strategic Divestitures: The sale of the credit card business in Q1 1999 reduced net interest income and average loans but significantly lowered net charge-offs (from $179M in 1998 to $102M in 1999).
- Acquisitions: PNC Advisors revenue grew 60% due to the acquisition of Hilliard-Lyons. BlackRock earnings increased 86% driven by new business and market appreciation.
- Expense Management: Noninterest expense increased $143 million, but the efficiency ratio improved to 54.01% due to revenue growth outpacing expense growth in fee-based businesses.
Guidance, Outlook, and Risks
- Strategic Acquisitions: Announced agreement to acquire First Data Investor Services Group (ISG) for $1.1 billion in cash, expected to close in Q4 1999. This will strengthen mutual fund servicing capabilities.
- BlackRock IPO: Filed registration for an initial public offering of BlackRock, Inc. common stock, with PNC retaining majority ownership. Expected to generate a gain for the Corporation.
- Business Exits: Completed exit of certain out-of-footprint large corporate, national healthcare, and non-strategic institutional lending businesses.
- Year 2000 Readiness: Virtually all systems tested and ready. Estimated cumulative cost is $30 million ($23 million expensed through June 30, 1999). Management believes no material adverse impact on loan portfolio quality is expected.
- Risks: Forward-looking statements are subject to risks including Y2000 remediation failures, pricing pressures, credit risk, integration of acquisitions, and changes in interest rates. Interest rate risk modeling indicates net interest income would decrease by 0.8% if rates rise 100 basis points.
Investor Verification Checklist
- Adjusted Earnings: Verify the $592 million adjusted earnings figure by excluding the $331 million in gains on credit card/EPS/Concord sales and the $142 million in valuation adjustments.
- Asset Quality: Confirm the impact of the credit card sale on the allowance for credit losses (1.29% of total loans) and nonperforming assets (.59% of total loans).
- Acquisition Integration: Monitor the closing of the ISG acquisition and the BlackRock IPO for regulatory approvals and expected financial impact.
- Interest Rate Sensitivity: Review the income simulation model assumptions regarding a 100 basis point rate shift and its impact on net interest income.
- Capital Ratios: Verify Tier I (8.16%) and Total Risk-Based (11.72%) capital ratios remain well above regulatory requirements following recent stock repurchases and dividend payments.