Filed by The PNC Financial Services Group, Inc.
Pursuant to Rule 425 under the Securities Act of 1933 and
deemed filed pursuant to Rule 14a-12 of the Securities Exchange Act of 1934
Subject Company: Mercantile Bankshares Corporation
Commission File No. 0-5127
The following is the transcript from an investor presentation that took
place on October 9, 2006, in connection with the proposed acquisition by The PNC
Financial Services Group, Inc., a Pennsylvania corporation ("PNC") of Mercantile
Bankshares Corporation, a Maryland corporation. The press release and
accompanying slides referred to in the following transcript were previously
filed on October 10, 2006 by PNC pursuant to Rule 425 under the Securities Act
of 1933, and the transcript should be read in conjunction with those materials.
Bill Callihan: Thank you and good morning. Welcome to today's conference
call for The PNC Financial Services Group. Participating
in this call will be PNC's Chairman and Chief Executive
Officer, Jim Rohr, and Mercantile's Chairman, President
and CEO, Ned Kelly, and Rick Johnson, PNC's Chief
Financial Officer.
If you move to Page 2 of our slide deck, as a reminder,
the following statements contain forward-looking
information. Actual results and future events could
differ, possibly materially, due to a variety of factors
including those described in this call, today's press
release and slides and in our most recent Form 10-K and
10-Q and other SEC reports.
These statements speak only as of October 9, 2006 and PNC
undertakes no obligation to update them.
The following comments also include a discussion of
non-GAAP financial measures, which to the extent not so
qualified in the comments or in the slides is qualified by
the GAAP reconciliation information included in our
release, presentation, Form 10-K and 10-Q and other
documents available on the PNC web site.
Please note that the slide presentation accompanies our
remarks today, and you can find that presentation along
with today's release on our web site. I'd now like to turn
the call over to Jim Rohr.
Jim Rohr: Thank you very much, Bill, and good morning everyone.
This is a very exciting day for us today at PNC, as we're
announcing this definitive agreement to acquire Mercantile
Bankshares.
Mercantile is a storied franchise in the region. It's
really done an outstanding job in growing very profitably,
very well situated and a remarkably good fit for PNC -
geographically as well as culturally with regard to how
they take care of their customers.
As a merger partner, clearly, Mercantile is highly sought
after. The more Ned and I talked about this merger, the
more I knew that PNC and Mercantile were a perfect fit.
Our philosophies on clients and risk are almost identical.
The way we go to market by empowering frontline managers
tells me that we are a winning combination. Mercantile
offers a quality set of products and services in
commercial banking, consumer banking and wealth management
through a relationship model that has produced strong
results.
And we've identified several areas where we can actually
expand these offerings with PNC products and technology.
Best of all, the transaction will further PNC's expansion
in the affluent and growing New Jersey-Washington D.C.
corridor.
It will give us hundreds of new branches in Maryland,
Washington, Virginia and Delaware. We'll be the second
largest bank by deposit market share in
Maryland and Delaware. And as a result of this
transaction, our growth will accelerate in Virginia and
the District.
The transaction clearly meets many of our strategic
objectives, and the financial criteria that I've discussed
with you in the past. We expect it to be accretive in
2008. And we expect a 15% internal rate of return using
conservative assumptions.
In moving to the next slide, let me show you why I'm so
enthusiastic about this opportunity. I've already
mentioned Mercantile's approach to the business. It's a
perfect fit for PNC.
And on the banking side, Mercantile has a strong balance
sheet. It has assets of about $17 billion and its loans of
about $12 billion are invested primarily in their clients
around the region.
On the risk side, we also have a similar culture. And it's
about having a strong understanding of your client's needs
and how to best meet those needs. In terms of asset
quality, their nonperforming loans are very, very low. And
they've actually had net recoveries for the first half of
2006.
So the credit risk side we're very pleased with. On the
interest rate risk side, they've got a balance sheet
that's even more neutral than ours. Frankly, this is a
real positive.
Nearly 1/4 of Mercantile's $12 billion in deposits are in
more valuable commercial, noninterest bearing deposits,
giving Mercantile a proportion of this low-cost funding
source that's higher than PNC's, which is already the
highest in our peer group.
Additionally, Mercantile has an excellent wealth
management business, with $21 billion in assets under
management and $47 billion in assets under administration.
The combination will give PNC's private banking operation
more than $70 billion in assets under management, and $132
billion in assets under administration, clearly making us
one of the top bank wealth managers in the country.
I'd like to return to capital. Mercantile has also a
strong capital position with a 9.85% tangible capital
ratio. And they've generated impressive results. The
bank's five year compounded annual growth rate for both
revenue and net income is 11%.
Now as we turn to the map, I think it's fairly self
evident that the combination of Mercantile and PNC will be
a mid-Atlantic powerhouse. As you see on Slide 5,
Mercantile's footprint fits well into PNC's footprint.
And with their 240 branches, PNC will have market coverage
of the wealthy East Coast corridor from the Hudson River
to the Potomac. In fact, 69% of our branches will be east
of the Appalachians.
And as I said, we'll be the second largest bank in
Maryland and Delaware by deposit share, and this
accelerates our expansion in Virginia and the District.
Also, Mercantile will give us a presence in Howard County,
Maryland, one of the ten most affluent by median household
income in the United States.
The transaction also allows us to expand into the
Baltimore-Annapolis metro area for the first time, along
with some of Washington's most elite suburbs.
You probably know that Maryland has some of the highest
R&D spending in the country. That helps make it one of the
best places in the country for entrepreneurs and
technology. And these opportunities are a great fit for
our Corporate Bank's treasury management and capital
markets businesses.
Combined with the increased government spending we see in
the Washington area, these facts should continue to
translate to growth and greater affluence.
Moving to Slide 6, as you know, our strategy has been
focused on investing in wealthier, faster growing markets
and this transaction will accelerate that strategy.
When you compare household income in the PNC and
Mercantile footprints, Mercantile's households average
much higher income. More importantly for our future,
projected household income growth in Mercantile's
footprint is about the same as PNC's, but it's starting
off of a much higher base. And also, the projected
population growth for Mercantile's footprint is
significantly higher.
We believe this translates into opportunity for revenue
growth, and in earlier mergers we successfully captured
that opportunity.
As an example, we've been developing a new model for the
emerging affluent clients, and we're assigning
relationship managers to these clients in our branches in
an attempt to provide the desired service, and increase
the revenue we derive from this segment.
Early results have been very positive. And I think this
will be a nice addition to the service offerings in this
footprint.
Let me tell you about the model that we've built to take
advantage of these opportunities. It focuses on
acquisition, growth and retention of checking
relationships. We believe it's the keystone product, and
we leverage checking accounts and customer service to take
a greater share of the payments business.
We've seen 27% growth in small business debit card, and
21% in consumer debit card. And we've also seen online
bill payment skyrocket.
What gives us the confidence that we could achieve this
with Mercantile's customers and prospects? Well, we
recently did it with Riggs in Washington, D.C. The Riggs
integration is widely hailed as a success.
In fact, if you consider our acquisition of UnitedTrust
and others, along with the One PNC initiative, you know
that PNC has a history of delivering on its promises.
Customer checking accounts, average deposits, average home
equity loans all increased in the double digits in D.C.
Small business checking relationships and average deposit
growth in the former Riggs footprint were even more
impressive, up 29% and 22%, respectively.
Off a small base, we've built Washington area average
small business loans over 200%. So, we've clearly
differentiated ourselves by launching innovative programs
and customer friendly practices.
And they've included extended hours, free ATMs for our
customers. We've remodeled a number of branches, and in
fact, a recent mystery shopper research report comparing
Washington, D.C. area branches noted PNC's unique layout
and the quality of merchandising.
Moving to Slide 9. To achieve the benefits for our
shareholders, customers, employees and communities, we
have to execute the integration well.
I've asked a PNC executive, Joe Rockey, to help us with
the job. He's a highly experienced manager who had day to
day responsibility for the integration of Riggs and
UnitedTrust, and he is adept at putting these companies
together.
Joe will rely on many other experienced PNC employees as
well as Mercantile's Chief Administrative Officer and
Deputy Counsel, Michael Paese. As they have before, they
will ease the transition for our customers, and the
priority will be on minimizing disruption by preserving
frontline employees.
We expect minimum branch consolidation. Frankly, some of
their locations were in areas where we had already been
targeting for expansion. And this will help us avoid those
investments.
And I'm looking forward to adding Ned and many of his fine
team to PNC. Ned will be appointed a Vice Chairman of PNC
at the closing.
And one of the strengths of this great company is its
relationship with its clients. We have an intensive action
plan focused on the transition. This will be focused
around autonomy in Baltimore with a regional president.
And also a decision making that is resident in the
marketplaces across the entire footprint as is traditional
for PNC as well as Mercantile.
The integration also carries potential cost savings. Even
better, it offers potential revenue growth that we have
not included in our projections. We will be able to apply
our Merchant Services to Mercantile's large base of small
business clients.
We offer state-of-the-art online banking and point-of-sale
technology. We can help simplify payroll and purchasing
for them, too. Mercantile's corporate customers will
benefit from the technology resident in PNC treasury
management, capital markets and corporate services.
We also have those capabilities from P-cards to M&A with
Harris Williams as well.
Hopefully, I would expect that our ongoing relationship
with BlackRock will provide Mercantile's - and that
hopefully it will. PNC's ongoing relationship with
BlackRock will provide Mercantile's wealth management
clients access to more products, and they'll benefit from
the greater scale.
Turning to Slide 11, we'll just go through the summary.
Here are the basics of the transaction. We value
Mercantile at $6 billion, or $47.24 per share, based on
PNC's closing price on October 6.
The consideration is to consist of approximately $2.1
billion in cash and 52.5 million shares of PNC common
stock. And we'll add two directors from Mercantile to the
PNC board.
We expect the transaction to close in the first quarter of
'07 pending Mercantile shareholder and regulatory
approval.
And lastly, I want you to know, and very importantly, how
deeply we are committed to this region. In every single
acquisition that PNC has been involved in, we have
contributed more money to the resident community than the
resident company did before.
In order to make sure that the people understand that, in
this case we're committing $25 million to a charitable
foundation in Baltimore.
Now, I'll ask Ned to tell you how their customers,
communities and employees will benefit from this
transaction. Ned?
Ned Kelly: Thank you very much, Jim. I'm delighted to be here this
morning. As Jim has gone through the rationale for this
deal, I will be very brief.
I think from our shareholder standpoint it is a compelling
transaction, not only frankly, in terms of the price, but
also in terms of the currency we're receiving.
We, and my board in particular, have been impressed with
the momentum that PNC has developed over the past several
years under Jim's leadership, and of course we were
particularly impressed with the diversity of the revenue
streams.
Secondly, customer standpoint. We firmly believe, as Jim
has suggested, that PNC does business like Mercantile.
They have a similar philosophy and focus. They are very
customer oriented, which is how we've made a living for
many, many years.
PNC joining forces with us allows us to increase the
breadth and depth of the consumer and commercial product
offerings. In particular, I believe that PNC
has a very strong retail platform which has been in
development for some time, which should allow us to make a
leap forward in terms of what it is that we've been trying
to do.
And in many respects, not most importantly, but certainly
a critical factor is that PNC has very robust technology
which should lead to even better service for our clients.
And it's an area in which we've been focused. And the fact
is that this is a circumstance in which the benefits of
scale are clear.
Our employees, I believe, will have enormous opportunity
going forward. As Jim has pointed out, there's relatively
limited overlap between us. Our employees are going to
have huge opportunities to grow with the firm as a whole.
And in particular, these are two firms that fit together
extremely well, that I think both Jim and I believe should
be able to grow together.
And then finally, because it's always been a hallmark of
Mercantile, PNC has reflected, as I've gone through the
materials, over time an extraordinary commitment to the
communities it serves.
Their commitment to set up a $25 million foundation or, in
fact, to increase the size of ours in Baltimore is
reflective of that. And I know that there are many other
areas in which PNC's philanthropy is reflected throughout
their footprint.
From my standpoint, and I believe from the board's, this
is a transaction where all the stars aligned in terms of
all the constituencies that we think
about, from shareholders to customers to employees to the
community. And we were thrilled to be able to enter into
it.
Jim Rohr: Thank you very much, Ned. Let me turn it over at this
point to have Rick Johnson review the financial aspect.
Rick Johnson: Thank you, Jim and thank you, Ned, and good morning
everyone. Let's start by answering the $6 billion
question. Is this the best use of our capital? And I
believe the answer is yes.
A 15% return on investment will create a great deal of
long-term value for our shareholders. If you look at the
chart, you will see that a 28% market premium on
Mercantile is a fair price and just above the median.
And I should point out that this price represents an 18%
premium to Mercantile's $40 price a few months ago. P/E,
price to book and price to tangible book value are all in
the ballpark.
If you look at other recent bank deals, you'll see that
the 40% deposit premium on Mercantile is just above the
median and slightly above the Wachovia, and below the
SunTrust transactions.
This pricing reflects the higher proportion of commercial
noninterest bearing deposits, inherent growth in this
attractive market, and the disproportionately high level
of assets under management.
I specifically pulled out these transactions - the
Wachovia, the SunTrust deals - because I believe they best
reflect pricing in great markets where there's a scarcity
of investment opportunity.
But now let's take a look at the next slide, and what this
deal does to us from a financial perspective. As you'll
see, we've used more conservative assumptions than in
previous deals because this deal is different.
First, as a starting point, we use the IBES estimated EPS
for PNC and Mercantile. Second, we estimated cost savings
of a little bit over $100 million, or approximately 25% of
Mercantile's expense base.
Roughly half of this is personnel-related and almost
entirely in non-customer facing positions. The remainder
of the cost save is reduced spending for software,
professional services and other outside services.
Third, we believe there will be synergies on the PNC side.
They arise from cost avoidance on new branches in the
Washington area of $12 million, and $15 million in
benefits from repositioning Mercantile's investment
portfolio.
Fourth, we expect one time costs to be around $141 million
after tax, which as you would expect, primarily in
personnel, occupancy and other similar costs. And we have
targeted a PNC tangible capital ratio of 5.5%.
At the bottom of the slide, you see the EPS impact this
transaction could have on PNC, assuming IBES estimates.
Based on those assumptions, we expect the transaction to
be accretive on a GAAP basis in 2008. And on a cash basis
without one time items, the deal will be accretive in
2007.
In addition to these points, our two companies have many
complementary strengths which should lead to further
growth. In addition to Jim's comments earlier, the
combination will increase, on a pro forma basis, the
loan-to-deposit ratio to 82%.
And the net interest margin will be enhanced by 23 basis
points. We will retain our high percentage of attractive
fee-based income, our efficiency improves, and it will
diversify our loan book.
And most of all, asset quality and asset flexibility
improve. This company is a great fit with our strategic
priorities.
If you turn to the next slide, let's take a look at this
from an investment perspective. Our criteria has always
been to look for investments that exceed 12% return, which
is our cost of capital at approximately 10% plus an
execution risk premium.
The 15% internal rate of return from this transaction
easily meets that criteria. Let me explain. First, we've
assumed Mercantile's future cash flows grow at only 9%.
And second, we put a sensible 14 terminal multiple on the
fifth year cash flow. Compare this to the potential
investment we could have made in a stock buyback, which is
essentially our cost of capital.
It's easy to demonstrate that this acquisition offers
superior returns to shareholders, given our demonstrated
ability to integrate and execute on acquisitions.
We are very excited about the value creation opportunities
this offers our shareholders. And with that, I'll hand it
back to Jim.
Jim Rohr: Thank you very much, Rick. Anyone who knows the Mercantile
Bank has seen an outstanding franchise grow. And actually,
I think under Ned's tutelage, doubled in size over a
recent period of years.
That he and his team have been able to put together really
a terrific franchise in the state of Maryland and Virginia
and around.
And the idea that this is an attractive acquisition, I
think is not lost on anyone. When we think about how the
fit comes together with PNC, we're extraordinarily excited
about this transaction, the geographic fit, the cultural
fit, with regard to the relationship management and
products.
The ability to leverage some of the technology that PNC
has built really, I think, gives us a terrific opportunity
in one of the most remarkably prosperous regions in the
country.
I mean, this combination creates a mid-Atlantic powerhouse
banking franchise with high market share in some of the
most attractive markets in the entire country. And it does
everything we want it to do. It's geography, it's a first
class team of people, a perfect fit with superior returns.
Then that team of people has done a wonderful job managing
credit risk and interest rate risk in a way that
differentiates them in any peer group you put them on.
With Mercantile, we really see not only the cost save
opportunity that we have for eliminating some of the
branches we have to build, but also a real path to enhance
revenue growth, we'll leverage the technology, and the
relationship really to continue to invest and become a top
competitor in that marketplace.
So with that, we're very, very excited as you can tell.
It's a terrific opportunity for all of us. And we'll be
happy to turn it over to the operator for questions.
Operator?
Operator: At this time, if you would like to ask a question, press
star, then the number 1, on your telephone keypad.
Your first question comes from Gary Townsend.
Gary Townsend: Good morning Jim and Ned, congratulations on your deal.
Jim Rohr: Good morning, Gary.
Ned Kelly: Hi, Gary.
Gary Townsend: Ned, I wanted - we remarked in our brief after the second
quarter earnings conference call that it sounded to us
like you were being so cautious with respect to the
banking environment and its difficulties.
It almost sounded like you were waving your arms and
trying to attract attention. Was it - what was
particularly motivating the timing?
Ned Kelly: There wasn't any particular motivation of the timing,
Gary. The fact is, that as you well know, we grew our
earnings last year roughly 20%.
You know, the fact is that I was very clear at the
beginning of this year that it would be tough, principally
because of the year over year comparison, and the fact
that the environment has gotten more difficult.
I think you also recall that once you wrote that, we had a
conference call where I suggested that you shouldn't read
too much into it because as near as I can tell, reading
people's quarterly earnings reports, we certainly weren't
alone with respect to the difficulty in the environment.
Having said that, as you know, we've always been clear and
I believe our board has, that we make investment decisions
every day, and we try to think actively about what it is
that we should do.
Fortunately, there was a confluence of circumstances
including, as you know, the investment that PNC had made
in BlackRock and their ability to monetize that, which put
Jim in a position to pursue, obviously, what he regarded
as a strategic acquisition in the mid-Atlantic.
And from my standpoint, looking out at what it might take
to take Mercantile to the next level versus what it is
that we were able to get in connection with this
transaction, and given what it does for our communities
and employees and obviously, our shareholders and
customers, we believe that it was the sensible thing to
do.
I think we did it from a position of strength, which is
the always the way to do it. And fortunately, Jim and PNC
seemed to recognize the value that we believe was inherent
in the franchise.
Gary Townsend: Well again, congratulations. Perhaps Richard could ask or
answer this question. How quickly can you move the
combined companies down to 5.5% tangible equity level?
Rick Johnson: At the deal closing, we're going to get to about 5.7%. So
I think by the end of - probably by the end of '07 we'll
be down to the 5.5%. And as you know, this will close
sometime in the first quarter, and should be fully
integrated during the course of 2007.
Gary Townsend: Any difficulty in merging - Mercantile has 12 or 14
affiliates, any particular difficulty dealing with that
issue or not?
Rick Johnson: Well, the affiliates will be something obviously we'll
have to merge into the banks. But I think the real
question is, where is the technology and operations? And
they've done a good job of centralizing that, so that
helps it to be a little bit easier.
Gary Townsend: Yes, they have. Thanks very much.
Bill Callihan: Next question, please.
Operator: Your next question comes from Meredith Whitney.
Jim Rohr: Hello, Meredith.
Meredith Whitney: Hello, good morning. I just wanted some clarification in
terms of I appreciate the franchise that you guys are
acquiring. But the one thing that I'm just a little bit
confused with is you guys are increasing your
composition of spread lending.
But given the capital, tangible capital ratio you'll be
at, you still look like you're not going to be maximizing
your ability to generate net interest income because of
your relatively low loan to deposit mix.
I guess this is a follow on to Gary's question in terms
of, what type of flexibility do you see in terms of
building loans that you can really maximize your capital
utilization rate?
Jim Rohr: The asset side of the balance sheet, as you know, we
have a tremendous amount of flexibility. And actually,
Mercantile, although it diversifies our loan mix, we'll
still have a tremendous amount of flexibility on the asset
side.
And I think one of the questions for all of us, and I
think Ned pointed it out when he talked about the flat
yield curve, and some of the competitive environment on
the loan side, where you're just not getting paid for it.
Now would not be the time, I don't think, to leverage the
balance sheet up and take a lot of risk and minimize the
returns.
So, we do have a lot of flexibility and I think we'll be
able to take advantage of that at the appropriate time.
Meredith Whitney: Okay, thank you.
Bill Callihan: Next question, please.
Operator: Your next question comes from Mike Mayo.
Jim Rohr: Morning, Mike.
Rob Rutschow: Hi, it's actually Rob Rutschow.
Jim Rohr: Hi, Rob.
Rob Rutschow: Hi. Could you tell us the charter system, it sounds like
you're going to be consolidating those. How do you prevent
deposit runoff there?
Jim Rohr: The most important thing you do is take care of the
customer. I'm not sure that any of the charters serve the
customer - the people and the employees that serve the
customer and the locations. And the important thing for
us to do is to make sure that we not only maintain
customer service, but hopefully, we'll enhance it. Ned?
Ned Kelly: Rob, my own sense of that is that obviously we have had an
affiliate structure over time that has served us well. As
you probably know, we have, in fact, consolidated some
over the past few years.
And as somebody pointed out earlier, the systems and back
office are centralized. I think whatever risk is
associated with consolidating the affiliates further will
be more than compensated by the fact that PNC, as I said,
has a more robust retail offering. Better technology
should make doing business with us easier.
And my strong suspicion over time is that you're going to
find more loyal and more customers based on what PNC
brings to the table.
Rob Rutschow: Okay. And I guess, could you comment on - Ned, could you
comment on the asset management business and the hedge
fund gains that you typically take, and what the outlook
is there going forward?
And maybe, Jim, you can comment on that as well, since it
seems like you're combining maybe sort of a sub-optimal
asset management at Mercantile with PNC Advisors, which
has also had some issues in the past.
Ned Kelly: Well, you can argue...my own view is that you could
argue that almost any asset management business at any
given point in time is sub-optimal. The fact
is that it is a very difficult environment, as you know,
just from the standpoint of fractured competition.
And it's very difficult, obviously, to generate market
share. I think, over time, we've actually done a pretty
good job in terms of stabilizing the business at
Mercantile.
My own view for what it's worth is that the two firms
together actually get to a scale where the investments
that we have to make in people and client service are
going to be easier than they are on a stand alone basis.
And I know my people and my view of it is that they're
going to be very excited about the capacity to work
together with our colleagues at PNC Advisors, and put
together a franchise in the mid-Atlantic in particular,
which is going to have a fair amount of force.
With respect to the hedge fund investment, the fact is we
have a separate line item, as you know, in our financials
that covers non-marketable investments.
We have three hedge fund of funds. The fact is they have
performed extraordinarily well for us, as has been
published. One of those hedge fund of funds had a small
investment reflecting our principal investment in
Amaranth.
My recollection is that our loss in that connection was
about a million dollars in connection with Amaranth.
The fact is that those hedge fund of funds, as I said,
have served us pretty well. The aggregate investment is
about $65 million. It is not, frankly, a very big deal in
the grand scheme of things.
Jim Rohr: I can't say much more. I mean, Ned and I talked about the
opportunity for wealth management private banking.
And in the region, I think together we're a much stronger
firm than we are individually.
Rob Rutschow: Okay. And the hedge fund gains are included in the 15%
IRR?
Rick Johnson: Yes.
Rob Rutschow: Okay, thanks a lot.
Bill Callihan: Next question, please.
Operator: Your next question comes from John Balkind.
Jim Rohr: Morning, John.
John Balkind: Morning everyone, quick question on capital. I think you
guys mentioned that you're going to close at about 5.7%.
But I'm also making the assumption, I could be wrong, that
the current consensus '07 that you all are using includes
a fair amount of buybacks.
Talk a little bit about what you plan to do with the
buyback into the close and going forward in '07 versus how
you're going to fund the transaction.
Rick Johnson: I'd be happy to. A lot of the guidance we provided you in
the past has been that we were going to take our
tangible common ratio to about 5.5% to 5.25% over a two
year period.
And many of you, obviously, took that into consideration
in the share buyback in the estimates that are out there.
I would say that in total, you've probably had about a 5%
buyback of shares over a two year period.
Obviously, with this transaction, we'll get close to that
5.5% quickly. And so therefore, there will be less
opportunity for share buyback around that, although we
will continue to buy back amounts that are reasonable to
maintain the tangible common equity ratio of 5.5%.
John Balkind: Okay, so at no point will you go below that 5.5%, or might
you dip below as you go into the deal close and then just
wait around a bit and regenerate the capital?
Rick Johnson: We might go below that at some point. I think right now,
we think 5.5% is where we'll get to with this deal. What
we've given you here is just how much we'll get from this
deal.
We're not trying to tell you what our ultimate capital
strategy is, just to give you a pro forma of what it would
look like at 5.5%. The other thing to keep in mind is,
even at 5.5% we've got $3 billion of value off our balance
sheet related to the BlackRock investment, which has not
been recognized.
John Balkind: Great, thanks.
Bill Callihan: Next question?
Operator: Your next question comes from Nancy Bush.
Jim Rohr: Hello, Nancy, how are you?
Nancy Bush: I'm fine guys, how are you doing?
Jim Rohr: Great.
Nancy Bush: Just a couple of questions here. Rick, you alluded to the
fact that some of the synergies, or some of the numbers,
are coming from the fact that PNC will not have to be
doing as many de novos in the region. Could you elaborate
on that a bit, please?
Rick Johnson: Yes, happy to. If you recall, when we announced the Riggs
transaction, we talked about a lot of branch build out in
the suburbs in the D.C. marketplace.
And what we basically found out here is we looked at where
the branches were in the Mercantile organization versus
some of the areas that we wanted to build out, we realized
that we could avoid cost simply by not going forward
because they had excellent locations.
Roughly eight to ten branches representing about a - cost
avoidance of about $12 million.
Nancy Bush: Okay, and if you could just elaborate a bit further. I
think Ned mentioned the hedge fund specifically, but
could you just mention how the asset management businesses
will be integrated, sort of what the timeline will be?
I realize this is always a bit of a touchy or tricky issue
when you're putting two companies together like this.
Jim Rohr: You're exactly right, Nancy. I mean, what we're trying to
do is finish today. And then we've got six months to
figure out, probably five or six months to figure out how
we're going to do that.
Ned has an excellent team of people who have really done a
wonderful job in the last couple of years in the wealth
management group. And frankly, PNC Advisors in the last 18
months has performed very well itself.
So, I think we're kind of enthusiastic about figuring out,
but I think both of us in a way got it right. And what we
want to do is figure out how to make three out of two. So,
to be honest about it, I couldn't really tell you how
we're going to figure it out in the next few months.
But I'm looking forward to working with Ned's people to
make sure we get it right.
Ned Kelly: Nancy, I'm reasonably persuaded that this really is one of
those cases where putting the two of them together, in
fact, does add up to three. And we're looking forward to
it.
I don't know that, frankly, that there is much destructive
overlap. I think the fact is that these two franchises, if
you will, in investment wealth management should genuinely
be additive.
We're obviously going to work through it carefully to
ensure that we all keep the people that we believe we
should keep going forward. And I think we'll be in a
position to add the people that we need beyond that.
Nancy Bush: Okay, just one final question. Rick, you mentioned that
there would be, I guess, a balance sheet or a bond
portfolio restructuring on the Mercantile side, will this
occur concurrent with closing, or how will this be done?
Rick Johnson: Yes, it would occur with closing. Basically, as you take
the mark on the portfolio, sell the securities and
repurchase new ones at a higher yield.
Nancy Bush: Okay, thank you.
Rick Johnson: Not a lot of execution risk on that.
Bill Callihan: Next question, please?
Operator: Your next question comes from Jason Goldberg.
Jim Rohr: Hi Jason, how are you?
Jason Goldberg: Good, thank you. I guess just a follow up to, I guess, a
comment you made with respect to looking at consensus
estimates that you use, I guess for '07-'08.
You're suggesting we should back out 5% stock buyback when
kind of looking at accretion dilution for this?
Rick Johnson: Yes, baked into the PNC '07 and '08 IBES estimates was
about a 5% stock buyback, from what we could see. Although
as you know, information is kind of difficult to tell
exactly, what all of you have implied in there in terms of
share repurchase.
Jason Goldberg: So I guess that dilution could be, in theory at least, a
bit greater than advertised.
Rick Johnson: No, because we actually took the IBES estimates and did
all the calculations related to the transaction off that
number, which makes it accretive.
Jim Rohr: Right.
Jason Goldberg: Okay, then secondly, on Page 23 in the appendix you have
Mercantile projected net income. And it looks like you're
showing 29% growth between 2008 and 2007.
Bill Callihan: That was the number from IBES.
Rick Johnson: 29%? Do you want to clarify there, Jason? Did you say
29%?
Jason Goldberg: Well, three, six, 279 to 360. On the second line.
Bill Callihan: Yes, those were just right out of the IBES database. So,
that was the assumption that was there.
Jason Goldberg: Seems like a lot of growth. For a bank.
Rick Johnson: It certainly does, Jason. Let's go back and take a look.
Bill Callihan: Okay, next question?
Operator: Your next question comes from Ed [Najarian].
Ed Najarian: Yes, good morning guys, it's Ed Najarian.
Jim Rohr: Morning Ed, how are you?
Ed Najarian: Good, how are you all?
Jim Rohr: Just great.
Ed Najarian: Two quick questions. First question I guess is for Ned,
could you give us some kind of an indication as to what
extent there were other initial bidders on this
transaction, or to what extent it was opened up to an
initial bid process?
Ned Kelly: It was not. In other words, I think one thing that's
important to understand is there was no process. As you
might well imagine, given where we are in the quality of
the franchise, I've had numerous approaches over the
years, none of which have been nearly so compelling as
this one.
The fact is that Jim and I have talked a fair amount over
the years, never specifically about this. But I think Jim
has always been interested in what it is that we might do.
I think it's fair to say we got together for the first
time just a couple of weeks ago. As I said, the sun, the
moon and the stars aligned. And Jim was in a position I
think, to do something that he might have had in mind for
a while, but was now better positioned to do it. But we
did not, and I just want to underscore that, we did not
run a process.
Ed Najarian: Okay, so in sort of, last month or whatever recent
timeframe kind of you want to put around the structure of
this deal, it was - you did not really negotiate with
other potential bidders?
Ned Kelly: I have been aware, obviously, of other bidders' interest.
And, obviously, there's no rocket science associated with
this. You have a sense of what it is that people might be
able and willing to pay.
The fact is we believe that the fit with PNC is an
extraordinarily good one. Moreover, we believe their
currency is a good one. And we believe secondarily that
it's the best deal for our employees, customers and the
communities we serve.
And I think from the board's standpoint, as we think about
it theoretically at least, there is no other deal that is
close.
Ed Najarian: Okay, thanks. And then second question, I guess, is for
Rick. Could you give us a little more insight as to how
you came up with a hundred million in expense saves?
Rick Johnson: Yes, I'd be happy to. The first thing we did was to take a
look at where we had overlaps on a lot of the non-client
facing activities. And in going through that exercise, we
determined that about 50% of the total cost saves would be
people-related.
And then we went through all the other payments that the
company made for professional services. We took a look at
some of the software, where there would be overlap in
software, we'd write the software off.
We looked at occupancy where there's duplicate facilities
and so on, so we went through an exercise there to
actually determine.
The other thing too that we looked at is we've had some
great success with One PNC in terms of how we manage our
cost base, as has Mercantile. And we think there are some
opportunities there as well to find some further savings.
Jim Rohr: Another thing, I think it's worthwhile to reiterate is
that we did not put, other than the bond portfolio, we
did not put revenue opportunities that have been
identified. You never give us any credit for them, anyway.
On both sides, I would tell you, during the due diligence
process, I think the teams were very excited about revenue
opportunities in the future of this company.
So, it was really a very eye opening and worthwhile due
diligence process. As you can imagine, we didn't have to
spend a lot of time looking at bad credit or a lot of
interest rate risk.
So, we had the benefit of really talking about what kind
of opportunities there might be.
Ed Najarian: Okay, thanks. And then just one final question, and I
guess this is for Rick as well. Rick, can you give us any
kind of a sense as to what you guys believe, as you
measure it, what the internal rate of return of
repurchasing PNC stock, excuse me, would be, at its
current price? In sort of that $73-$74 range, had you not
done this deal and executed a large buyback, what do you
think that IRR would have been on that purchase price?
Rick Johnson: We typically look at it as just a return of capital and
whatever our cost of capital would be, which is about a
10% return.
The other thing to keep in mind is that's just a one time
event, it's not an opportunity to grow the franchise,
which we get with this transaction at a 15% return.
So I think overall, I would say, one, you've got the
hurdle from 10 up to 15, and secondly, you got the
opportunity to grow the company from there.
Ed Najarian: Okay, so putting growth assumptions aside in terms of any
kind of extra growth that Mercantile brings
you from a franchise value standpoint, or strategic
standpoint, you are estimating the IRR of your buyback at
only about 10%. Is that correct?
Rick Johnson: That's correct.
Ed Najarian: Okay, thanks.
Operator: Your next question comes from David Hilder.
Jim Rohr: Hi, David.
David Hilder: Hi, good morning. Most of my questions have been asked.
One remaining is that you've projected a closing of the
first quarter of '07. Given where we are on the calendar,
is that more likely to be toward the end of the first
quarter than the beginning?
Jim Rohr: I would think so. Yes.
David Hilder: And again, just on the redeployment of the Mercantile
portfolio, Rick, you suggested very little execution risk
because you're just marking it to market, and then
redeploying it. No, if you will, no fancier methodology?
Rick Johnson: No, not at all. As a matter of fact, you know, we plan to
maintain the duration of equity in the business as they
have in the portfolio that they have. That does not
include anything with respect to extending our asset base
at all.
So, the whole position that we've talked about around PNC
being positive one year duration of equity, we still have
that opportunity to expand as we go through the rate cycle
and the easing. And Mercantile complements that
terrifically.
David Hilder: Great, thanks for that clarification.
Bill Callihan: Next question, please.
Operator: Your next question comes from Peter Monaco.
Jim Rohr: Hi, Peter.
Peter Monaco: Good morning, thanks for your time. Could I ask you to
just, please, be a little more precise about what your
capacity and appetite for buyback are in the coming year
or so?
It seems pretty clear that the windfall from the BlackRock
transaction has been spoken for. That said, you presumably
will earn at a high level over the next year.
So help us, please, think about capacity and appetite for
buyback when you also incorporate earnings to be generated
into the equation.
Rick Johnson: Okay. I think - let me respond in two ways. One is, the
calculation that we have right here is merely to say what
will be the impact of this transaction, assuming we did
not have a substantial amount of buyback in addition to
that.
I think our capital strategy, which is to manage the
company at 5.25% to 5.5% will continue. So I would say,
over time, obviously, depending on our earnings growth and
balance sheet growth and so on, we'll be adjusting our
buyback plan to target a 5.25% to 5.5% tangible common
equity ratio.
Jim Rohr: We'll also look at the dividend as well, as you know, in
order to think about how we might return capital to the
shareholders.
Peter Monaco: Thanks a lot.
Bill Callihan: Next question, please?
Operator: Your next question comes from Bob Hughes.
Bob Hughes: Hi, good morning, I've got two questions.
Jim Rohr: Morning.
Bob Hughes: First - good morning. Ned, I know there was some question
asked about consolidating the affiliates - not so
concerned about the charters or anything else, but what
kind of plan do you have for dismantling say the
management teams and advisory boards, or how do you handle
that?
Ned Kelly: Well, as you know, Bob, there in fact, they are actual
boards of directors just to be clear, you know, that are
with each of those affiliates. My strong suspicion, Jim
and I have not talked about this in detail is that a
number of them may very well become members of advisory
boards in connection with specific regions.
Moreover, based on my conversations with Jim, as you know,
we have some very, very good affiliate CEOs. And part of
the reason we went through the consolidation was to ensure
that they, in fact, had a broader palette, if you will, in
which to paint.
I think the fact that given this deal with PNC, they're
going to see that that's the case. And based again on my
conversations with Jim, I think there are going to be
substantial roles for those affiliate managers going
forward given the limited overlap between us and them.
And frankly, even in areas where there's overlap, I think
my people are going to have big opportunities with a much
broader array of products and services to offer, which
always makes any banker happy.
Jim Rohr: I couldn't agree with you more, Ned. We've been very
successful with regional presidents having a tremendous
amount of responsibility for the customer in the
marketplace, which is the majority of what Ned's CEOs do
right now.
And in all of our markets, we have advisory boards and
basically, they're very active people in the communities,
and help us tremendously with our customers and charitable
contributions and various kinds of involvements.
One thing that happens is the advisory board members don't
have legal liability like the charter directors do. And we
found out that's a fairly positive aspect from their point
of view.
Bob Hughes: Okay, and the follow up is, Jim, I think we'd all like to
hear how it is that you guys missed that the net income
numbers in IBES for (unintelligible) call for
29% growth? Because that obviously calls into your
question your IRR calculations, do you have any other
explanation?
Jim Rohr: I don't have that answer to that question.
Rick Johnson: We were just looking at those figures. What's probably
wrong here is the '07 IBES number because if you think of
what Mercantile has delivered in the first six months,
it's $144 million in net income.
Presuming they continue to deliver at a pace reasonable to
that, I'm not going to sit here and comment on their
earnings (unintelligible) for the year.
Ned Kelly: And, Bob, as you know, I never comment on IBES, never
have, won't do it still now. But if you look at it on the
face of it, it looks like there's a mistake with '07
because the fact is that at $280 in suggested earnings, at
least based on what you (unintelligible) are going to be
down in '07. That's what generates it.
Rick Johnson: Yes.
Bob Hughes: Okay, thanks.
Ned Kelly: Not the 360 number, it's the 280 number.
Bob Hughes: Right.
Rick Johnson: That's correct.
Jim Rohr: I like that answer better than other ones we could have
had.
Bill Callihan: Next question, please.
Operator: Your next question comes from Nick Elfner.
Jim Rohr: Hi, good morning.
Nick Elfner: Hi, good morning. Just a question regarding PNC
bondholders, what do you see as the one or two principal
benefits of this transaction for them?
And do you have any expectations regarding your credit
ratings going forward?
Rick Johnson: Well, I think two things. One is we have spoken to the
rating agencies. And they found the transaction very
appealing. They were very impressed with the franchise
that we're purchasing across the board.
I think in terms of what they like the most, it's a
diversification of the customer base that PNC has. The
ability to take advantage of products and technology
across the Mercantile platform.
And the fact that, you know, it also diversifies many of
the things we talked about in terms of our earning stream.
And still maintains the strengths of what PNC brings to
bear in terms of a strong fee base of income, as well as a
strong capital base.
Jim Rohr: If you think about it really from a bondholder's point of
view, the credit quality that Mercantile brings, the
interest rate risk neutrality that Mercantile brings, the
capital that Mercantile brings, the diversification to the
franchise, and the remarkably high component of demand
deposits.
This is a very high quality franchise that's being added
to a high quality franchise. I think the bondholders ought
to be delighted.
Nick Elfner: Thank you.
Bill Callihan: As you can imagine, it's a busy day for the team here. We
have time to take one more question. So operator, we have
one last question.
Operator: Your last question comes from Jason Eisen.
Jim Rohr: Hello, Jason.
John McDonald: Hey Bill, it's John McDonald calling.
Bill Callihan: Okay.
Jim Rohr: Hi, John.
Rick Johnson: Hello, John.
John McDonald: Rick, could you clarify your answer to Jason Goldberg on
the consensus? So, the consensus is 5% too high because of
the buybacks, but you incorporated that into your
calculation of dilution? Or you didn't?
Rick Johnson: No. We basically took the consensus, okay, that was
printed and then did all the other calculations of
financing cost, cost saves, everything else related to
determining accretion dilution, additional shares issued
off of those numbers, and based upon that, we will be
accretive in the second year.
John McDonald: Okay, on the first year...
Rick Johnson: We're not - I think the thing I want to be clear of is not
giving guidance as it relates to '07 and '08. But we are
saying is if the current estimates that are out there are
correct, then we will be accretive to those estimates.
John McDonald: And you're saying, your view is that they embedded a 5%
buyback?
Rick Johnson: That's what the best we can tell. It looks at though there
was a 5% buyback over two years embedded in those numbers.
That's correct.
John McDonald: Okay, thank you.
Bill Callihan: Okay, thank you all. I don't know, Jim, do you have any
final comments?
Jim Rohr: Thank you very much. We really appreciate you joining us
this morning. It's a very exciting time for us, a
wonderful franchise that's being created here in the
mid-Atlantic states. And we think it's a great investment
opportunity. Thank you very much.
Ned Kelly: Thank you.
Rick Johnson: Thank you.
END
ADDITIONAL INFORMATION ABOUT THIS TRANSACTION
The PNC Financial Services Group, Inc. and Mercantile Bankshares Corporation
will be filing a proxy statement/prospectus and other relevant documents
concerning the merger with the United States Securities and Exchange Commission
(the "SEC"). WE URGE INVESTORS TO READ THE PROXY STATEMENT/PROSPECTUS AND ANY
OTHER DOCUMENTS TO BE FILED WITH THE SEC IN CONNECTION WITH THE MERGER OR
INCORPORATED BY REFERENCE IN THE PROXY STATEMENT/PROSPECTUS, BECAUSE THEY WILL
CONTAIN IMPORTANT INFORMATION.
Investors will be able to obtain these documents free of charge at the SEC's web
site (www.sec.gov). In addition, documents filed with the SEC by The PNC
Financial Services Group, Inc. will be available free of charge from Shareholder
Relations at (800) 843-2206. Documents filed with the SEC by Mercantile
Bankshares will be available free of charge from Mercantile Bankshares
Corporation, 2 Hopkins Plaza P.O. Box 1477, Baltimore, Maryland 21203,
Attention: Investor Relations.
The directors, executive officers, and certain other members of management and
employees of Mercantile Bankshares are participants in the solicitation of
proxies in favor of the merger from the shareholders of Mercantile Bankshares.
Information about the directors and executive officers of Mercantile Bankshares
is set forth in the proxy statement for its 2006 annual meeting of stockholders,
which was filed with the SEC on March 29, 2006. Additional information regarding
the interests of such participants will be included in the proxy
statement/prospectus and the other relevant documents filed with the SEC when
they become available.