PNC Financial Services (PNC)

Leadership

The skills we developed during One PNC have provided us an opportunity to establish a continuous improvement program. We are currently implementing many new ideas, including several hundred generated by non-management employees.

The combined effects of One PNC and the ongoing continuous improvement program also have helped us reinvest in our business and still hold down our expense growth.

We are investing to grow our business. After 11 years of helping build BlackRock into one of the industry’s most respected asset managers, PNC welcomed the widely acclaimed BlackRock/Merrill Lynch Investment Managers merger, which created a global company with more than $1 trillion under management. We recognized a $1.6 billion addition to capital as a result, including a $1.3 billion after-tax gain.

We took advantage of the resulting capital flexibility to announce the planned acquisition of Mercantile Bankshares Corporation. The combination of PNC and Mercantile, scheduled to close in March of 2007, will build on our established presence in Pennsylvania, New Jersey, the greater Washington, D.C. area and Delaware to make PNC a Mid-Atlantic banking powerhouse with more than 1,000 branches. Seventy percent of them will be east of the Appalachians in the affluent and rapidly growing corridor stretching from the Hudson to the Potomac.

The integration process is well under way and already succeeding in its priority to retain both customers and key employees. We are finding significant new revenue opportunities and potential cost savings. For example, Mercantile has many business relationships that should benefit from PNC merchant services technology. Also, we have identified approximately 400 middle market prospects within the Mercantile service territory.

And, finally, we continue to manage risk to drive consistent growth. The current interest rate environment, characterized by an inverted to flat yield curve, may persist late into 2007, and intense competition for credit is pressuring financial institutions to make lending decisions that could compromise asset quality. These headwinds have the potential to stir volatility across the industry.

In spite of the challenges, we are confident that PNC is well positioned for the year ahead.

PNC unlocked a portion of the value of its BlackRock investment in 2006 when BlackRock acquired Merrill Lynch Investment Managers. The transaction made BlackRock one of the world’s largest publicly traded asset managers, and added $1.6 billion to PNC’s capital, including a $1.3 billion gain. Today, BlackRock competes as a truly global company, with a portfolio of products in nearly every asset class. PNC’s stake in the new BlackRock is approximately 34 percent, but the business expects to contribute even more to PNC’s earnings than it did as a majority-owned subsidiary.