PNC Building War Chest for Acquisitions
A $420 million stock offering has restored PNC Financial Corp. to the ranks of strong superregionals on the prowl for acquisitions.
The Pittsburgh banking corporation raised the cash last month in the biggest deal of the year among banks. The injection lifted the ratio of common equity to assets, a key figure in getting regulatory approval for acquisitions, to 7.6%
"It is evident that the industry will go through a consolidation and regulators will allow companies to be acquirers if they have a fortress-like balance sheet," said William J. Johns, senior vice president.
To help ensure that it is an acquirer in any consolidation, PNC also sold $100 million in medium-term notes last week.
Nonperformers Still High
But PNC's balance sheet still is not what it was before misguided lending practices came home to roost. Back in the middle to late 1980s, PNC was considered one of the best-quality regional banks, with a return on assets around 1.20%.
Assets now total $41.6 billion, but the proportion of nonperforming assets is a lofty 4.6% and chargeoffs are nearly 1.5% of assets Both measures exceed levels at banking companies with the best track records. At Banc One Corp., for example, nonperforming assets are 2.2% of loans. Chargeoffs at Wachovia Corp. are 1.14% of loans.
Nonperformers continue to plague PNC. Bad loans cost it $592 million in 1990, when ROA dropped to a meager 0.16%. The outlook is better for |91, partly due to strong feebased revenues and gains on sales of stock. Morgan Stanley & Co. estimates that PNC will earn a profit despite $395 million in loan-related losses. In the third quarter, PNC earned $105 million.
"The problems are identified and they are being handled," said Dennis Shea, an analyst with Morgan Stanley. The loan portfolio has been shrinking, due to chargeoffs and fewer originations. PNC has shifted some of its best credit people from headquarters to affiliate banks, which were the sources of most bad loans.
Another vote of confidence came from Thomson BankWatch, an affiliate of the American Banker. The rating company upgraded PNC's debt rating early this month to B from B/C.
"Problem asset levels are still high on a ratio basis, but the capital is strong it has good earnings potential, and the margins are holding up," said," said Gregory Root, president of BankWatch.
Even before the stock offering, PNC was busy acquiring this year, concentrating on its Pennsylvania backyard.
CCNB Acquisition Planned
A megadeal is unlikely. Leveraging the new proceeds will let PNC add about $7 billion in assets, though stock swaps could increase that figure.
PNC plans already to issue stock to acquire CCNB Corp., a $1.2 billion-asset bank holding company in Pennsylvania.
PNC has been rebuilding itself on other fronts, pulling in its reach and changing its funding strategy to be more like other big regional banks. It closed its foreign offices and got out of Ohio by selling four banks to Banc One, and sold off some businesses. Despite the withdrawal from Ohio, analysts expect PNC to add assets in the three states outside Pennsylvania where still operates.
PNC once relied heavily on money borrowed from other banks to maintain asset levels. Now, the funds are increasingly coming from money it has on deposit. Last quarter, for example, deposits supported about half of assets.
The sale of the Ohio banks was a slight setback, but the planned acquisitions will compensate. One example of the change in funding policy is the PNC's commercial paper. The company once had $2 billion in commercial paper. Now it's down to $286 million.
The Financial Accounting Standards Board issued a statement requiring all companies to disclose market values of their investments in footnotes to their financial statements.
Banks and other companies will continue to report the historical value of many investment securities on their financial reports, but they will now have to reveal the current market value of those assets in footnotes.
The new rule takes effect at yearend 1992 for all companies with more than $150 million in assets. It is part of the board's ongoing study of the best ways for companies to recognize and measure financial instruments.
Table : PNC's Push to Improve After adding $440 million in equity capital, PNC rejoined an exclusive club Percent of common equity to assetsFifth Third 9.7%Wachovia 8Boatmen's Bashares 7.7PNC 7.6Banc One 7.4
Source: Morgan Stanley