By acquiring part of Chemical Bank New Jersey for $504 million, PNC Bank Corp. is gambling that it will be able to achieve cost savings and additional fund management revenues in an upscale market.

Analysts said Pittsburgh-based PNC is likely to succeed. They add that the price PNC is paying, including a mix of cash and perpetual preferred stock, should not have any negative impact on PNC's earnings or share price.

"Strategically, it makes sense, and financially it also seems to make sense," remarked Michael Diana of Bear, Stearns & Co.

The acquisition, announced by both banks Wednesday, includes 84 branches in 15 counties in south and central New Jersey, retail deposits of $2.9 billion, $1.8 billion in consumer loans, and $500 million in middle-market commercial loans.

PNC executives emphasized that the deal will permit the bank to enter a high-density market with 366 households per square mile with an average household income of $57,000. PNC's current market typically has 96 households per square mile, with average incomes of $42,000.

This, they argued, gives PNC access to lower-cost funding from retail deposits and opens up opportunities to build fee income through retail fund management.

"We're one of the largest bank managers of mutual funds and one of the largest mutual fund providers, and money and fund management fits the demographics of this market," said Richard L. Smoot, president and chief executive of PNC Bank, Philadelphia.

PNC, unlike New York-based Chemical Banking Corp., has a large operation based in Philadelphia. Southern New Jersey is an obvious extension of this market, analysts said.

By folding the New Jersey branches into its Philadelphia-based banking unit, PNC can achieve substantial savings by consolidating back offices. PNC can also strip out the large administrative costs associated with having a separate board of directors and separate quarterly reporting for the New Jersey offices.

PNC executives said on Wednesday that they expect to save 25% of annual noninterest expenses, or nearly $29 million, by eliminating such operating costs.

Under the agreement, PNC can use up to $300 million of perpetual preferred stock to pay for the acquired franchise. Unlike common stock, preferred stock pays a fixed dividend that usually gives off lower-than- average returns on equity. The balance of the purchase price will be paid in cash.

Assuming PNC achieves a 25% cost reduction the first year, borrows $204 million at 7.15%, issues $300 million in preferred stock at 8.5%, and has 20 years to write off an estimated $297 million in goodwill, the acquisition should increase earnings in the first year by $5.7 million, or 2 to 3 cents a share, according to Salomon Brothers Inc. analyst Carole S. Berger.

However, PNC executives said they have yet to decide how much preferred stock PNC will issue, both to finance the transaction and amortize the goodwill included in the purchase price.

"It's in their best interest to pay cash," remarked Frank R. DeSantis, a banking analyst with Donaldson, Lufkin & Jenrette. He speculated that PNC will likely seek to raise the maximum amount of cash between now and yearend, thereby reducing the amount of preferred stock it needs to issue.

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