Analysts reacted favorably to PNC Bank Corp.'s decision this week to assimilate Midlantic Corp. and clean up its balance sheet in one fell swoop.
The result will be fourth-quarter charges totaling $388 million to cover merger expenses and after-tax losses on the sale of fixed-rate securities. PNC said the move will result in a nearly 33% drop in net income, to $410 million, for all of 1995.
But analysts were pleased despite the earnings hit. "It's a high cost to recognize these things, and an even higher cost not to recognize them," said Jarius DeWalt, an analyst with M.R. Beal & Co.
Pittsburgh-based PNC, which has been criticized for its unusually high ratio of securities to assets, will reduce its securities portfolio to 23% of earning assets. That compares with 40% a year ago, according to a bank spokesman.
PNC chairman Thomas H. O'Brien said the bank has substantially reduced its vulnerability to investments. He also said the merged bank will be less reliant on wholesale funding. Because of the Dec. 31 merger with Midlantic and the March 1995 acquisition of 81 branches from Chemical Banking Corp., PNC has gained attractive middle-market and consumer customers, Mr. O'Brien said.
"These actions create a financial institution with a more stable and consistent earnings stream," he added. As a result of the two acquisitions, PNC now has $72 billion in total assets.
PNC said it will take a $198 million charge during the fourth quarter to sell off $6 billion in fixed-rate securities, and to terminate interest rate swaps and caps - instruments used to protect against the sudden rise or fall of rates. PNC purchased the caps a year ago. The bank has been trying to repair a securities portfolio that was jolted by rising interest rates in 1994.
Specifically, the bank will liquidate $1.9 billion of U.S. Treasury securities and $4.1 billion of collateralized mortgage obligations. The bank will take a $190 million charge for merger-related expenses associated with its takeover of Midlantic.
Mr. DeWalt said PNC's merger with Midlantic softens the blow of the securities sales losses because those charges will be spread out over a larger and less risky balance sheet.
Midlantic's ratio of securities to total assets is much smaller than PNC's, at 17%, said Mr. DeWalt. M.R. Beal rated a number of banks based on their percentage of securities to total assets a year ago. Mr. DeWalt said PNC was one of the worst rated for risk, while Midlantic was one of the best.
Mr. DeWalt predicts that other banks will take similar charges for 1995. While he said he applauds PNC, Mr. DeWalt said the bank should not have "piecemealed" its losses over the past year.
PNC took a $79 million charge in the fourth quarter of 1994 after selling off securities and purchasing the interest rate caps.
James M. Schutz, an analyst with Chicago Corp., said he had expected the severe drop in PNC's earnings. He said PNC had kept analysts aware that it would be taking a charge associated with the completion of the Midlantic acquisition.
"The Midlantic transaction is what set this off," Mr. Schutz said. "What they were weak on was core deposits, and Midlantic has core deposits and core deposits to spare."