When rising interest rates last year caught PNC Bank Corp. off guard, the Pittsburgh-based company took some big steps in the fourth quarter to reduce its interest rate sensitivity.

PNC's securities portfolio, which had long been larger than those of its peers, represented 37.5% of earning assets early in 1994. By the end of this year, the number is expected to decline to 30%.

PNC's measures to create a more neutral balance sheet by selling off securities, along with plans to buy back 10% of its outstanding shares in 1995 and 1996, have received the stamp of approval from analysts.

Now that the tide of bad news has ebbed, attention is beginning to turn to a key shift in PNC's strategy: The bank is putting a new emphasis on building its retail banking business.

"PNC had a very strong wholesale focus, and I think they've just realized they need to balance that better to get the kind of multiple they want and to get the type of earnings growth and stability that they want," said Dennis F. Shea, an analyst with Morgan Stanley. The interest rate squeeze last year prompted "a top-to-bottom review which has led them to the conclusion that they really should be emphasizing the retail side much more."

Not everyone, however, sees a direct cause and effect. "I am not sure they are directly linked," said Joseph C. Duwan, a Keefe, Bruyette & Woods Inc. analyst in New York.

While PNC banking executives declined to comment for this story, a spokesman, Jonathan Williams, said, "I would say it was coincidental. Things were moving on that track. But the interest rate problems emerged in the second half of last year at about the same time."

And Mr. Duwan noted that consumer banking is already the largest of PNC's three major lines of business - the others being corporate banking and asset management - in terms of both revenues and earnings.

In 1994, the consumer banking business - defined as private, mass market, and mortgage banking - contributed 47% of corporate earnings, compared to 35% the previous year. In the first quarter of this year, earnings from the business line increased to 56% from 43% a year earlier.

PNC, of course, is hardly alone among banks that long had a strong wholesale focus and are now building their retail business.

"The best example you have of a bank that people used to think of as wholesale, and now finally recognize the retail nature of it, is Bank of New York," noted Mr. Shea.

Other examples include National Westminster Bancorp, Jersey City, which began to build its consumer and middle-market lending business following big real estate losses in the early 1990s, and Old Kent Financial Corp., in Grand Rapids, Mich.

Like other banks, PNC wants to reduce the cost of delivery by getting customers to use telephones and ATMs instead of visiting branches. The bank has consolidated seven telephone banking centers into a single facility staffed by 450 telephone bankers working around the clock.

A CS First Boston research report published last winter says PNC believes the new centralized telephone center could, in the "intermediate" future, generate the equivalent of 200 branches worth of sales.

The bank also hopes to use the center for outbound sales calls to expand into new markets.

And last March, the bank said it would install 426 automated teller machines at Wawa Food Markets, a convenience store chain that operates in the Delaware Valley. When the deployment is completed at the end of this year, the bank will have the nation's fifth-largest network of ATMs at locations other than banks.

The emphasis on developing alternative delivery channels is also being followed by plans to shutter 30% of PNC's branches over the next two or three years. It's one of the largest planned branch consolidations unrelated to an in-market merger.

"It's quite an aggressive plan," said Mr. Shea. "They have been in the process of consolidating their branch system for a long time. They expect that trend to continue."

To cover costs related to the branch closings and telephone center consolidation, PNC took a fourth-quarter charge of $31 million.

The bank also faces the challenge "to continue to reduce the cost of traditional delivery systems and invest in alternative delivery channels, while at the same time increase revenue," the annual report noted.

Despite the "rationalization" of PNC's branch network, chairman and chief executive Thomas H. O'Brien wrote in the annual report that, "branches continue to be a priority. . . . Freed of many telephone activities, branch employees can dedicate more time to sales and marketing."

Toward that end, PNC last year piloted a new process to better manage branch sales in Philadelphia. According to the bank, teller-to-platform referrals doubled and sales of products and services jumped 20%. The bank plans to roll out the process to its other markets this year.

The plan, according to First Boston research, involved extensive sales training and incentives for all branch employees.

"Furthermore," the report noted, "through eliminating all paper transactions (and) redundant tasks, and truncating processes, it was able to cut 25% to 35% of expenses."

PNC has also been active on the acquisition front. Earlier this year, it agreed to buy 84 branches in New Jersey from Chemical Banking Corp.

"Their focus on a retail, middle-market banking front is clearly east," said Mr. Shea. "To establish a major presence in eastern Pennsylvania, they will probably look to acquire at some point. And you have to look at eastern Pennsylvania hand in hand with southern/central New Jersey."

Observers noted that the demographics in that region make it a more attractive banking market than western Pennsylvania, a competitive market dominated by PNC, Mellon Bank Corp., and Integra Financial Corp.

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