CHICAGO - PNC Bank Corp. will continue using swaps to manage interest rate sensitivity even after it completes its balance sheet restructuring.
Randall King, senior vice president of PNC's asset and liability management division, said that deals for Midlantic Corp. and branches from Chemical Banking Corp. will virtually eliminate the Pittsburgh-based company's liability sensitivity. But he said the bank will continue using shorter-term swaps to lock in its funding costs.
He made his remarks here at a conference on derivative issues for regional banks held by the International Swaps and Derivatives Association. Among the issues discussed at the gathering were how to report on derivatives activities to senior management, ratings agencies, and analysts.
Mr. King's remarks gave a glimpse of how the $62.7 billion regional bank has used its derivatives portfolio to alter the characteristics of its balance sheet.
Late last year, the company publicly disclosed that its liabilities were maturing, and therefore repricing, more quickly than its assets. As a result, an increase in interest rates would affect costs of the bank's $17 billion in borrowings sooner than it would boost rates earned from its loans or other assets.
To lessen the problem, Mr. King said, the bank entered into swap transactions maturing in one year or less in an attempt to convert floating rates paid on short-term borrowings into fixed rates. In this way, he said, the bank was able to obtain the liquidity it needed and lock in its borrowing costs.
But the strategy was expensive. Carole Berger, a regional-bank analyst with Salomon Brothers, said the cost of putting on these swaps was expected to hurt earnings until the balance sheet makeover is complete, which she estimated would take three years on a stand-alone basis.
In acquiring Midlantic, though, PNC is getting one of the few asset- sensitive banks available, she said. And by adding Edison, N.J.-bank's core deposits, PNC could take a "giant leap" toward accomplishing its goal.
"It may be that many people underestimated how long it would take them to get back on balance on a stand-alone basis," she said. "With the merger, it's accomplished on day one."
Despite their costs, Mr. King said the swaps were helpful in getting the bank headed in the right direction and will continue to play an important role even after the acquisitions are complete.
"The derivatives transactions in the fourth quarter of 1994 got us on the way to where we wanted to be," he said in a later telephone interview. "I think the bank will still have a need for short-term swaps to modify our interest rate position."