PNC Bank suffers less

PNC Financial Services Group's 39 percent drop in third-quarter net income showed that the Pittsburgh bank with major operations in the Philadelphia region has not escaped the turmoil that has remade the nation's financial industry in recent weeks.

"We're not immune to this unbelievable volatile market," James E. Rohr, PNC's chairman and chief executive officer, said in an interview yesterday.

Much of the decline in profit - to $248 million, or 71 cents a share, from $407 million, or $1.19 a share, a year earlier - came from an $82 million loss on the value of commercial mortgages because of volatile interest rates. It included impairment charges of $74 million on PNC's holdings of battered preferred stock in Fannie Mae and Freddie Mac.

Still, PNC's lower profit was in sharp contrast to huge losses reported at larger financial firms. Citigroup Inc. said it lost $2.8 billion in the third quarter, its fourth consecutive quarterly loss. Merrill Lynch & Co. Inc. reported a $7.47 billion quarterly loss, its fifth in a row.

Investors have rewarded PNC's consistent profitability with a relatively strong stock price. The company's shares closed down 10 cents yesterday, at $61.40 on the New York Stock Exchange.

Among stocks of the nation's 20 largest banks, PNC's has held up second-best over the last year, losing just 7 percent of its value, far better than the average loss of about 40 percent. U.S. Bancorp, of Minneapolis, down 5 percent, performed best.

PNC shares have held up because "they've avoided some of the problems. They didn't get into the exotic mortgage products. That has saved them considerably," said Matthew Schultheis, financial-services analyst at Boenning & Scattergood Inc. in West Conshohocken.

Rohr said that PNC decided in the late 1990s not to get into subprime lending. PNC sold its separate residential-mortgage business in 2001 to Washington Mutual Inc., though it continues to originate loans.

Washington Mutual's stock soared above PNC's during the housing boom, but last month Washington Mutual failed under the weight of overzealous and risky lending and is being taken over by JPMorgan Chase & Co.

An analyst said PNC also benefited from a stint in the regulatory doghouse after it was caught in 2002 hiding losses through deals structured by American International Group Inc. "They overhauled their risk-management practices, and it's really helped them," said James Sinegal, an analyst with Morningstar Inc., of Chicago.

Rohr said the key to PNC's success was that it stayed close to customers. "If you think about how a lot of these problems were generated, people didn't really know the customer they were dealing with," he said.

PNC's biggest exposure to consumer lending - an area of great concern given the rising jobless rate - is in $14.9 billion in home-equity loans. The bank wrote off 0.58 percent of those loans as uncollectible in the third quarter. Bank of America Corp., by contrast, wrote off 2.53 percent of its homeequity loans in the quarter.

Schultheis warned that PNC had problems from the downturn in the credit cycle that had not showed up yet in quarterly reports to shareholders. He said second-quarter reports to bank regulators showed sharp increases in 30- to 89-day delinquencies.

"The question remains how bad is it going to get on the cyclical side. That's the biggest risk to this bank," Schultheis said.