was advised by the
that it was improperly accounting for its preferred stake in subsidiaries of an outside financial institution. The Pittsburgh bank said adapting its accounting to the Fed's advice will reduce its 2001 earnings by $155 million, or 53 cents a share.
The Fed told PNC to consolidate three units of a third-party financial institution in which it held the stakes. The central bank's opinion differed from that of PNC's independent financial adviser, although the company plans to comply. (To see Jim Cramer's take on PNC,
The accounting change will cut PNC's 2001 net income by 53 cents a share and its liabilities by more than $100 million, PNC said. It is not expected to alter 2002 operating results, and PNC reaffirmed analyst predictions that it will earn $4.60 a share this year.
PNC noted that there isn't any "off-balance-sheet debt related to the subsidiaries," and described them as fully funded by equity capital with "significant liquid assets."
"The effect of the consolidation is to reclassify PNC's preferred interests, currently carried on its balance sheet as securities available for sale, to other asset categories including loans held for sale," the company said.
In its Jan. 17 earnings release, PNC described a yearlong effort to reduce leverage and improve the risk profile of its lending business. The measures included "residential mortgage securitizations and runoff, transfers to held-for-sale and managed reduction of institutional loans, and sales of institutional loans to subsidiaries of a third-party financial institution." The company also noted it had cut its venture capital assets through a "sale to a subsidiary of the same institution and valuation discounts," adding that "PNC's preferred interests in the third party subsidiaries are included in securities available for sale."
PNC will revise fourth-quarter results and restate the second and third quarters to reflect the consolidation. As a result, net income for 2001 is estimated to be $412 million, or $1.38 a share, PNC said.