PNC Financial Services Group's deal to acquire troubled National City Corp. will give PNC control of more than half the banking deposits in Western Pennsylvania and will give other banks a chance to buy branches it is expected to discard, analysts said Friday.
National City, Ohio's biggest bank, agreed to be purchased by PNC, Pennsylvania's biggest bank, for about $5.6 billion in a government-assisted merger.
The transaction vaults PNC into the ranks of the nation's five largest banks -- which are being pushed to merge by the global financial crisis.
The new PNC will dominate Pittsburgh's and Pennsylvania's banking business. Operating mainly in the Mid-Atlantic states, PNC will push west into new markets from Cleveland to Chicago to St. Louis.
"This is a tremendous opportunity and will be viewed as a coup for PNC over the long term," said Gerard Cassidy, an analyst at RBC Capital Markets of Portland, Maine, who follows both banks.
PNC plans to eliminate $1.2 billion in expenses, equal to 10 percent of the combined banks' overhead. But not much will be cut in the Pittsburgh market, said CEO James Rohr in an interview.
"This is a terrific deal and a good thing for Pittsburgh, too," said Rohr, who returned from making the deal in Cleveland about 3 a.m. yesterday. "We're not going to lose jobs in Pittsburgh from this."
Rohr said the addition of National City, the nation's seventh-largest bank by deposits, will push more banking transactions through PNC's operations. That will produce jobs over time at PNC Firstside Center, the bank's operations base Downtown, "because we will be processing a lot of things in Pittsburgh," he said.
PNC has about 7,000 employees and National City about 1,800 employees in Western Pennsylvania.
A government infusion of money set up the deal, which came hours after the U.S. Treasury agreed to pay $7.7 billion in exchange for PNC preferred shares. The money is part of the U.S. government's program to stabilize financial institutions and adds significantly to PNC's capital strength.
Treasury officials turned down National City's request for money in exchange for preferred shares and directed National City to "find an acquirer," Cassidy said.
National City was essentially auctioned off Thursday night in Cleveland. The only other bid came from U.S. Bancorp, the fifth-largest bank by deposits. But its bid of $1.25 per National City share was much lower than PNC's $2.23 offer.
"PNC got a bargain. And they are doing it with cheap capital from the (government) program," said Frank Barkocy, research director at Mendon Capital Advisors of New York.
Three days ago, National City said it would cut 4,000 jobs over the next three years. The announcement coincided with the Cleveland bank posting a $729 million loss for the July-September quarter, mainly the result of its portfolio of problem loans.
"It's logical to set that (job-cutting plan) aside. The PNC transaction supersedes that," said National City spokeswoman Kristen Baird Adams. "It's now PNC's determination to make in terms of how they want to proceed."
Adams would not comment about regulators' involvement in the deal.
There will still be job cuts, mostly outside Pittsburgh. Rohr said duplication in businesses, such as information services and commercial mortgage servicing, would likely be eliminated.
"I think a good portion of that $1.2 billion, maybe about 30 percent, they could get out of the corporate headquarters in Cleveland," said Cassidy.
PNC will consolidate a number of branches where the two banks' offices overlap, said Rohr. He could not say how many might be closed or sold because PNC spent more time examining National City's troubled loan portfolio than its branches.
"They will consolidate branches that are close together," but retain their deposits, said Robert Wagner, senior vice president at Ferris Baker Watts, a securities firm in Mt. Lebanon.
"The most logical players to take advantage of a spinoff of branches would be FNB Corp., S&T Bank and First Commonwealth," he said. "They want a greater presence in the Pittsburgh region."
"Yes, we would have an interest, once PNC determines which branch offices it wants to divest," said Robert New Jr., CEO of FNB, based in Hermitage, Mercer County, which operates locally as First National Bank.
"Community banks like First Commonwealth have benefited from unprecedented changes in the financial services arena in the past year. This should be no different," said Ed Lipkus, First Commonwealth Financial's chief financial officer.
A spokesman for S&T said it was too early to comment.
The fortified PNC Bank would command 53 percent of the deposits in the seven-county Pittsburgh region, where PNC is largest and National City is second. The deal also gives PNC 254 branches -- twice as many as next-highest Citizens Bank.
Analyst Barkocy believes PNC will be able to digest the bad loans it gets from National City. PNC said it expects to lose $19.9 billion over time on National City's $113.4 billion in loans. But National City set aside nearly $4 billion to cover those losses.
"This was not overnight due diligence. PNC did a helluva lot of homework," said Barkocy. "Rohr said PNC examined virtually every credit."
National City stockholders will receive 0.0392 shares of PNC stock for each one of their own, equating to a price of $2.23 per share for National City. The deal is expected to be completed by Dec. 31.
"This is a tragic end for National City," said Cassidy. "This is a bank that was trading at $37 in spring 2007, and now it's selling out for $2.23 a share."
National City shares closed yesterday at $2.07, down 68 cents. PNC shares closed at $58.88, up $2.
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