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PNC Pushes Southeast After Housing Bust Rattles Local Lenders

PNC Financial Services Group Inc.’s $3.62 billion deal to buy Royal Bank of Canada’s U.S. retail unit thrusts the bank across the U.S. southeast, challenging local lenders hurt by the real-estate bust.

PNC agreed yesterday to buy Raleigh, North Carolina-based RBC Bank USA and related credit-card assets in a deal that would add more than 420 branches in Alabama, Florida, Georgia, the Carolinas and Virginia -- most of which is new retail territory for PNC. The Pittsburgh-based lender’s 2,500 outlets are primarily in the North, Midwest and Florida.

The Southeast bore much of the brunt of the financial crisis as subprime lending and falling home prices roiled housing markets in the area. Regions Financial Corp. last reported an annual profit in 2007 and has written off more than $3 billion in loans since the start of 2009. More than 130 banks have failed since 2007 in the states PNC is entering.

“PNC comes in after the markets have come under pressure,” Terry McEvoy, an analyst for Oppenheimer & Co. in Portland, Maine, said in a phone interview last week. “The banks have already recognized a significant amount of losses. PNC would benefit from the recovery in the value of those assets and the recovery of the economies down there.”

PNC expects the population to increase 6.5 percent and household income to rise 12.6 percent in RBC Bank USA’s territory during the next five years, according to a presentation for investors. That compares with average U.S. growth rates of 3.9 percent and 12.4 percent in population and income, according to the presentation.

Rohr’s Returns

“There are good growth trends there for sure,” PNC Chairman and Chief Executive Officer Jim Rohr, 62, said yesterday in an interview. “We’re taking their franchise and their distribution network and we’re putting a large amount of product capability in their hands, and I think that will be very successful in a region that grows like that.” If interest rates go up, the returns will be “significantly greater” than what PNC expected, Rohr said.

PNC is paying about 97 percent of tangible book value for RBC Bank USA, a discount of about $112 million according to the bank. The rise in population, income and inevitable increases in interest rates will make the investment pay off for PNC, said McEvoy, who rates the shares “outperform.”

Rising Rates

“A deposit is not as valuable as it is when rates are higher -- and at some point we will be in that environment,” he said. “That’s another benefit now of accumulating these assets on the cheap.”

Competitors include Atlanta-based SunTrust Banks Inc., ranked eighth by deposits among U.S.-based commercial lenders, and Birmingham, Alabama-based Regions, ranked 10th. After the RBC deal, PNC is ranked sixth behind U.S. Bancorp. SunTrust has about 1,665 branches according to its website and Regions has about 1,800.

SunTrust repaid its government bailout funds in March and returned to quarterly profitability last year for the first time since 2008 as it set aside less money to cover bad loans. SunTrust and Regions were among the worst performers in the KBW Bank Index in 2008 and 2009, dragged down in part by defaults from real-estate borrowers. This year, PNC is down 6.7 percent to $56.66 a share, still good enough to rank 10th in the 24-company KBW index.

Carolina Comeback

“The Atlanta marketplace, North Carolina, those are all places that over time will come back again,” Michael Rose, an analyst with Raymond James & Associates Inc. in St. Petersburg, Florida, said in an interview last week. “It’s hard to see now, but from a longer-term perspective in looking at your customer base, that’s where the growth is going to occur.”

SunTrust controls almost 35 percent of all deposits in Florida and 25 percent in Georgia, according to data compiled by Bloomberg. Regions has about 20 percent each in Florida and Alabama.

“We think competition is good for the communities and clients,” said Mike McCoy, a spokesman for SunTrust, who said the circumstances may be an opening for his company. “We would certainly take advantage of the opportunity to share our service and our SunTrust story with those clients who may be interested in making a change.” Tim Deighton, a spokesman for Regions, declined to comment.

While PNC’s lack of presence in the area may provide for more growth, it may also limit potential cost savings from purchasing RBC Bank USA because it doesn’t have branches in the region that it can consolidate, Rose said.


BB&T Corp., the Winston-Salem, North Carolina-based lender that controls almost 29 percent of deposits in its home state, would have been able to take a more aggressive cost-cutting strategy if it had won the bidding for RBC Bank USA, Rose said. BB&T, the ninth-largest U.S. commercial bank by deposits, was also among lenders to show interest in the unit, two people with knowledge of the matter said in April. BB&T stayed profitable throughout the financial crisis.

National banks such as JPMorgan Chase & Co. are pushing into Florida as well, with the New York-based lender planning to open 375 to 500 more outlets in the state on the theory that more density will help serve current customers and attract new ones. For now, said PNC spokesman Fred Solomon, “we are focused on completing this transaction and integrating RBC Bank.”

Thwarted Bid

RBC would be PNC’s biggest acquisition since its purchase of Ohio’s National City Corp. in 2009 for about $3.9 billion in stock. Rohr told investors earlier this year that his bank was ready for another takeover.

“They’re looking at their experience with National City where they added thousands of new customers, and they’re looking to replicate it down in the Southeast,” said R. Scott Siefers, an analyst at Sandler O’Neill & Partners LP in New York who rates PNC “buy.”

PNC was frustrated in one of its latest attempts at expansion when its bid for Milwaukee-based Marshall & Ilsley Corp. in December was trumped by a $4.1 billion offer from Bank of Montreal, according to two people with knowledge of those discussions.

Rohr has said in the past that he would like to be among the top three retail franchises in a market or have a 10 percent market share in large cities. That could leave open the question of whether PNC would make another acquisition to reach that status in the Southeast, Siefers said in a note yesterday.

Rohr revised that outlook after announcing the RBC deal, saying the bank does not need to be among the top three franchises to add customers or cross-sell products, and he’s not planning to “go on a buying spree” to acquire more lenders in the Southeast.

“We don’t see that at all,” Rohr said in the interview. “What we’ve found is we can go into a marketplace and be successful even though we don’t have the largest branch distribution network because we have a product set that’s very competitive.”

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