The agreement combines Pittsburgh-based PNC with National City, a large, Cleveland-based regional bank weighed down by high-risk mortgage loans, and is the latest deal in the rapidly consolidating banking industry.
The acquisition makes PNC Financial the nation's fifth largest bank by deposits and will give it the fourth most branches, said James Rohr, PNC's chairman and chief executive, during a conference call with investors and analysts. The new combined bank will have about $180 billion in deposits and more than 2,700 branches.
"PNC now becomes a major force in retail," said Bart Narter, a senior vice president in the banking group at consulting firm Celent. "PNC just doubled in size for not a lot of money."
PNC will pay $5.2 billion for National City through a stock transaction that values National City at about $2.23 per share, an 18.9 percent discount from Thursday's closing price of $2.75. The remaining $384 million will be a cash payment to certain warrant holders.
National City shareholders will receive 0.0392 shares of PNC common stock for each share of National City they own.
Shares of PNC rose $3.11, or 5.5 percent, to $59.99 in morning trading. National City shares fell 57 cents, or 20 percent, to $2.18 in early trading.
The government plan calls for the U.S. Treasury to purchase preferred stock and warrants from banks in return for fresh capital. The plan is designed to help banks that have been struggling since the middle of 2007 with rising mortgage defaults and a credit crisis that has essentially shut down lending among banks and severely restricted lending to consumers.
The government will receive warrants to acquire a 15 percent stake in PNC Financial. The warrants will be good for 10 years unless retired by PNC, the company said during the call.
With the government investment, and after the acquisition, PNC said its Tier 1 capital ratio will be about 10 percent, well above regulatory standards for a "well capitalized" bank.
Rohr said the bank will not need to raise capital through a common stock offering to help pay for the deal, but said it would consider a stock raise in the future, depending on market conditions, to help further improve capital ratios.
PNC is taking over a regional bank that has been hit especially hard over the past year and a half by the downturn in the mortgage market. Earlier this week, National City posted a quarterly loss of $5.15 billion, or $5.86 per share. Excluding a special dividend, National City lost $729 million, or 85 cents per share. The company also said this week that it planned to cut 4,000 jobs, or about 14 percent of its total work force, over the next three years as it works on a previously announced initiative to reduce costs.
National City set aside $1.18 billion during the third quarter for loan-loss provisions, compared with provisions of $368 million during the same quarter a year earlier. The shares have plummeted about 96 percent this year.
PNC Financial said it will aggressively take write-downs and increase reserves on National City's loan portfolio when the deal closes. PNC Financial estimates lifetime losses of $19.9 billion on National City's remaining $113.4 billion lending portfolio, as of Aug. 31, Rohr said. Those losses include $3.8 billion National City has already reserved to cover future loan losses, Rohr added.
The deal is expected to close by the end of the year.
