PNC will buy troubled National City Corp. for $5.58 billion

NEW YORK -- PNC Financial Services pnc, a large, Pittsburgh-based regional bank said Friday that it is buying National City ncc, a struggling Cleveland-based bank, for $5.58 billion. The deal will create the nation's fifth-largest bank by deposits.

PNC said the U.S. Treasury will provide a $7.7 billion capital injection through the purchase of preferred shares. "In essence, PNC bought National City for a very inexpensive price and with taxpayer money," says Matthew Schultheis, analyst at Boenning & Scattergood in Philadelphia. PNC became the 10th bank to take advantage of the Treasury's emergency cash program.

The National City deal is seen by some as a harbinger of how the Treasury will operate its Capital Purchase Program, where it intends to buy $250 billion of senior preferred shares in financial institutions, with $125 billion set aside for community and regional banks.

The Treasury's infusion shows it approves the PNC-National City deal. "We are gratified that we have been selected to participate in Treasury's Capital Purchase Program, which has helped to put this transaction on a very solid footing," PNC CEO James Rohr said.

Many regional banks have said they plan to apply for help from the Treasury — from the relatively small such as Michigan's Dearborn Bancorp with $1 billion in deposits to the large, such as Atlanta's SunTrust Banks, with $100 billion.

More infusions are expected to be announced soon. Analysts say this deal suggests Treasury would likely lend money to relatively large and stable regional banks, like PNC, that have a history of acquisitions. "The Treasury will probably not be looking for smaller banks with less than $10 billion in assets," says Schultheis. "They will basically look to pair up stronger banks with others that are too weak to survive this crisis."

PNC says it is paying $5.2 billion in stock for National City, or $2.23 per National City share. Wall Street hailed PNC's decision, sending its stock higher. At the same time disappointed investors sold National City stock, sending those shares down 74 cents to $2.01 in afternoon trading Friday.

During the current financial crisis, PNC has been relatively untouched. However, National City has had to report large losses and has been considered one of the weaker banks, especially after Wells Fargo bought Wachovia and JPMorgan Chase bought Washington Mutual.

PNC says National City will boost its deposits to $180 billion, which will make it fifth in size after Bank of America, Wells Fargo, JPMorgan and Citigroup.

"This transaction is about two companies that fit well together in terms of geography, products and services," said Peter Raskind, CEO of National City.

PNC says it could book $19.9 billion in losses on National City's loan portfolio over time. It expects the transaction to start to add to earnings in 2010. PNC says it will incur merger expenses of $2.3 billion. The transaction should close by year-end.