Only months into his tenure as CEO of PNC Financial Services Group, Jim Rohr had a conversation that would change the course of the company.
"The head of our mortgage business came to me and said, 'We have to sell the mortgage company,'" Rohr recalls. "I said, 'I thought you ran the mortgage company.' But we weren't getting paid to take the risk, and that's why we sold the mortgage company."
It was a decision that would help PNC skirt the worst of the trouble that would arrive a few years later—and one that would allow the company, in late 2008, to acquire a rival that had missed all the signals.
Purchasing National City would require a certain strategic flexibility, as it would mean marching back into mortgages just a few years after PNC's deliberate exit from that business.
In going ahead with the purchase, Rohr indicated—as he had in previous deals and in deals since, including the pending acquisition of RBC Bank USA—that the future of PNC would be governed not by management's arbitrary ideas about what businesses or geographies the company would stick to, but by management's willingness to take advantage of opportunities wherever they presented themselves.
In another era, this might have been interpreted as the sign of a company that couldn't make up its mind. In this era, with the "new normal" for regulation, economic trends and consumer behavior still being defined, it might be interpreted as the sign of a company that's willing to adapt.
Andrew Marquardt, an industry analyst with Evercore Partners, is among the admirers of banks that are taking time to weigh their options.
"We're still in the figuring-out phase of determining what the landscape is going to be and how banks should adjust," Marquardt says. "Everyone quickly went to thinking, 'Gee, I should go to the Wells (Fargo) model of core relationship-based banking, of being retail-oriented and core-funded.' And it's unclear if that makes the most sense. It's become a lower-profit picture for banking broadly and for retail banking in particular, and it takes longer to break even. That all plays into [deciding what will be] the best return on investment."
As opportunistic investments go, National City has turned out to be a very good one. The integration of the Cleveland-based company took PNC 18 months instead of the expected two years. Costs taken out of the combined institution approached $2 billion, surpassing an initial $1.2 billion estimate. The acquisition vastly expanded PNC's footprint and gave the company new gravitas in business lines such as corporate banking.
In short, PNC pulled off one of the most transformational deals to get done during the height of the credit crisis. But less than two years later, PNC was looking like a bank badly in need of another acquisition.
The issue was not one of size. With National City, PNC had grown to become the fifth-largest U.S. bank by deposits. If the company never was going to be the size of a Bank of America, Citigroup, JPMorgan Chase or Wells Fargo, and still was going to be classified by regulators as a big bank, then there was no better place, size-wise, to be.
PNC's problem was one of growth, or, more precisely, a lack of it.
Banks everywhere are waiting for loan demand to recover from the recession, but with National City having pulled the Pittsburgh-based company deeper into the slow-growth markets of the Midwest, its prospects for participating in an eventual economic rebound no longer looked as robust as they otherwise might have.
Meanwhile, a huge runoff portfolio of distressed assets was shrinking the company's asset base from one quarter to the next, and capital rules filtering out of Basel suggested that PNC's Tier 1 common equity would take a noticeable hit, not just because of its mortgage securities portfolio but because of its big stake in the asset manager BlackRock.
There was at least one other trend adding to the pressure to find a deal. "There are a lot of big banks with excess liquidity," Marquardt says. "They had the most."
PNC came up with an answer in June, when it agreed to acquire the Royal Bank of Canada's U.S. retail banking operations for just under $3.5 billion. RBC Bank would help to round out PNC's presence in central Florida, while giving the company a toehold in places like Raleigh, N.C., and Mobile, Ala.
But the deal raised a new round of questions on Wall Street. Chief among them: how quickly could the bank do a follow-up deal, and turn its new toehold into a foothold in markets across the South?
From his 30th-floor office overlooking downtown Pittsburgh, Rohr calmly pushes back against the suggestion that a follow-up deal will be necessary. It's the day after PNC's second-quarter earnings release, and Rohr has just returned from taping a Sunday morning business news show at KDKA, the local CBS television station.