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.
Rohr enjoys doing television—he has a quarterly guest-hosting gig on CNBC's "Squawk Box"-and during the taping with the local newscaster who interviewed him for the Pittsburgh business show, he chatted amiably about the federal debt ceiling and the strong first half of the season for the Pittsburgh Pirates, who were finally packing folks in at PNC Park after a long drought.
You can stare straight into the baseball stadium from the windows behind Rohr's desk, but Rohr—a Cleveland native who has become one of Pittsburgh's biggest boosters since relocating here in 1972 for a job in PNC's management development program—says he's not even tempted to watch day games from his office.
His biggest focus now is on PNC's strategy, which Wall Street has struggled to follow since the announcement of the RBC Bank deal. The stock market sees a company with the proven ability to integrate a major acquisition, and has reason to believe it could, and even should, do another big deal in the South, where RBC has little branch concentration to speak of. But PNC officials say they consider RBC a deal that largely stands on its own, requiring little else besides the fill-in approach that PNC has used elsewhere.
Rohr says that the disconnect between where the company is going and where investors want it to go can be explained by PNC's rethinking of a classic problem in retail banking: scale. In Atlanta, for example, RBC has 55 branches, and Rohr says he'd like to acquire or build enough locations to bump the count up to about 100 or so, but not to the 200 or so that he says others have suggested he needs.
"We did for many years say our aspiration is to be No. 1, 2 or 3 in a market," Rohr acknowledges. "But we don't have to have that in order to be successful."
What's changed? There's technology, for starters, and the nature of banking relationships. As Rohr observes, "The small business customer doesn't have to be down the street anymore from the branch."
Moreover, if they take advantage of their breadth, diversified banks like PNC can supplement their returns on retail with returns on corporate banking, wealth management and other businesses that can be brought to bear in a new market.
RBC's capital markets group in New York, which is not part of the sale to PNC, had been kept separate from the RBC Bank business in the South. PNC, Rohr says, will take a different approach. "We'll have capital markets people in the [RBC retail] markets, just as we have them in places like Chicago and Milwaukee."
Rohr also has aspirations for bringing PNC's treasury management services to the region, along with its specialized services for university and healthcare clients. (He says there are at least 1,000 hospitals and 450 universities in RBC's footprint.) "We have a lot of people to hire," he says.
Within the branches, Rohr sees a huge opportunity for PNC's popular retail products such as the online-focused Virtual Wallet account, for which it is signing up 6,000 customers a week. If he's right, then this deal could be the exception that proves the rule about retail banking having become a commoditized business.
RBC's 424 branches "do not, today, have a competitive product set," says Rohr, who at the time of the acquisition agreement described a "plug-and-play" opportunity for PNC's products. "The issue for the Royal," he says, and the reason that the Canadian company sold, "was that they would have had to build a product set for the U.S. market."
With the combination of potential returns on retail banking, corporate banking, wealth management and even investment banking—PNC owns the mid-market merger advisory firm Harris Williams—RBC Bank signifies the evolution of PNC's approach to acquisitions.
"All of our old deals were more or less led by retail," says William Demchak, who as senior vice chairman oversees all of PNC's banking and asset management businesses.
A turning point in the company's acquisitive history occurred in 2005, with the purchase of Riggs National, a scandal-ridden institution that came with considerable legal and regulatory risk but also a substantial list of wealth management and large corporate clients, as well as branches in the attractive D.C. metro market.
"We went into Washington with lots of fanfare and advertising, but we fought well above our weight from a branch saturation level," Demchak says. PNC got about 50 D.C.-area branches in the Riggs acquisition. Between de novo branches and the 2007 purchase of Mercantile Bankshares of Baltimore, PNC now has about 180 branches in the D.C. market.
Given the low-rate environment and the long-term impact of credit-card legislation and debit interchange rules, it's easy to see why PNC no longer wants to be led around by the nose by retail. But retail no doubt will remain a key driver for the company, which excluding the RBC deal has 2,500 branches across 15 states.
Retail also is likely to remain an important business in markets such as Florida, a deposit-rich state that PNC gained entry to through National City. PNC added to its Florida presence this year with the acquisition of 19 branches from BankAtlantic, and RBC will give the company another 83 locations there, effectively doubling PNC's Florida presence.
That's still not enough, according to Ken Thomas, an independent bank consultant and economist in Miami.
"RBC was a nice hit," Thomas says, "but they need a few hundred branches more" to be effective in a market where PNC would be a distant No. 6 to Wells Fargo, Bank of America, SunTrust Banks, JPMorgan Chase and Regions Financial. "If they want to do a blockbuster deal, that deal is very simple: Regions or SunTrust. But if you start picking and choosing little pieces here and there (around the South), pretty soon you just get overlap with SunTrust," Thomas says.
For now, PNC is going the picking-and-choosing route. A month after inking the RBC deal, the company announced it would acquire 27 branches in Georgia from Flagstar Bancorp of Michigan, which is exiting metropolitan Atlanta to focus on its Midwest base. PNC agreed to pay book value for the fixed assets, and no premium for the $240 million of deposits included with the deal.
Thomas scoffs at the terms, noting that with all of the Federal Deposit Insurance Corp.'s recent activity in the state, "you can get Georgia branches with a negative premium on a Friday night."
But PNC President Joseph Guyaux said in a news release announcing the Flagstar deal that the acquired branches "complement our strategic plan for the Atlanta region and reflect our intention to become a competitor there." Combined with the RBC transaction, PNC would have more than 70 branches in the Atlanta area—"a sufficient presence to grow the retail banking customer base and leverage our corporate banking and wealth management opportunities," he said.
Not everyone may agree. But considering the shape in which many banks find themselves these days, just having the flexibility to do deals, regardless of where and in what manner, is something of an achievement.
"They're very disciplined about what they expect to get out of an acquisition, but given their geographic base they can go a lot of places. And given the strength of their capital and their deposit base, it gives them the freedom to do things that a lot of other people are restricted from doing," says Jimmy Dunne, senior managing principal of Sandler O'Neill + Partners, which represented PNC on the Riggs and National City acquisitions and represented Mercantile in its sale to PNC.
Dunne is speaking on a spotty satellite phone connection from Zanzibar, during a summer safari vacation. He calls back to finish the discussion the next day, when he is able to access a landline. Rohr no doubt has become an important client to Dunne over the years. He also has become a more influential voice in the industry. (Rohr was made chairman of the Financial Services Roundtable this year.)
"When you think about all the CEOs in the industry, especially those who didn't fare as well in the crisis, Jim is every bit as smart as them but he's a humble guy so he doesn't have to worry about pretense or putting on a show," Dunne says. "He's somewhat of a throwback, which is more in vogue today than it was eight or 10 years ago."
Rohr was involved in Boy Scouts as a kid, and summer jobs to pay for school included work at a steel mill. Career advancement meant sticking with one firm for the long haul—next year he will have been with PNC for 30 years—and retirement by his schedule comes at the traditional age of 65. "I'll be 63 in October. Facts are facts, and I'm an old-fashioned guy who grew up in the steel business," he says wryly. "But Bill's got plenty to do in the meanwhile, so it's not like he's bored."
Bill refers, of course, to Demchak, the Pittsburgh native who came home in 2002 to be chief financial officer at PNC after a successful run in the structured finance group at JPMorgan Chase. He has assumed roles of increasing responsibility since then, and a year ago his oversight was expanded to include essentially all of PNC's businesses.
Demchak, 49, has been widely applauded for aligning PNC's disparate businesses, so that wealth managers might get more mileage out of the company's retail branch presence, which in turn might do more to promote the services of PNC's corporate bank.
Demchak says he is happy to wait patiently wait for the even bigger role he is expected to inherit. In the meantime he's picking up as much as he can from Rohr, especially when it comes to being more of a people person. "On that, I'll never be as good as him," Demchak says, shaking his head and smiling. "He could spend all day long talking to people and standing up and speaking at lunches. That stuff tires me. It energizes him."
Rohr is a major figure in Pittsburgh civic issues. He is about to make PNC even more central to the revitalization of the city's downtown business district with the building of a new headquarters tower—which the company says will be the tallest building in Pittsburgh and the most environmentally friendly skyscraper in the world.
Surveying the view from his current office, in a 40-year-old building that is struggling to keep pace with the technology demands of a modern workforce, Rohr acknowledges that the history of corporate headquarters projects is littered with companies that built at the height of their success. But he shrugs off the idea of a new-headquarters curse.
"It bothered me," he admits. "But PPG is across the street, and they've done fine," he says, waving toward a window overlooking the distinctive spires atop PPG Place. The striking glass office complex has been home since the 1980s to PPG Industries, formerly known as Pittsburgh Plate Glass.
There are other reasons Rohr has confidence in PNC's plans for a new tower. "We're not doing it on the basis that we're going to grow into it. What the new building will do is house the people we have here already."
Rohr's current office building, One PNC Plaza, will be repurposed for PNC, with the boardroom perhaps getting turned into an employee training room, for example. But the details are still being worked out.
PNC has buildings all over town, including facilities inherited from National City. When it comes to reconfiguring the local workforce and deciding where to slot different offices and functions, Gary Saulson, PNC's director of corporate real estate, will have to be at least as opportunistic as his CEO has been in his approach to dealmaking.
"We don't know how many more acquisitions we'll be making; we don't know what kind of impact that will have on [PNC's facilities in] Pittsburgh," Saulson says. "So we're keeping our options open."
