PNC to Bulk Up in Atlanta With Deal for Flagstar Branches

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Flagstar Bancorp Inc. in Troy, Mich. is exiting the Atlanta market to focus on its core banking business in the Midwest and problems and its expansion into the Northeast.

The $12.7 billion-asset company, which has spent the last few years battling credit- quality issues, announced Tuesday that it is selling its 27 branches in the metropolitan Atlanta to PNC Financial Services Group Inc.

The deal includes $240 million of deposits, but Pittsburgh-based PNC will not pay a premium. It will pay $42 million, or book value, for the fixed assets associated with the branches. The deal is expected to close in the fourth quarter.

The branch pick-up further fuels PNC's push into the Southeast. Earlier this year, it paid a 10% deposit premium to buy 19 branches and $350 million of deposits on Florida's west coast from BankAtlantic Bancorp Inc. Last month, it announced it would acquire the U.S. retail banking operations of Royal Bank of Canada for $3.45 billion. RBC Bank has $25 million of assets 424 branches in the U.S. That deal is expected to close early next year.

Joseph C. Guyaux, president of PNC and its head of retail banking, said that the RBC and Flagstar deals combined would give PNC more than 70 branches in the Atlanta area.

"This transaction provides PNC the opportunity to acquire branches that complement our strategic plan for the Atlanta region and reflect our intention to become a competitor there," Guyaux said in a press release late Tuesday.

Flagstar's management called the deal a "win-win" for both companies.

"PNC will be acquiring a banking franchise with great potential, while Flagstar will be able to focus its growth strategy on our two major markets, the Midwest and the Northeast," said Joseph P. Campanelli, chairman, president and chief executive of Flagstar, in a press release. Earlier this year, Flagstar announced that the company was expanding into New England, a region that Campanelli once oversaw for Sovereign Bank. The new territory is expected to help the company diversify its mortgage-dominated operations.

Separately, Flagstar announced Tuesday that it lost $74.9 million in the second quarter, compared to a loss of 97 million in last year's second quarter. The company reported a loss of $31.7 million in the first quarter.

The loss was partially driven by a loan loss provision of $48.4 million, down 44% from a year earlier, but up 71% from the first quarter.

Flagstar has lost money in the last 12 quarters as it has struggled to get its arms around its asset quality problems. In the fourth quarter 2010, the company sold off $474 million of nonperforming assets. And at the end of the second quarter, nonperforming assets totaled $513.4 million, or 4.10% of total assets. The total amount was down 60% from a year earlier and down 6% from the first quarter.

Despite its losses, the company has managed to keep its Flagstar Bank unit well capitalized by raising roughly $1.5 billion in fresh equity since early 2009, with most of that money coming from MatlinPatterson Global Advisors LLC, a New York private-equity firm.

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