Success in bank M&A resembles success in most walks of life: more money brings more problems.
PNC Financial Services Group (PNC) — led by James Rohr, one of the hungriest dealmakers in banking — provided a reminder Wednesday. Growing pains from buying RBC Bank (USA) in March and the ongoing absorption of the 2009 purchase of National City drove down second-quarter profits 40% at the Pittsburgh bank.
Surprise mortgage-repurchase costs and further write-downs of acquired loans were some of the merger-related headaches that hurt PNC's numbers. Then there was the added cost to staff and run the 400-plus branches acquired in the RBC deal.
Rohr may yet preserve his reputation as a savvy operator who has more than doubled PNC in size (to $300 billion of assets and 2,900 branches) in less than four years, but he had a lot of explaining to do to Wall Street.
"I'm disappointed by the size of the provision for the mortgage repurchases," Rohr, the chairman and chief executive, told analysts on a conference call. "It's a function of our recent experience and our new expectations regarding mortgage repurchase activity from both" Fannie Mae and Freddie Mac.
Rohr stood by both acquisitions and emphasized the prospects for long-term gain. PNC still sees "great potential growth in these new Southeastern markets," and the customer growth across the legacy National City operations "is now showing up in the revenue side," he says.
PNC's main headache was the surprisingly high $438 million it had set aside to cover repurchases of bad mortgages, primarily ones that National City made during the credit bubble and sold to Fannie and Freddie. PNC had earlier forecast a putback expense of as much as $350 million.
Rohr was not alone in dealing with mortgage-related problems Wednesday, as Bank of America CEO Brian Moynihan faced questions about whether his company has set aside enough reserves to cover a 40% jump in requests to buy back soured mortgages.
PNC's putback provision overshadowed the benefits of its acquisitions, including muscular loan growth and gains in consumer and corporate services fees. It also magnified the pain from two other big hits to earnings: $34 million in integration costs and an $85 million charge tied to the redemption of $800 million in trust-preferred securities.
Rohr says his primary focus is to get the most out of the RBC and National City deals rather than buy anything else. There is not much out there worth buying anyway, he says. The small banks up for grabs are "very expensive" and their deposits "aren't worth very much," he says.
PNC's top two capital priorities are to make loans to new customers and return money to shareholders via stock repurchases or dividend increases, Rohr says. "We really want to execute around the National City and RBC USA acquisitions. I think the loan growth and the customer growth has been quite terrific," Rohr says. "That's where we're going to really focus."