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Tickers in this Article: PNC, NCC, JPM, WFC, WB
In what could be a trend setting move, Pittsburgh-based PNC Financial Services Group (NYSE:PNC) purchased National City Corporation (NYSE:NCC), a regional bank based in Cleveland, Ohio, for $5.58 billion last week. PNC bought the troubled Midwestern bank with the help of $7.7 billion in federal Troubled Asset Relief Program (TARP) funds and becomes a bigger player in the banking industry.

Is National City A Falling Star Or Falling Knife?
National City Corp., which actually has more deposits on its books than PNC, lost $729 million, or 85 cents per share, excluding a special dividend, in its most recent quarter. The stock traded at $2.75 per share at the time of the sale last week, but it had been as high as $23.90 in the last year, and had traded in the high $30s over the last two years. Its market cap has shriveled to under $5 billion. (To learn how to decipher a bank's complicated financial statements, read Analyzing A Bank's Financial Statements.)

PNC estimates that losses on the remaining $113.4 billion in National City's loan portfolio will amount to $19.9 billion. National City had moved aggressively into the risky subprime mortgage loan area and away from commercial and industrial lending the last few years, so the slump in the housing and mortgage industry has caused steep losses. National City announced last week it will cut 4,000 jobs.

Federal Funding for the Deal
PNC used the $7.7 billion in funds from the TARP program, which were part of the $700 billion federal government program to provide capital to recapitalize the banking industry, and signaled what could be the first among many deals involving regional banks. National banks have been fairly active in acquisitions with JPMorgan Chase (NYSE:JPM) buying failed Washington Mutual (NYSE:WAMUQ) and Wells Fargo (NYSE:WFC) buying Wachovia (NYSE:WB). PNC is selling $7.7 billion of preferred stock to the U.S. Treasury Department as part of the TARP program, and also announced that it might sell an additional $1 billion of new common stock shares it may issue to boost its capital.

First Of The Super-Regionals
With the acquisition, PNC more than doubles its deposit base to $180 billion, and becomes the nation's fifth-largest bank. It will now have 2,747 branches, more than doubling its previous amount. PNC, which is spread throughout the Midwest from its base in Pennsylvania, now adds more branches in Ohio and Michigan as well as other areas where they overlap with National City, but also gains entry into new areas such as Illinois, Missouri and Florida.

PNC's stock price increased $2 to $58.58 when the deal was announced, and has traded in a range from $49.01 to $87.99 this year. Its market cap prior to the deal had been $22 billion, and the stock was trading at a P/E of around 17, while its dividend yield was 4%. PNC maintains the deal will provide a 15% rate of return and boost per-share results in the second year. If these projections hold true, with its size, deposit base and potential scale, PNC will gain obvious strength as a new kind of bank, the super-regional.

More Deals to Come, With Questions
PNC may be able to obtain a tax-break as large as $5 billion in its deal for National City, due to the lifting of limits on taxable income that can be offset in such a purchase. Many have questioned the potential uses for the Treasury's TARP bailout money, and these questions intensified after PNC's acquisition of National City.

The $700 billion bailout money was originally intended to buy up bad mortgage-backed securities as part of the federal government's Emergency Economic Stabilization Act. Then it morphed into a program of the government buying stock in healthy banks to boost capital and lending, and there was speculation that the money would be held by banks who received it and used instead to pay dividends. Now with the PNC-National City deal it is clear at least some of the funds received by banks will be used to make acquisitions.

First Of Many
With PNC's acquisition of the troubled National City, it has not only moved into position as a larger, potentially more potent super-regional, but it signals what could be the first of many more such deals, and set the pattern for how they're accomplished. As to the original suggestions that Treasury's money be directly used to spur lending, or perhaps include help for troubled homeowners facing foreclosure, whether that will now happen is anyone's guess.

If you're concerned about the safety of your savings, check out Are Your Bank Deposits Insured?

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