Can PNC Get Regional Bank M&A Moving?

For a sector that is still dealing with remarkable turbulence and challenges to old business models, there have been remarkably few acquisitions in the regional bank industry. Sure, there have been plenty of distressed deals, where a bank has failed (or is about to) and an opportunistic suitor snaps up branches and deposits without having to pay much at all, but not much has happened in the way of strategic moves and not among the larger banks.

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If an acquisition rumor about PNC Financial (NYSE:PNC) is accurate, though, that may be about to change and perhaps 2011 will be a year where there is more activity in the industry. After all, banks like PNC, U.S. Bank (NYSE:USB), Spain's Santander (NYSE:STD) and Canada's Toronto-Dominion (NYSE:TD) could all look to put capital to use this way.


The Rumor
The South Florida Business Journal recently ran a story suggesting that Pittsburgh's PNC is looking to expand its presence in Florida and is considering acquiring either Regions Financial (NYSE:RF) or BankAtlantic (NYSE:BBX) to do so. While this particular rumor is new and fresh, it is something of a reheated story. Regions and BankAtlantic were always thought to be prime acquisition targets during the boom years, and even during the worst of crunch as both banks were seen to be very much at risk from bad loans. While PNC has not generally been the buyer most frequently tied to Regions, the idea of PNC buying either of these banks makes sense.


The Targets
Regions has gone through some hard times. The company did a large deal just before the crisis hit, found its loan book in much worse shape than many Southern/Southeastern rivals, and was late to raise capital. That led to high loan losses (especially due to its concentration of business in Florida and Atlanta), a high TARP bill, high dilution and decidedly low confidence in management. That said, the company still has attractive long-term market exposure and a good capital position today, and management has been aggressive in trying to clean up its loan books.

BankAtlantic is not in nearly such good shape. This bank is much more highly focused on Florida and residential lending, and that one-two punch has left the company reeling. Although the bank's capital ratio looks good on first blush, the company's bad loans are still increasing at an alarming rate and it does not seem like the bank is setting aside enough to cover them (at least not in the context of how the Florida markets are looking).

Where Does a Deal Get Done?
At this point, there is no word on what it might take to buy either company. Looking at the recent deal between M&T Bank (NYSE:MTB) and Wilmington Trust, BankAtlantic shareholders may consider themselves lucky to get a bid at full book value, especially since an analysis of the balance sheet suggests further capital-raising (which will dilute shareholders) may be necessary. Also complicating a deal for BankAtlantic is the fact that any buyer will probably have to add capital to the business - not a problem for a bank like PNC (that seems to have excess capital), but a limiting factor nonetheless.


By comparison, Regions shareholder may get a better premium. This balance sheet looks better and the capital position is a little stronger. It is not such a concentrated bet on Florida, though, which is a good news/bad news situation. Since Florida is still seen as an attractive long-term banking market, some buyers may not be willing to pay up to for Regions' super-regional exposure just to get to Florida, but it only takes one willing buyer.


The Bottom Line
With larger banks having spent a lot of 2010 using cheap capital to repair their balance sheets and waiting for regulatory certainty, 2011 may be a year of more M&A activity. In such an environment, banks in the South, Southeast, and Texas may start getting more attention, and that could include names like Synovus (NYSE:SNV) and Texas Capital (Nasdaq:TCBI). As a large bank that could use a broader geographic base, PNC is certainly one of the likely players. While there are always a surplus of rumors relative to deals, it makes sense that major banks are on the hunt again and investors may want to take a closer look at some of the small banks that would not only make for good tuck-in buys but could also succeed on their own. (To learn more, see The Industry Handbook: The Banking Industry.)

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