PNC plans return to 'old-fashioned' lending standards

March 2, 2009
Pittsburgh-based PNC Financial Services Group Inc. acquired struggling National City Corp. on Dec. 31 for $5.6 billion. Before their merger, PNC had no presence here, while Cleveland-based National City had 172 Indiana branches, including 75 in the Indianapolis area.

PNC CEO James Rohr, 60, recently sat down with IBJ to discuss the merger, the recession and PNC's strategy. The following is an edited version of that interview.

IBJ: The public seems increasingly skeptical of the federal government's spending to strengthen the banking industry overall. What's your opinion about its approach to the banking crisis?

ROHR: You always look at these things in hindsight. It's hard to sit in their chairs. But if you look at what they've been able to do, last summer they took 'systemic risk' off the table. They dealt with Bear Stearns, they dealt with Lehman Brothers, they dealt with AIG. You really have to compliment them for that.

If AIG would have been allowed to fail, a number of other firms would have failed because we really do have a global financial market. And then you wouldn't have known what happened. Bear Stearns, for example, had $3 trillion of derivatives on their books. If they would have allowed them to go bankrupt, the collateral damage would have been hard to estimate.

Then, when they put in the additional capital from the TARP program and the increased deposit guarantees by the FDIC, I think they did a very good job of taking the 'run on the banks' risk off the table. Really, from a financial system point of view in the U.S., they had to deal with those two issues.

Now, how do you really go after the key issue, which is housing prices and the housing business and mortgage business, which is the reason for all of this? We built way too many houses. We financed way too many houses. And now we have to pay the price. The industry has lost a trillion dollars already in defaulted mortgages, and they'll lose more. We have to deal with that.

IBJ: What strengths of National City do you want to try to build on? And which areas did you think they need to improve?

ROHR: Obviously, some of the portfolios they acquired in subprime, they had a national subprime business, a national brokered home equity business that really created a lot of losses and consternation at National City.

The core bank actually has done very well. It's a difficult environment, so nothing's perfect in a recessionary environment. But the core bank has done fine. They've been very customer-focused and relationship-oriented.

And I think that's really the value that we saw in National City. We've taken the opportunity to mark those troubled assets to fair value so we can get them out of here, the things that could cause the real problem. And when we have those gone, quite frankly, what we've got is the core business, which is really quite good.

IBJ: Can you tell us about how PNC's approach to loan risk differs from National City's, and how that might affect businesses when they apply for loans-particularly small businesses, which were always a focus of National City?

ROHR: From a credit quality point of view, I think you'll just see some old-fashioned credit rules instituted. We've already changed the credit-approval process.

We're much more liquid than National City was. National City had a loan-to-deposit ratio that peaked at about 140 percent — [in other words], they lent out about 140 percent of their deposits. On a combined basis, we're at 91 percent. The industry average is about 111. So we're very liquid and well capitalized. We're very much in the customer space, looking for new customers and new loans.

IBJ: With the recession deepening, how are you approaching businesses that need restructuring of their loans?

ROHR: Clearly, whenever you're talking about a loan, it's one loan at a time. Obviously, there's no circumstance that repeats itself. You have to know your customer. Not knowing your customer is how we got into this economic environment we're in, quite frankly.

One of the things that happens frequently for unsecured borrowers is, they can roll into a collateralized situation where we can monitor the collateral and we can, in many cases, increase the [credit] availability, but be on a secured basis. Then when times get better, they move back into the unsecured space.

IBJ: Can you talk about PNC's approach to cross-selling, trying to get your core customers to try other products?

ROHR: Actually, National City cross-sold their credit card better than PNC by quite a bit. Their credit card business is a lot larger than PNC's. So we're going to have to learn better on how to cross-sell credit card at PNC, and we can learn from our friends at National City. Same thing with mortgages. I think that they cross-sold mortgages much better than we did. So that's important for the PNC folks to learn.

On the corporate side, PNC cross-sold capital markets and treasury management and syndication, things like that, better than National City. We had a larger product suite on the corporate side. They had a larger product suite on the consumer side.

IBJ: You've pledged to make $28 million worth of charitable contributions in the National City communities, which is $5 million more than National City had last year. What sorts of charities does PNC give priority to?

ROHR: We have a history of charitable giving. Obviously, National City always gave back to their community, as well. I don't think there's a community we've moved into as PNC where we have not given more than our predecessor, even if the predecessor bank was headquartered there. So we've got a lot to live up to, because we've acquired some very charitable companies.

We have an early childhood education initiative called "Grow Up Great." We committed $100 million over 10 years for that. Early childhood education is something we find very, very important.

If you look at [economics professor] Jim Heckman's study from the University of Chicago, for every dollar of early childhood education that we spend, we reduce or save the society somewhere between $18 and $27 in incarceration, rehabilitation and welfare.

We give money locally to early childhood education centers where our employees would like to volunteer. So we upgrade the center with money and with volunteers. We have about 28,000 employees, [and] we have 6,500 volunteers. We'll be introducing "Grow Up Great" into the National City markets.

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