PNC Is Back in Servicing with National City Buy

PNC Financial may have been drooling over National City's substantial deposit customer base when it agreed to acquire the Cleveland-based lender, but the deal also puts PNC squarely back in the mortgage business.

Currently, PNC originates and services mortgages through a joint venture with Wells Fargo. The company has yet to detail how its National City purchase will affect that business.

But clearly, taking on National City puts PNC back in mortgage servicing with a portfolio that will require some "high touch" effort. National City services $190 billion of home loans, mostly owned by third parties through securitization. By contrast, PNC, which sold its mortgage unit to Washington Mutual almost eight years ago, only services $24 billion of home loans. Assuming PNC holds onto all the servicing it is getting in the deal, the combined entity will service $214 billion in mortgages, making PNC once again a top 10 mortgage servicer.

One thing market watchers will pay close attention to is how PNC deals with National City's $21 billion liquidating portfolio, consisting mostly of subprime mortgages and home-equity loans owned by the bank. PNC is marking the value of these assets down by 49% to reflect heavy loss expectations, and it is expected that PNC may try to sell all or part of the portfolio once the acquisition is done. The markdown of National City's loan portfolio reflects PNC's expectation that the economy is worsening. PNC's heavy markdowns of the National City portfolio has analysts wondering if other banks are not facing up to the severity of losses they are likely to see.

Another question that needs to be addressed is cost cutting. In a conference call to discuss ramifications of the acquisition, PNC executives expressed confidence that they can wring significant efficiencies out of the combined entity, and there is little doubt that mortgage operations will be part of that cost-cutting effort. Already, National City has significantly scaled back its wholesale and home-equity lending operations. PNC's chief executive, James Rohr, said the bank intends to instill a "moderate risk culture" in the banking operations being acquired from National City.

Mr. Rohr also said that PNC "has a strong track record" of identifying and implementing cost reductions. He said PNC believes it can find at least $1.2 billion of operational cost savings through the integration.

"We believe, frankly, that this is a conservative estimate."

And chief financial officer Richard Johnson said the valuation marks being put on the construction and residential lending assets do reflect an intention to sell them. He said disposing of problem portfolios will help PNC achieve its cost-cutting goals.

"It takes a lot of resources to take care of these books for life."