PNC Bank will become Kentucky's largest bank if its purchase of National City wins final approval.
The new PNC would be so large — 12.5 percent of all deposits held by the state's 234 banks — that it probably would trigger action by federal regulators in more normal economic times.
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But federal intervention is not likely in this case, says University of Kentucky banking professor Don Mullineaux.
The federal government wants the $5.6 billion merger to occur — in fact, it is indirectly paying for it — because National City is a troubled bank that PNC can fix.
PNC is receiving a $7.7 billion loan from the U.S. Treasury, part of the $700 billion federal bailout of the financial services industry.
So Mullineaux thinks regulators might ignore the fact that PNC will have more than 10 percent of Kentucky's deposits, the national ceiling set by federal law in the 1990s.
"In normal times, they (PNC) would be selling off some branches to divest themselves of some deposits to get down to 10 percent," he said in a recent interview.
Mullineaux thinks there is a good chance PNC will be able "to stretch the process out and operate above that 10 percent ceiling."
There is even a movement in Washington to raise the ceiling, but no new limit has been proposed.
The powerful American Bankers Association has no position on the question, says spokesman Peter Garuccio. The ABA represents banks on both sides of the issue and there is no consensus.
Nevertheless, Mullineaux says, "whether it's 12 percent or 10 percent, that's still a lot of market share for a single institution. They will have quite a presence in a lot of markets (in Kentucky)."
Lexington might be less affected than other Kentucky cities because three banks already share 55 percent of the market's total deposits, according to data from the Federal Deposit Insurance Corp.
Chase bank has 20.4 percent of Lexington's deposits, followed by Central Bank with 18.23 percent and Fifth Third with 16.24 percent. The new PNC would be fourth — National City's current ranking — with 11.72 percent of the city's deposits.
PNC won't comment on its future size in Kentucky until after the deal is done, probably in late December, says spokesman Fred Solomon.
PNC is currently No. 6 with a 3.5 percent deposit market share in Kentucky, while National City is No. 1 with an 8.95 percent share.
It's ironic, Mullineaux said, that National City probably spent more money than PNC to advertise and build name recognition in Kentucky, and yet the new bank will be PNC.
The size of the new bank won't be an issue in Frankfort either, says Kelly May of the Kentucky Office of Financial Institutions. The state doesn't regulate nationally chartered banks such as PNC and National City. That's the feds' job.
The merger means, at least on paper, that one dollar out of every eight deposited in Kentucky's banks — $8 billion of the $64.4 billion — will be controlled by PNC.
In reality, with or without federal intervention, that might not happen.
Some PNC depositors will be lured away by competitors during and after the merger, and there could be other mergers that reshape the banking industry in Kentucky, says Mullineaux and Hilliard Lyons bank analyst Ross Demmerle in Louisville.
There are reports, for example, that Citigroup wants to buy the merged PNC-National City.
Citigroup, the nation's fifth-largest bank, has not found a merger partner in the latest round of pairings and is in danger of slipping in the national deposit rankings.
The $700 billion federal bailout includes $250 billion to strengthen bank balance sheets, and that money most likely will fuel future combinations of healthy banks with troubled banks, just as it is fueling the PNC-National City merger.
Such mergers are blessed by regulators because they mean the FDIC won't have to rescue the failing bank's depositors.
At least six mergers involving banks or stock brokerages with operations in Kentucky have already occurred or are under way.
In addition to PNC and National City, JPMorgan Chase bought Bear Stearns and Washington Mutual, Bank of America got Merrill Lynch, Wells Fargo acquired Wachovia, and Fifth Third swallowed First Charter Bank.
"We are going to see more mergers long term for sure," Mullineaux said, "because we still have way too many financial institutions in the country."
For the next 18 months or so, most mergers will be "distress deals" involving healthy banks gobbling up troubled banks, he said.
"As you look across the country," Demmerle said, "I think you are going to see more (mergers) just because of the way the financial industry is right now."
The government is encouraging healthy banks to buy troubled banks, but "I don't see that necessarily driving any of Kentucky's institutions together. I don't think they need to do that to compete," Demmerle said, because Kentucky-based banks are generally healthy.
He follows three publicly owned Kentucky banks very closely: Stock Yards, Community Trust and Republic.
"They are all in really good shape," Demmerle said. "They have healthy balance sheets. They weren't involved in a lot of the subprime loans. They have no reason or need to sell to anybody. They can make it just fine on their own."
Overall, Mullineaux said, Kentucky-based banks seem to be doing well, although there has been "some deterioration in performance" due to increasing loan losses as the economy turns down.
"I don't know of any banks that are in significant distress in Kentucky," he continued, although that could change if the economy continues to erode.
As for the regional banks that operate in the state — Fifth Third, U.S. Bank, BB&T and others — Demmerle thinks they will probably remain independent for the near future. They may, in fact, buy up other banks, he said.
Mullineaux and Demmerle agreed that many of Kentucky's small banks could gain by competing with a giant like the new PNC.
Only 12 Kentucky banks have $1 billion or more in deposits, leaving 222 that would be considered small by industry standards.
"I think it opens up a lot of opportunity for the smaller banks," Demmerle said.
Some customers will inevitably leave the new PNC after the merger and the goal of smaller banks will be to attract as many of them as possible.
"Those smaller institutions try to take advantage of that (conversion) and they should," Demmerle said. "It's good business."
Mullineaux said small banks like to compete with big banks "because they think they can beat them on service." They know that for whatever reason, they stand to gain customers from PNC.