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PNC Financial Services Group Inc. (PNC-N) said it plans to buy Royal Bank of Canada's (RY-T) U.S. retail bank operations for $3.62 billion US in cash and stock, allowing PNC to expand in the U.S. Southeast.
    
The deal may be the start of a new consolidation wave among U.S. regional banks, which are buying smaller competitors to expand into new markets and add customer deposits.
    
"This is the time to be acquiring franchises in these kinds of markets," James Rohr, PNC Financial's CEO, told analysts on a conference call Monday.
    
Rohr said he expects fewer small banks to exist five years from now.
    
"The idea of acquiring large banks, those opportunities are few and far between, if not gone entirely, quite frankly," he said.
    
RBC, Canada's largest bank, is offloading a money-losing business as some of its rivals are expanding in the United States. For PNC, the deal expands the Pittsburgh-based bank's Midwestern focus across the U.S. Southeast.
    
RBC Bank (USA) has $25 billion of assets and 424 branches in six U.S. states in the Southeast. As of March 31, PNC had 2,446 branches and $259.38 billion of assets.
    
RBC said it will continue to provide banking services to RBC Wealth Management and RBC Capital Markets in the United States.
    
RBC expects the deal to result in a loss of $1.6 billion CDN, which will be recorded in the current quarter. The figure includes an estimated goodwill write-off of $1.3 billion.
    
STOCK OFFERING
    
PNC has the option of paying RBC up to $1.0 billion of the purchase price in common stock; $1.0 billion of stock would amount to 3 percent of PNC's outstanding common shares, based on the bank's closing stock price of $57.79 on June 17.
    
The stock part of the deal will be limited to RBC not owning more than 4.9 percent of PNC's shares at closing of the deal, expected in March 2012.
    
PNC executives said any common stock issuance tied to the deal will depend on the regulatory climate and economic conditions when it closes.
    
PNC expects to fund the cash portion of the buy with cash on hand, debt issuance and a preferred stock offering.
    
The purchase price represents a $112 million discount to the tangible book value of the unit.
    
Pittsburgh-based PNC will also buy RBC's related credit card assets for $165 million.
    
RBC expects the deal to add to 2012 earnings, while PNC expects the purchase to add to its earnings by the end of 2013 or sooner depending on the stock component of the deal, the companies said in separate statements.
    
PNC projects it can cut $230 million in annual expenses from RBC's U.S. operations, and is projecting an internal rate of return of more than 19 percent on the bank.
    
PNC's retail operations are focused on Pennsylvania, Ohio, New Jersey, Michigan, Maryland, Illinois, Indiana, Kentucky, Florida, Virginia, Missouri, Delaware, Washington, D.C., and Wisconsin.
    
With the acquisition, PNC will gain branches in Alabama, Florida, Georgia, North Carolina, South Carolina and Virginia.
    
U.S. DEPARTURE

    
RBC is selling its U.S. retail banking assets roughly 10 years after entering the market through its acquisition of Centura Banks in 2001. It later expanded its U.S. presence through the acquisitions of Eagle Bancshares, Admiralty Bancorp and other banks in the U.S. Southeast.
    
RBC has struggled with credit losses in the United States following the economic downturn.
    
PNC beat out Winston-Salem, North Carolina-based rival BB&T Corp in the battle for the RBC unit.
   
 Bank of America Merrill Lynch was the financial adviser to PNC, while J.P. Morgan Chase & Co was the financial adviser to RBC.

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