PNC + FirstBank = Shareholder Value?

September 12, 2025 | In this edition of The Institutional Risk Analyst, we consider the proposed acquisition of FirstBank Holding Company (FBHC) by PNC Financial (PNC). If the target’s name does not ring a bell, that’s because it is one of the bigger private banks in the US after Apple Bank in New York. And PNC, of course, is one of the larger and better managed banks in the US. The $550 billion PNC ranked 16th in the WGA Top 50 Banks for Q3 2025. 

As the PNC press release notes, FBHC is in “a leading position in Colorado and a substantial presence in Arizona.” Colorado will now become one of PNC’s biggest markets and the deal adds 95 branches in both states.  However, the FBHC purchase is very expensive at 2.4x the $1.7 billion total book equity of FBHC.

PNC has been sitting at ~ 1.3x book value for the past year. In fact, Citigroup (C) is the only top-five large cap bank in our top 25 group based upon three-month returns. PNC went down less in April, but then lagged the leaders in our bank test group, not exactly a rousing vote of confidence in the $550 billion bank. The acquisition of FBHC may not help. The chart below from YahooFinance shows Citi and PNC over the past year. Citi is up 4x PNC. We do not have a position in PNC.

The traditional rule of thumb in banking is that paying anything more than 1.25x book for a bank is usually not recovered.  Is there any value creation here for PNC shareholders after paying aggregate consideration of approximately 13.9 million shares of PNC common stock and $1.2 billion in cash for FBHC? We don't see it.

FBHC is a peer performer looking at Peer Group 1, which is the top 100 or so banks in the US by assets. The WGA Top 100 Banks includes all of the publicly traded banks in the US and the complete universe is available to subscribers of the Premium Service.  

If FBHC were included in our test group, the bank would fall somewhere in the middle in terms of financial metrics, but we’d doubt that the $27 billion bank holding company would trade at 2.5x book. With the exception of fintech darling SoFi Technologies (SOFI), most of the better performers in the group over the past 90 days are still trading below 2x book value.

If we stare at the standardized data from the FFIEC for a few minutes, you’ll start to perceive that FBNH manages to achieve that middle of the pack performance by keeping operating costs and credit expenses very low. FBHC is in the bottom quartile of Peer Group 1 in terms of credit losses. Interest expense is likewise in the bottom quartile of large banks, but so is the yield on the bank’s loan book. 

The average loan yield for Peer Group 1 is around 6% of average assets, but FBHC is a full point lower in yield at 5%. Net interest margin is below 3% vs 3.6% average for peers. Over 90% of the FBHC loan portfolio is in real estate, putting the bank in the 96th percentile in terms of loan concentration. The credit book is balanced about evenly between 1-4 family residential exposures and commercial real estate (CRE).

The overhead expenses for FBHC are likewise in the bottom 10% of all large banks in the US, but PNC’s overhead expenses are above average. What happens to the value proposition of FBHC for PNC shareholders when the 95 branches of the target assume a cost structure like that of the rest of PNC?  PNC’s overhead expenses were 2.42% of total assets vs 2.3% for Peer Group 1 and 1.8% for FBHC in Q1 2025 (latest data available).

While those credit metrics may look good from a distance, FBHC has been aggressively restructuring its commercial real estate (CRE) portfolio, modifying delinquent credits to keep the assets from sliding into foreclosure. The chart below from BankRegData shows that FBHC is significantly above peer in terms of modification of CRE loans. Importantly, modifications by FBHC for all loan classes are running about half (0.39%) of Peer Group 1 (0.6%) in Q2 2025. 

CRE Loan Modification

Source: FDIC/BankRegData

While FBHC does have $750 billion in unrealized losses on its securities book, lower interest rates will fix that problem -- eventually. The bank's securities portfolio is a bit of a mess, with an average yield on all securities of 2.6% vs 3.3% for Peer Group 1. The MBS portfolio is yielding 2.35% vs an average of 3.14% for Peer Group 1 as of Q1 2025.

FNMA 2.5s for delivery in September are trading 84 bid this AM. Hello. Of note, however, is the fact that the conservatively managed FBHC has little in the way of goodwill or intangibles. So the equity that PNC has agreed to purchase at 2.5x book is real enough, but the question remains about the outcome for the commercial loan portfolio. 

We think that PNC is overpaying for FBHC in terms of the overall acquisition and that the assets of the target are likely to underperform as the bank is merged into PNC. FBHC had an efficiency ratio of 52% in Q1 because of the low overhead cost, but the same measure at PNC is 62%. The overhead cost of PNC is significantly higher than FBHC, meaning that the assets and deposits of the target will need to be repriced accordingly. But the kicker may be the CRE portfolio, which may not be fixed by lower interest rates.

In the near-term, we do not expect this transaction to help PNC's equity market performance, but in a market showing telltale signs of asset price inflation, a lower interest rate environment may ultimately lift all boats. Just don't be disappointed if PNC continues to underperform the leaders in the bank group. We worry that CRE is the loan performance problem today, but FBHC could also catch a 2x4 in the face two years from now when the overheated CO residential mortgage market corrects significantly. That is a systemic risk that faces much of the US banking industry.

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