Vision Credit Education, Inc.

In a move that is heralded as the “template for regional bank takeovers,” PNC Financial Services Group Inc. will become the fifth-largest U.S. Bank (based on deposits). National City Corp. was under some pressure to find a buyer, since it was to be left out of the government bailout. PNC received $7.7 billion in government proceeds to allow it to complete the takeover.

Other ailing banks are expected to be taken over by stronger rivals. The expectation is that it will protect stockholders who would otherwise face steep reductions in stock prices due to hemorrhaging mortgage losses.

The Wall Street Journal reported that 22 banks would receive funds from the Treasury as part of the government bailout. The purpose is to enable these banks to weather the storm from loan losses that might result from the takeover of a weaker rival.

Indeed, taking over an ailing bank might be difficult given the combination of multi-billion dollar purchase prices and an even higher allowance for loan losses. Government backing allows for the writedown of expected loan losses that come along with the bank’s assets.

What is extraordinary about this deal is that National City is being taken over by a smaller rival. According to the FDIC, National City held some $97 million in deposits through 1,568 branch offices. PNC claimed $82 million in deposits through its 1,200 branches (figures as of June 30, 2008).

That is the cost of overly-leveraging assets in order to expand their loan portfolio. National City fell victim to some of the same policies of other failing banks that led to its holding of billions of dollars in toxic mortgage debt.

Other banks are expected to take over weaker rivals in coming weeks. In addition, newly converted entities Goldman Sachs and Morgan Stanley are each expected to purchase one or more banks in order to provide the framework for their branch banking network.